BLOCKBUSTER INC, S-1/A, 1999-08-03

BLOCKBUSTER INC
S-1/A, 1999-08-03
VIDEO TAPE RENTAL

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 3, 1999

REGISTRATION NO. 333-77899
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 5
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

------------------------
BLOCKBUSTER INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 7841 52-1655102
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

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

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)
------------------------

EDWARD B. STEAD
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
BLOCKBUSTER INC.
1201 ELM STREET
DALLAS, TEXAS 75270
(214) 854-3000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------

Copies to:

<TABLE>
<S> <C> <C>
STEPHEN T. GIOVE MICHAEL D. FRICKLAS KENNETH A. LEFKOWITZ
SHEARMAN & STERLING VIACOM INC. HUGHES HUBBARD & REED LLP
599 LEXINGTON AVENUE 1515 BROADWAY ONE BATTERY PARK PLAZA
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10036 NEW YORK, NEW YORK 10004-1482
(212) 848-4000 (212) 258-6000 (212) 837-6000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective. If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.

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- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE

This registration statement contains two forms of prospectus: one to be used
in connection with a U.S. and Canadian offering of the registrant's class A
common stock and one to be used in connection with a concurrent international
offering of the class A common stock. The international prospectus will be
identical to the U.S. prospectus except that it will have different front and
back cover pages. The form of U.S. prospectus is included herein and is followed
by the alternate pages to be used in the international prospectus which differ
from those used in the U.S. prospectus. Each of the alternate pages for the
international prospectus included herein has been labeled "Alternate Page for
International Prospectus." Final forms of each prospectus will be filed with the
Securities and Exchange Commission under Rule 424(b) of the General Rules and
Regulations under the Securities Act of 1933.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 19, 1999
P R O S P E C T U S
31,000,000 SHARES
[BLOCKBUSTER LOGO]
BLOCKBUSTER INC.

CLASS A COMMON STOCK
$ PER SHARE
---------

We are selling 31,000,000 shares of our class A common stock. Of the
31,000,000 shares of class A common stock that we are selling, 24,800,000 shares
are being offered in the United States and Canada by a syndicate of U.S.
underwriters and 6,200,000 shares are being offered concurrently outside the
United States and Canada by a syndicate of international underwriters.

In addition, the U.S. underwriters may purchase up to 3,720,000 additional
shares of our class A common stock under some circumstances. The international
underwriters may also purchase up to 930,000 additional shares of our class A
common stock under some circumstances.

This is an initial public offering of our class A common stock. We currently
expect the initial public offering price to be between $16.00 and $18.00 per
share. Our class A common stock has been approved for listing on the New York
Stock Exchange under the symbol "BBI."

Following this offering, we will have two classes of authorized common
stock, the class A common stock and class B common stock. The rights of the
holders of class A common stock and class B common stock are identical, except
with respect to voting and conversion.
--------------

INVESTING IN THE CLASS A COMMON STOCK INVOLVES CERTAIN RISKS. WE REFER YOU
TO "RISK FACTORS" BEGINNING ON PAGE 10.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
--------------

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<CAPTION>
PER SHARE TOTAL
--------- ------------
<S> <C> <C>
Initial Public Offering Price.................................................................. $ $
Underwriting Discounts and Commissions......................................................... $ $
Proceeds to Blockbuster Inc. (before expenses)................................................. $ $
</TABLE>

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JOINT BOOK-RUNNING MANAGERS
SALOMON SMITH BARNEY BEAR, STEARNS & CO. INC.
---------

CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
BANC OF AMERICA SECURITIES LLC
ING BARINGS
PAINEWEBBER INCORPORATED
SCHRODER & CO. INC.
SG COWEN
WIT CAPITAL CORPORATION

, 1999

<PAGE>

PROSPECTUS COVER GATEFOLD
INSIDE FRONT - PAGE 1

{PHOTO OF PEOPLE IN BLOCKBUSTER
STORE}

BLOCKBUSTER LOGO

<PAGE>

PROSPECTUS COVER GATEFOLD
INSIDE FRONT - PAGE 2

NEW RELEASES

{PHOTOS OF FOUR SATISFACTION
VIDEO CASSETTE GUARANTEE
BOXES} Now, BLOCKBUSTER-Register
Trademark- has more New
Releases Guaranteed in
stock than ever before!
And a library of thousands
of BLOCKBUSTER
Favorites-TM- movies (all
non-new release) that can
be enjoyed for five
evenings.

GAMES {PHOTOS OF EIGHT
VIDEO GAME BOXES}

BLOCKBUSTER-Register Trademark- is an
industry leader in video game rentals,
offering multiple formats and rental
program with state-of-art hardware

DVD LOGO

<PAGE>

PROSPECTUS COVER GATEFOLD
INSIDE FRONT - PAGE 3

{PHOTO OF PROMOTIONAL {PHOTO OF
MATERIAL OF MOTION PICTURE} LIST OF NEW
RELEASES}

{PHOTO OF FIVE
GIFT CARDS}

BLOCKBUSTER LOGO GIFTCARD {PHOTO OF FOUR
Give the Gift of VIDEO CASSETTES}
Entertainment-TM-,
Great for rentals,
movies, DVP and
more!

{PHOTO OF FILM WITH
BLOCKBUSTER LOGO}

<PAGE>
TABLE OF CONTENTS

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Page
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<S> <C>
Prospectus Summary................................................................... 3
Risk Factors......................................................................... 10
Separation from Viacom............................................................... 19
Use of Proceeds...................................................................... 21
Dividend Policy...................................................................... 22
Capitalization....................................................................... 23
Dilution............................................................................. 24
Selected Consolidated Historical and Pro Forma Financial and Operating Data.......... 25
Unaudited Pro Forma Consolidated Financial Data...................................... 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 32
Video Industry Overview.............................................................. 49
Business............................................................................. 53
Management........................................................................... 76
Related Party Transactions........................................................... 92
Principal Stockholder................................................................ 99
Description of Capital Stock......................................................... 100
Description of Credit Agreement...................................................... 106
Shares Eligible for Future Sale...................................................... 108
Material United States Federal Tax Consequences to Non-United States Holders......... 109
Underwriting......................................................................... 112
Legal Matters........................................................................ 116
Experts.............................................................................. 116
Where You Can Find More Information.................................................. 116
Index to Consolidated Financial Statements........................................... F-1
</TABLE>

1
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[INTENTIONALLY LEFT BLANK]

2
<PAGE>
PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS"
SECTION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE
STATEMENTS.

OUR COMPANY

We are the world's leading retailer of rentable home videocassettes, DVDs
and video games, with about 6,500 stores in the United States and 26 other
countries as of March 31, 1999. We operate primarily under the highly recognized
BLOCKBUSTER brand name, which, according to The Gallup Organization, achieves
nearly 100% recognition with active movie renters in the United States. Based on
1998 industry estimates from Paul Kagan Associates, Inc., a video industry
analyst, we estimate that our company-operated and franchised stores attained a
U.S. market share in excess of 27%, over three times greater than that of our
nearest competitor. Our customer transaction database contains information on
about 87 million U.S. member accounts. We estimate that about 59% of the U.S.
population lives within three miles of one of our stores. Our revenues in 1998
increased 17.5% from 1997, with about 79% of these revenues generated in the
United States and about 21% generated outside of the United States. We believe
that over 1 billion movies and video games have been rented worldwide from us or
our franchisees within the last 12 months, and of these rental transactions
about 750 million were generated from U.S. company-operated stores. For the year
ended December 31, 1998, we and our franchisees recorded worldwide revenues of
about $4.7 billion, which includes $3.9 billion from our company operations and
$0.8 billion from our franchised stores.

Under the management team led by John F. Antioco, our chairman, president
and chief executive officer, we developed and implemented a new business model
that focuses on our core rental business and significantly improves customer
satisfaction. Most significantly, we entered into domestic revenue-sharing
agreements with all of the major Hollywood movie studios. Under these
agreements, we agree to share our U.S. rental revenue with the studios for a
limited period of time. We believe that these agreements have significant
benefits to us, including:

- substantially increasing the number of newly released videos in our stores
to better satisfy customer demand;

- contributing to an increase in revenues resulting from an increase in the
total number of transactions and the number of videocassettes rented per
transaction; and

- aligning the studios' economic interests more closely with ours because
they share a portion of the rental revenue with us for a period of time.

Under our new business model, quarterly domestic same store rental revenues
increased 8.6%, 17.5%, 20.0%, 20.5%, 23.1% and 12.9% in the six quarters ended
June 30, 1999 compared to the comparable quarters in the prior years.

INDUSTRY OVERVIEW

The home video industry is highly fragmented, with single store owners
currently operating about 49% of all locations that rent video titles. We
believe that there are several competitive advantages of

3
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being a large home video chain and therefore believe individual stores and small
chains in the home video industry will continue to consolidate with national and
regional chains.

STRATEGY

BUSINESS MODEL

We believe our business model gives us an advantage over other large home
video chains and a significant advantage over our single store competitors. The
key elements of our business model are to:

- provide a large number of copies and a broad selection of movie titles;

- operate conveniently located and highly visible stores;

- offer superior and consistent customer service;

- optimize our pricing to local market conditions;

- nationally advertise and market our BLOCKBUSTER brand name and the
differences between us and our competitors;

- use our extensive customer transaction database to effectively operate and
market our business; and

- improve our efficiency and lower our costs through self distribution.

GROWTH STRATEGY

The goal of our growth strategy is to increase our U.S. systemwide market
share from 27%, for the year ended December 31, 1998, to over 40% within the
next three years and to significantly increase our market share in those
countries outside the United States where it is profitable to do so. The key
elements of our growth strategy are to:

- increase our same store revenues;

- expand our domestic store base;

- expand our international store base;

- expand our worldwide franchise program;

- apply the benefits of our greater size by spreading fixed costs across our
expanding operations;

- pursue strategic acquisitions; and

- pursue new technologies and products related to rentable home
entertainment which capitalize on our brand name.

RISK FACTORS

We operate in a highly fragmented and competitive market. Our business model
and growth strategy are subject to risks which are described under "Risk
Factors." The following are among the risks which may adversely affect our
future financial performance or our ability to effectively compete in our
market:

- introduction and acceptance of new technologies;

- adverse changes in the movie studios' current distribution and pricing
policies;

- uncertainties with respect to our new business model; and

- obstacles to our U.S. and international new store expansion.

4
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SEPARATION FROM VIACOM

We are currently an indirect wholly owned subsidiary of Viacom Inc.
Immediately after the completion of this offering, Viacom will own none of the
outstanding shares of our class A common stock and 100% of the outstanding
shares of our class B common stock. Accordingly, Viacom will own common stock
representing about 82.3% of our equity value, or about 80.2% if the underwriters
exercise their over-allotment options in full, and about 95.9% of the combined
voting power of our outstanding common stock, or about 95.3% if the underwriters
exercise their over-allotment options in full. Viacom has rights protecting its
ability to control at least 80% of our equity value and the combined voting
power of our two outstanding classes of common stock. We refer you to "Related
Party Transactions -- Agreements Between Viacom and Us -- Initial Public
Offering and Split-off Agreement" for additional information with respect to
these rights. Viacom has announced that, if it receives a favorable tax ruling
from the Internal Revenue Service, it currently intends to distribute all of its
holdings in our common stock to its stockholders who participate in an exchange
offer intended to qualify for tax-free treatment under Section 355 of the
Internal Revenue Code. Viacom has the sole discretion to determine if and when
such split-off will occur and all terms of such split-off. If Viacom determines
to make the distribution, it will occur some time after the later of (1)
September 29, 1999, the five-year anniversary of the merger of Viacom and
Blockbuster Entertainment Corporation, and
(2) unless the underwriters consent to an earlier date, 180 days after the
completion of this offering. For additional information on the risks associated
with Viacom not completing the split-off, we refer you to "Risk Factors -- Risk
Factors Relating to Our Separation from Viacom."

RECENT DEVELOPMENTS

We are in the process of preparing our consolidated financial statements for
the three and six months ended June 30, 1999. We expect to report revenues of
about $1,041.7 million, operating income of about $4.2 million, net loss of
about $39.9 million and net loss per share of about $0.28 for the three months
ended June 30, 1999 as compared to revenues of $890.0 million, operating loss of
$456.9 million, net loss of $318.0 million and net loss per share of $2.21, for
the three months ended June 30, 1998. For the six months ended June 30, 1999, we
expect to report revenues of about $2,154.7 million, operating income of about
$52.8 million, net loss of about $43.3 million and net loss per share of about
$0.30 as compared to revenues of $1,821.2 million, operating loss of $389.9
million, net loss of $302.2 million and net loss per share of $2.10 for the six
months ended June 30, 1998.

We also expect to report earnings before interest, taxes, depreciation and
amortization (EBITDA) of about $101.2 million and about $244.6 million for the
three and six months ended June 30, 1999, respectively, as compared to negative
EBITDA of $362.4 million and negative EBITDA of $200.5 million, respectively,
for the corresponding periods of the prior year. Excluding the second quarter
1998 charge of $424.3 million associated with the change in the method of
accounting for rental library, as described in note 3 to our consolidated
financial statements, EBITDA was $61.9 million, operating loss was $32.6 million
and net loss was $44.9 million for the three months ended June 30, 1998, and
EBITDA was $223.8 million, operating income was $34.4 million and net loss was
$29.1 million for the six months ended June 30, 1998.

The increase in consolidated revenues for each period is principally due to
increases in worldwide same store revenues of 9.9% and 12.9% for the three and
six months ended June 30, 1999, respectively, as compared to the corresponding
periods of 1998 and an increase in the number of systemwide stores of 505 to
6,658 at June 30, 1999 from 6,153 at June 30, 1998. The increase in same store
revenues for both periods is principally due to increases in the number of
domestic rental transactions of about 5% and 10%, on a same store basis, for the
respective three and six month periods ended June 30, 1999 as compared to the
corresponding periods of the prior year. These increased revenues were partially
offset by an increase in advertising expenses of $24.6 million to $64.0 million
and $48.3 million to $119.7 million for the three and six month periods ended
June 30, 1999, respectively, when compared

5
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to the three and six month periods ended June 30, 1998. The increase in
advertising expenses reflects our planned investment in media and marketing
intended to achieve stronger market penetration. Interest expense increased
$24.3 million to $30.7 million and $46.6 million to $59.9 million for the three
and six month periods ended June 30, 1999, respectively, when compared to the
three and six month periods ended June 30, 1998. The increase in interest
expense is associated with a $1.4 billion dividend note issued to Viacom on
December 31, 1998 and other promissory notes issued to Viacom in January 1999
related to the purchase of video stores.

These results are preliminary and have not been audited. When the actual
results of operations are finalized, it is possible that results will vary from
the amounts set forth above. We do not believe, however, that any such
variations will be material.

THIS OFFERING

This offering is for 24,800,000 shares of our class A common stock in the
United States and Canada and the concurrent offering of 6,200,000 shares of our
class A common stock outside of the United States and Canada. In this
prospectus, a reference to each offering is a reference to both offerings. The
closing of each offering is conditioned upon the closing of the other.

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<S> <C>
Class A common stock offered by us:

Offering in the United States and Canada... 24,800,000 shares

Offering outside of the United States and
Canada................................... 6,200,000 shares
Total offering........................... 31,000,000 shares

Common stock outstanding after this offering:

Class A common stock....................... 31,000,000 shares(1)

Class B common stock....................... 144,000,000 shares(2)
Total common stock....................... 175,000,000 shares(1)

Voting rights; Conversion.................... The holders of class A common stock and class
B common stock have identical rights, except
with respect to voting and conversion.
Holders of class A common stock are entitled
to one vote per share and holders of class B
common stock are entitled to five votes per
share. Holders of the class A common stock
and class B common stock generally vote
together as a single class. We refer you to
"Description of Capital Stock -- Common Stock
-- Voting rights." Under some circumstances,
the class B common stock converts
automatically or at the option of Viacom into
class A common stock. We refer you to
"Description of Capital Stock -- Common Stock
-- Conversion."
</TABLE>

6
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<S> <C>
Use of proceeds.............................. We intend to use all of the net proceeds from
this offering to repay a portion of our
borrowings under our credit agreement which
we describe in "Description of Credit
Agreement." On June 23, 1999, we borrowed
$1.6 billion under our credit agreement. Most
of the borrowings were used to repay amounts
owed to Viacom International Inc., including
the repayment of a promissory note issued to
Viacom International Inc. as a dividend in
the principal amount of $1.4 billion plus
accrued and unpaid interest. For a full
discussion of the use of proceeds, we refer
you to "Use of Proceeds."

Dividend policy.............................. Subject to our financial performance,
limitations under our credit agreement and
action by our board of directors, we
currently intend to pay dividends on a
quarterly basis, at an initial quarterly rate
of $0.02 per share for each class of our
common stock, commencing with a first
declaration in October 1999 for payment in
November 1999. We refer you to "Dividends."
</TABLE>

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

(1) This assumes that the underwriters do not exercise their over-allotment
options. We refer you to "Underwriting."

(2) Viacom beneficially owns all of the class B common stock.

OUR COMPANY INFORMATION

Our principal executive offices are located at 1201 Elm Street, Dallas,
Texas 75270 and our telephone number is (214) 854-3000.

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SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA

The summary consolidated historical and pro forma financial data presented
below should be read in conjunction with the consolidated financial statements
and interim consolidated financial statements and notes thereto, the "Unaudited
Pro Forma Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
PRO FORMA AS PRO FORMA AS
YEAR ENDED OR AT DECEMBER 31, THREE MONTHS ENDED ADJUSTED YEAR ADJUSTED THREE
OR AT MARCH 31, ENDED MONTHS ENDED OR
------------------------------- -------------------- DECEMBER 31, AT MARCH 31,
1996 1997 1998 1998 1999 1998(1) 1999(1)
--------- --------- --------- --------- --------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AND WORLDWIDE STORE DATA)
STATEMENT OF OPERATIONS
DATA(2):
Revenues..................... $ 2,942.1 $ 3,313.6 $ 3,893.4 $ 931.2 $ 1,113.0 $ 3,893.4 $ 1,113.0
Gross profit................. 1,928.4 1,953.1 1,937.0 604.6 671.2 1,937.0 671.2
Operating income (loss)(3)... 267.6 (214.6) (359.2) 67.0 48.6 (359.2) 48.6
Income (loss) before income
taxes...................... 249.2 (269.3) (394.7) 61.0 20.0 (470.0) 25.5
Net income (loss)............ 77.8 (318.2) (336.6) 15.8 (3.4) (382.5) 0.0
Net income (loss) per share--
basic and diluted(4)....... $ 0.54 $ (2.21) $ (2.34) $ 0.11 $ (0.02) $ (2.19) $ 0.00
Weighted average shares
outstanding--basic and
diluted(4)................. 144 144 144 144 144 175 175

BALANCE SHEET DATA:
Cash and cash equivalents.... $ 58.6 $ 129.6 $ 99.0 $ 72.9 $ 75.0 N/A $ 75.0
Rental library, net.......... 676.0 734.5 441.2 750.2 457.3 N/A 457.3
Intangibles, net............. 6,309.6 6,192.7 6,055.6 6,161.0 6,074.3 N/A 6,074.3
Total assets................. 8,794.6 8,731.0 8,274.8 8,617.0 8,300.5 N/A 8,315.9
Long-term debt, less current
portion(5)................. 249.0 331.3 1,715.2 352.2 1,824.6 N/A 1,134.2
Stockholders' equity(5)...... 7,784.4 7,617.6 5,637.9 7,603.8 5,662.2 N/A 6,264.3

CASH FLOW DATA:
Cash flows from operating
activities(6).............. $ 985.0 $ 991.3 $ 1,234.5 $ 242.3 $ 166.5
Cash flows from (used for)
investing activities(6).... (1,235.1) (1,188.1) (1,022.2) (232.6) (325.4)
Cash flows from (used for)
financing activities(6).... 208.8 269.3 (241.1) (65.9) 135.6

OTHER DATA:
EBITDA(7)(8)(9).............. $ 599.3 $ 207.9 $ 23.7 $ 161.9 $ 143.4
Net income (loss) plus
intangible amortization,
net of tax(9)(10)(11)...... 239.6 (155.0) (172.5) 56.8 37.8
Amortization of
intangibles................ 166.2 168.7 170.2 42.6 43.0
Depreciation................. 165.5 253.8 212.7 52.3 51.8
Capital expenditures......... 323.7 262.2 175.0 38.5 59.8

WORLDWIDE STORE DATA:
Company-operated stores at
end of period.............. 4,472 5,105 5,283 5,076 5,438
Franchised and joint venture
stores at end of period.... 845 944 1,098 942 1,061
Total stores at end of
period..................... 5,317 6,049 6,381 6,018 6,499
Same store revenues increase
(decrease)(12)............. 5.1% (1.8)% 13.3% 7.6% 17.0%
</TABLE>

N/A-Not Applicable

See footnotes on the following page.

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(1) For information regarding the pro forma adjustments made to our historical
financial data, we refer you to "Unaudited Pro Forma Consolidated Financial
Data."

(2) The statement of operations data for the periods presented do not fully
reflect the trends in our business as we had significantly different
business models during these periods resulting in significant charges. As a
result, our statement of operations data for the periods presented are not
comparable.

(3) Operating income (loss) reflects (1) the $50.2 million restructuring charge
recorded in 1996 primarily related to our corporate relocation and
elimination of third party distributors; (2) $220.3 million of the $250
million charge recorded in 1997 primarily related to inventory write-downs,
closure of underperforming stores and additional expenses associated with
our corporate relocation; and (3) the $424.3 million charge recorded in 1998
related to a change in accounting for videocassette and game rental
amortization. The following table presents operating income (loss) excluding
the impact of these special item charges:

<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating income (loss).......................................................... $ 267.6 $ (214.6) $ (359.2)
Impact of special item charges................................................... 50.2 220.3 424.3
--------- --------- ---------
Operating income, excluding special item charges................................. $ 317.8 $ 5.7 $ 65.1
</TABLE>

(4) As described in note 1 to our consolidated financial statements, our company
was recapitalized to provide for class A common stock and class B common
stock. In accordance with SEC Staff Accounting Bulletin No. 98, the
capitalization of class B common stock has been retroactively reflected for
the purposes of presenting historical net income (loss) per share for
periods prior to this offering. Pro forma weighted average shares
outstanding reflect all shares of class B common stock issued and
outstanding which are beneficially owned by Viacom and the class A common
stock to be issued in this offering, assuming the underwriters do not
exercise their over-allotment options, as if these shares had been
outstanding since the beginning of each respective period.

(5) This reflects the December 31, 1998 declaration of a $1.4 billion dividend
payable to Viacom International Inc. in the form of an interest-bearing
promissory note.

(6) For information regarding the cash flows data, we refer you to the
consolidated statements of cash flows on page F-6 and the interim
consolidated statements of cash flows on page F-29.

(7) EBITDA represents net income (loss) before equity in loss of affiliated
companies (net of tax), benefit (provision) for income taxes, interest
income, interest expense, other items (net), depreciation and amortization
of intangibles. EBITDA may differ in the method of calculation from
similarly titled measures used by other companies.

(8) EBITDA includes: (1) the $50.2 million restructuring charge recorded in 1996
primarily related to our corporate relocation and elimination of third-party
distributors; (2) the $175.2 million effect on EBITDA of the $250 million
charge recorded in 1997 primarily related to inventory write-downs, closure
of underperforming stores and additional expenses associated with our
corporate relocation; and (3) the $424.3 million charge recorded in 1998
related to a change in accounting for videocassette and game rental
amortization. We refer you to notes 3 and 4 of our consolidated financial
statements included elsewhere in this prospectus.

(9) "EBITDA" and "net income (loss) plus intangible amortization, net of tax"
are presented here to provide additional information about our operations.
These items should be considered in addition to, but not as a substitute for
or superior to, operating income, net income, cash flow and other measures
of financial performance prepared in accordance with generally accepted
accounting principles.

(10) Net income (loss) plus intangible amortization, net of tax, includes: (1)
the $50.2 million restructuring charge recorded in 1996 primarily related to
our corporate relocation and elimination of third-party distributors; (2)
the $250 million charge recorded in 1997 primarily related to inventory
write-downs, closure of underperforming stores and additional expenses
associated with our corporate relocation; and (3) the $424.3 million charge
recorded in 1998 related to a change in accounting for videocassette and
game rental amortization. We refer you to notes 3 and 4 of our consolidated
financial statements included elsewhere in this prospectus.

(11) Intangible amortization, net of tax, included in this item is primarily
related to goodwill.

(12) A store is included in the same store revenue 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 53rd week after its acquisition and
conversion. The percentage change is computed by comparing total net
revenues for same stores as defined above at the end of the applicable
reporting period with total net revenues from these same stores for the
comparable period in the prior year.

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RISK FACTORS

You should carefully consider the risks described below and the other
information contained in this prospectus before making a decision to invest in
our class A common stock. We have separated the risks into three groups:

- risks that relate to our business and industry;

- risks that relate to our expected separation from Viacom; and

- risks that relate to the securities market and ownership in our stock.

In addition, the risks described below are not the only ones facing us. We
have only described the risks we consider to be the most material. However,
there may be additional risks that are viewed by us as not material or are not
presently known to us.

If any of the events described below were to occur, our business, prospects,
financial condition, results of operations and/or cash flows could be materially
adversely affected. When we say below that something could or will have a
material adverse effect on us, we mean that it could or will have one or more of
these effects. In any such case, the price of our common stock could decline,
and you could lose all or part of your investment in our company.

This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of factors both in
and out of our control, including the risks faced by us described below and
elsewhere in this prospectus.

RISK FACTORS RELATING TO OUR BUSINESS AND INDUSTRY

We are subject to the following risks, which include risks that relate to
our industry:

OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED BY NEW TECHNOLOGIES

New digital technologies, such as near-video-on-demand and video-on-demand
and others, could have a material adverse effect on us. This is especially true
if:

- newly released movies are made widely available by the studios to these
technologies at the same time, or before, they are made available to video
stores for rental; and

- these technologies are widely accepted by consumers.

THE WIDESPREAD AVAILABILITY OF ADDITIONAL CHANNELS ON SATELLITE AND DIGITAL
CABLE SYSTEMS MAY SIGNIFICANTLY REDUCE PUBLIC DEMAND FOR OUR PRODUCTS. Recent
advances in direct broadcast satellite and cable technologies may adversely
affect public demand for video store rentals. If direct broadcast satellite and
digital cable were to become widely available and accepted, this could cause a
smaller number of movies to be rented if viewers favor the expanded number of
conventional channels and expanded programming, including sporting events,
offered through these services. If this were to occur, it could have a material
adverse effect on us. Direct broadcast satellite providers transmit numerous
channels of programs by satellite transmission into subscribers' homes. Recently
developed technology has presented cable providers with the opportunity to use
digital technology to transmit many additional channels of programs over cable
lines to subscribers' homes.

In addition, because of this increased availability of channels, direct
broadcast satellite and digital cable providers have been able to enhance their
pay-per-view business 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.

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This is referred to within our industry and by others as near-video-on-demand.
If near-video-
on-demand were to become more widely available and accepted, pay-per-view
purchases could significantly increase. Near-video-on-demand allows the consumer
to avoid trips to the video store for rentals and returns of movies which also
eliminates the chance they will incur an extended viewing fee. However, newly
released movies are currently made available by the studios for rental prior to
being made available on a near-video-on-demand basis. Near-video-on-demand also
does not allow the consumer to start, stop and rewind the movie. Increases in
the size of this pay-per-view market could lead to an earlier distribution
window for movies on pay-per-view if the studios perceive this to be a better
way to maximize their revenue.

WE MAY EVENTUALLY HAVE TO COMPETE WITH THE WIDESPREAD AVAILABILITY OF
VIDEO-ON-DEMAND, WHICH MAY SIGNIFICANTLY REDUCE THE DEMAND FOR OUR PRODUCTS.
Some digital cable providers have begun testing technology designed to transmit
movies on demand with interactive capabilities such as start, stop and rewind.
This is referred to within our industry and by others as video-on-demand.
Video-on-demand is currently available in some test markets. However,
video-on-demand competes with other uses of cable infrastructure, such as the
ability to provide internet access and basic telephone services, some of which
may provide higher returns for operators. Video-on-demand could have a material
adverse effect on us if:

- video-on-demand could be profitably provided at a reasonable price; and

- newly released movies were made available at the same time, or before,
they were made available to the video stores for rental.

OUR INDUSTRY WOULD LOSE A SIGNIFICANT COMPETITIVE ADVANTAGE IF THE MOVIE STUDIOS
ADVERSELY CHANGE THEIR CURRENT DISTRIBUTION PRACTICES

A significant competitive advantage that our industry currently enjoys over
most other movie distribution channels except theatrical release is the early
timing of our distribution "window." This window is exclusive against most other
forms of non-theatrical movie distribution, such as pay-per-view, premium
television, basic cable and network and syndicated television. The length of the
window for movie rental varies, typically ranging from 30 to 90 days for
domestic video stores and from 120 to 180 days for international video stores.
Thereafter, movies are made sequentially available to television distribution
channels.

We could be materially adversely affected if:

- the video store windows were no longer the first following the theatrical
release;

- the length of the video store windows were shortened; or

- the video store windows were no longer as exclusive as they are now;

because newly released movies would be made available earlier on these other
forms of non-theatrical movie distribution. As a result, consumers would no
longer need to wait until after the video store distribution window to view a
newly released movie on these other distribution channels.

Although we believe that the studios have a significant interest in
maintaining a viable home video rental industry, because the order, length and
exclusivity of each window for each distribution channel is determined solely by
the studio releasing the movie, we cannot predict the impact, if any, of any
future decisions by the studios.

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BECAUSE MARGINS ON SELL-THROUGH PRODUCTS ARE LOWER THAN RENTAL MARGINS, WE COULD
BE MATERIALLY ADVERSELY AFFECTED IF A GREATER PROPORTION OF NEWLY RELEASED
MOVIES WERE INITIALLY PRICED AS A SELL-THROUGH PRODUCT IN THE UNITED STATES AND
CONSUMERS DESIRED TO OWN THESE MOVIES

Sell-through retail margins are generally lower than rental margins. Some of
our competitors, such as mass merchandisers, warehouse clubs and Internet sites,
can distribute and sell these sell-through movies at lower costs and/or may
operate at lower margins than can we. As a result, our sell-through business,
which is described below, in the United States represented only 7.0% of our
domestic revenues for 1998. We believe our profitability would be adversely
affected if we did not derive most of our revenues from the higher margin rental
business. Although we believe that industry economics will dictate that most new
releases on videocassettes and DVDs will continue to be initially priced for
rental, we could be materially adversely affected if:

- a greater proportion of either release format were initially priced as
sell-through merchandise in the United States; and

- consumers desired to own, and not rent, these movies.

In general, studios initially price their movies at prices that are too high
to generate significant consumer demand for purchase. Recently, however, the
studios have released a limited number of movies at prices intended to generate
consumer demand to purchase these movies rather than rent them. This is referred
to as sell-through pricing. Movies priced for sell-through are not subject to
our revenue-sharing agreements. However, if enough consumers desired to rent
rather than own these sell-through priced movies, the adverse effect of
sell-through may be offset, in part or in full, by the improved margins we would
obtain from renting sell-through movies because these movies have low initial
wholesale prices and are not generally subject to revenue-sharing.

SIGNIFICANT BENEFITS WOULD BE LOST AND WE WOULD BE MATERIALLY ADVERSELY AFFECTED
IF OUR REVENUE-SHARING AGREEMENTS WERE MATERIALLY ADVERSELY CHANGED OR
DISCONTINUED

If our revenue-sharing agreements are materially adversely changed or
discontinued, significant benefits, as described in the summary of this
prospectus, would be lost. This in turn would have a material adverse effect on
us.

Historically, we generally paid the major studios or their licensees between
$60 and $70 per videocassette for major theatrical releases that were priced for
rental in the United States. In 1998, we entered into revenue-sharing agreements
with the major studios in the United States. These agreements generally have
terms ranging from two to five years. Under these agreements, we pay only a
minimal up front cost per videocassette and agree to share our U.S. rental
revenue with the studios for a limited period of time. In addition, we agree to
take a minimum number of copies of each movie title that is released by a studio
in any U.S. movie theater. We also agree to take, in some cases, a minimum
number of movies that are not released by a studio in any U.S. movie theater.

IF THE AVERAGE SALES PRICE FOR THE PREVIOUSLY VIEWED TAPES OBTAINED UNDER
REVENUE-SHARING IS NOT AT OR ABOVE AN EXPECTED PRICE, OUR EXPECTED GROSS MARGINS
MAY BE ADVERSELY AFFECTED

Under our revenue-sharing agreements, we expect to earn revenues in two
ways:

- revenues resulting from the rental of the videocassettes; and

- revenues resulting from the sales of the previously viewed tapes to the
public after the end of their useful lives as rental products.

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To achieve our expected gross margins, we need to sell these previously viewed
tapes at or above an expected price. If the average sales price of these
previously viewed tapes is not at or above this expected price, our gross
margins under our revenue-sharing agreements may be adversely affected.

As a result of revenue-sharing, we will need to sell significantly more
previously viewed tapes than in the past. Even though revenue-sharing was not
fully implemented during all of 1998, domestically we sold about 17.6 million
previously viewed tapes in 1998, as compared to 1997 when we sold about 7.8
million previously viewed tapes. This represents about a 126% increase in sales.
We cannot assure you that we will be able to sell, on average, these previously
viewed tapes at or above the expected price since we do not have extensive
experience in selling previously viewed tapes in these quantities.

Other factors that affect our ability to sell these previously viewed tapes at
expected prices, include:

- consumer desire to own the particular movie; and

- the number of previously viewed tapes available for sale by others to the
public.

In addition, after the expiration of the video store distribution window,
the sales of previously viewed tapes also compete with newly released videos
which are priced for sell-through.

WE HAVE HAD LIMITED EXPERIENCE WITH OUR NEW BUSINESS MODEL AND CANNOT ASSURE YOU
THAT WE WILL OPERATE PROFITABLY IN THE FUTURE UNDER THIS NEW MODEL

Because we have had limited experience with our new business model, we
cannot assure you that we will have net income in future periods. Beginning in
the second quarter of 1997, we developed our new business model to refocus on
our core rental business. We have experienced significant losses during this
transitional period. We had net losses of $318.2 million in 1997 and $336.6
million in 1998. We also had a net loss of $3.4 million for the first quarter of
1999.

WE MAY BE UNABLE TO FULLY EXECUTE OUR NEW STORE EXPANSION

Although we believe that we have personnel and other resources required to
implement our store expansion goals, we cannot assure you that we will be able
to execute our new store expansion within the expected time frame. If we are
unable to execute this expansion, it would be detrimental to our goals of
increasing market share, increasing same store revenues and applying the
benefits of our size. We intend to proceed with a significant expansion. We
expect to open about 475 new company-operated stores in the United States in
1999 and about 500 new company-operated stores in the United States in each of
2000 and 2001. In addition, over each of the next three years, we expect to
open:

- about 200 new franchise stores in the United States;

- about 170 new company-operated stores in markets outside the United
States; and

- about 125 new franchise and/or joint venture stores in markets outside the
United States.

In order to meet our store expansion goals within this three-year period, we
will be required to invest considerable time in implementing these plans.

WE CANNOT ASSURE YOU AS TO THE PROFITABILITY OF NEWLY OPENED STORES

In connection with our growth strategy, we expect to open new
company-operated stores in markets, regions or countries where we have limited
or no operating history. As a result, we cannot assure you that

- these newly opened stores will achieve revenue or profitability levels
comparable to those of our existing stores; or

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- that these stores will achieve such revenue or profitability levels within
the time periods estimated by us.

NEWLY OPENED STORES MAY ADVERSELY AFFECT THE PROFITABILITY OF PRE-EXISTING
STORES

We expect to open smaller company-operated stores in markets where we
already have significant operations in order to maximize our market share within
these markets. Although we have a customized store development approach, we
cannot assure you that these smaller newly opened stores will not adversely
affect the revenues and profitability of those pre-existing stores in any given
market.

WE MAY BE LIABLE FOR LEASE PAYMENTS RELATED TO BLOCKBUSTER MUSIC STORES

In October 1998, about 380 BLOCKBUSTER MUSIC stores were sold to Wherehouse
Entertainment Inc. Some of the leases transferred in connection with this sale
had previously been guaranteed either by Viacom or its affiliates. If Wherehouse
defaults with respect to these leases, related losses could adversely affect our
future operating income. As of March 31, 1999, the average remaining term of
these leases was 4.1 years. We have agreed to indemnify Viacom with respect to
any amount paid under these guarantees. We estimate that, as of the time of the
sale, we were contingently liable for about $84 million with respect to base
rent for the remaining term of these leases if Wherehouse defaults on all of
these leases. This amount has not been discounted to present value. Our
contingent liability will vary over time depending on the lease terms remaining.
We have not recorded any reserves related to this contingent liability in our
consolidated financial statements.

WE COULD BE MATERIALLY AND ADVERSELY AFFECTED IF OUR CENTRALIZED DOMESTIC
DISTRIBUTION CENTER IS SHUT DOWN

Our domestic distribution system is centralized. This means that we ship
nearly all of the products to our U.S. company-operated stores, including newly
released videos purchased under the revenue-sharing agreements, through our
distribution center. If our distribution center is shut down for any reason we
could incur significantly higher costs and longer lead times associated with
distributing our videocassettes and other products to our stores.

AS A PARTICIPANT IN THE HOME VIDEO INDUSTRY, WE ARE SUBJECT TO GOVERNMENTAL
REGULATION PARTICULAR TO OUR INDUSTRY

Any finding that we have been or are in noncompliance with respect to the
laws affecting our business could result in, among other things, governmental
penalties or private litigant damages which could have a material adverse effect
on us. We are subject to various international, 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, U.S. federal and state laws that govern, among
other things, the disclosure and retention of our video rental records and
access and use of our video stores by disabled persons, and are subject to
various state and local licensing, zoning, land use, construction and
environmental regulations. Furthermore, changes in existing laws, including
environmental and employment laws, new laws or increases in the minimum wage may
increase our costs. Our obligation to comply with, and the effects of, the above
governmental regulations are increased by the magnitude of our operations.

WE MAY BE ADVERSELY AFFECTED IF OUR YEAR 2000 REMEDIATION EFFORTS ARE NOT
SUCCESSFUL

We are highly dependent upon the proper functioning of our computer and
infrastructure systems as well as those of our third party vendors. The failure
of our systems, or those of our third party

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vendors, to be year 2000 compliant could have a material adverse effect on us.
The possible consequences of a failure include, among others:

- incomplete or inaccurate accounting, recording or processing of rentals
and sales of videocassettes, DVDs, video games and other products and the
reporting of this information;

- delays or failures in ordering, shipment and distribution of
videocassettes, DVDs, video games and other products;

- the creation of uncertainty about our customer database; or

- the inability to consummate credit and debit card and check transactions.

If a potential year 2000 problem is not remedied, potential risks to us
include business interruption, financial loss, harm to our reputation and legal
liability. We refer you to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information.

RISK FACTORS RELATING TO OUR SEPARATION FROM VIACOM

We are subject to the following risks in connection with our expected
separation from Viacom:

WE WILL BE CONTROLLED BY VIACOM AS LONG AS IT OWNS A MAJORITY OF THE COMBINED
VOTING POWER OF OUR TWO CLASSES OF COMMON STOCK, AND OUR OTHER STOCKHOLDERS WILL
BE UNABLE TO AFFECT THE OUTCOME OF STOCKHOLDER VOTING DURING THIS TIME

AFTER THE COMPLETION OF THIS OFFERING, WE WILL BE CONTROLLED BY VIACOM. We
have two classes of common stock:

- class A common stock, which entitles the holder to one vote per share; and

- class B common stock, which entitles the holder to five votes per share,

on all matters submitted to our stockholders. After the completion of this
offering, Viacom will own in excess of a majority of the combined voting power
of our outstanding common stock. As a result, Viacom will be able to determine
the outcome of all corporate actions requiring stockholder approval. Because
Viacom has the ability to control us, it has the power to act without taking the
best interests of our company into consideration. For example, Viacom will
continue to control decisions with respect to:

- the direction and policies of our company, including the election and
removal of directors;

- mergers or other business combinations involving us;

- the acquisition or disposition of assets by us;

- future issuances of our common stock or other securities;

- the incurrence of debt by us;

- the payment of dividends, if any, on our common stock; and

- amendments to our certificate of incorporation and bylaws.

Any of these provisions could be used by Viacom for its own advantage to the
detriment of our other stockholders and our company. This in turn may have an
adverse affect on the price of our class A common stock.

VIACOM HAS NO OBLIGATION TO COMPLETE THE SPLIT-OFF. Viacom has the sole
discretion to determine the timing and all terms of any split-off and is under
no obligation to effect the split-off. We cannot

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assure you as to whether or not or when the split-off will occur, or as to the
terms of the split-off. If Viacom does not complete the split-off, Viacom will
continue to control us.

THERE ARE POTENTIAL CONFLICTS OF INTEREST WITH RESPECT TO OUR RELATIONSHIP WITH
VIACOM BECAUSE VIACOM CONTROLS US AND OUR BUSINESS OBJECTIVES MAY DIFFER

Because Viacom controls us and our business objectives may differ, there are
potential conflicts of interest between Viacom and us regarding, among other
things:

- our past and ongoing relationship with Viacom, including, but not limited
to, Viacom's control of our tax matters for years in which we are
consolidated with Viacom for tax purposes, the acquisition of
videocassettes from Paramount Pictures Corporation, an indirect subsidiary
of Viacom, and the agreements between Viacom and us relating to this
offering and the split-off;

- potential competitive business activities; and

- sales or distributions by Viacom of all or part of its ownership interest
in our company.

We cannot assure you that we will be able to resolve any potential conflicts
or that, if resolved, we would not be able to receive a more favorable
resolution if we were dealing with someone who was not controlling us.

THREE OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS AND EXECUTIVE OFFICERS OF VIACOM

Prior to our split-off from Viacom, we expect that three members of our
board of directors will be directors and executive officers of Viacom. These
directors will have obligations to us as well as to Viacom and may have
conflicts of interest with respect to matters potentially or actually involving
or affecting us. Our certificate of incorporation contains provisions designed
to facilitate resolution of these potential conflicts, which we believe will
assist our directors in fulfilling their fiduciary duties to our stockholders.
These provisions do not, however, eliminate or limit the fiduciary duty of
loyalty of our directors under applicable Delaware law. Subject to applicable
Delaware law, by becoming a stockholder in our company, you will be deemed to
have notice of and have consented to these provisions of our certificate of
incorporation. Although these provisions are designed to resolve such conflicts
between us and Viacom fairly, we cannot assure you that any conflicts will be so
resolved. We refer you to "Description of Capital Stock -- Some of the
Provisions of Our Certificate of Incorporation and Bylaws" for more information.

OUR HISTORICAL CONSOLIDATED FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF
OUR RESULTS AS A SEPARATE COMPANY

Since September 1994, our operations have been conducted by various entities
owned directly or indirectly by Viacom. Following this offering, we will be
required to supplement our financial, administrative and other resources to
provide services necessary to operate successfully as an independent public
company. In addition, the financial information included in this prospectus may
not necessarily reflect our results of operations, financial position and cash
flows in the future or what the results of operations, financial position or
cash flows would have been had we been a separate, stand-alone entity during the
periods presented. The financial information included in this prospectus does
not reflect many significant changes that will occur in our capital structure,
funding and operations as a result of our separation from Viacom and this
offering. For additional information, we refer you to "Related Party
Transactions," "Unaudited Pro Forma Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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RISK FACTORS RELATING TO THE SECURITIES MARKET AND OWNERSHIP OF OUR STOCK

There are risks related to the securities market that you should consider in
connection with your investment in and ownership of our stock. These risks
include limitations on our ability to execute some types of business
combinations and change of control transactions.

WE CANNOT PREDICT THE EFFECT THAT THE SPLIT-OFF WILL HAVE ON THE PRICE OF OUR
COMMON STOCK; THE PRICE OF OUR COMMON STOCK COULD BE MATERIALLY AND ADVERSELY
AFFECTED BY SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK IN THE PUBLIC
MARKET

We cannot predict the effect that the split-off will have on the price of
your class A common stock. The split-off could involve the distribution of about
144,000,000 shares of our common stock by Viacom to its stockholders who
participate in an exchange offer representing about 82.3% of the equity value of
our company, or about 80.2%, if the underwriters exercise their over-allotment
options in full. All of those shares would be eligible for immediate resale in
the public market, other than any shares held by our affiliates. Viacom has the
sole discretion to determine the timing, structure and terms of the split-off or
other distribution of its shares of our common stock.

Conversely, if the split-off or other similar transaction is not completed,
Viacom will have the right to require us to register its shares of our common
stock under the U.S. securities laws for sale in the public market. For a
further explanation of this right, we refer you to "Related Party Transactions
- -- Agreements Between Viacom and Us -- Registration Rights Agreement." Sales by
Viacom or others of substantial amounts of our common stock in the public
market, or the perception that such sales might occur, could have a material
adverse effect on the price of our class A common stock.

THERE MAY BE AN ADVERSE EFFECT ON THE PRICE OF OUR CLASS A COMMON STOCK DUE TO
DISPARATE VOTING RIGHTS OF OUR CLASS A COMMON STOCK AND OUR CLASS B COMMON STOCK
AND, POSSIBLY, DIFFERENCES IN THE LIQUIDITY OF THE TWO CLASSES

The differential in the voting rights of the class A common stock and class
B common stock could adversely affect the price of the class A common stock to
the extent that investors or any potential future purchaser of our common stock
ascribe value to the superior voting rights of the class B common stock. The
holders of class A common stock and class B common stock generally have
identical rights except that holders of class A common stock are entitled to one
vote per share while holders of class B common stock are entitled to five votes
per share on all matters to be voted on by stockholders. Holders of class A
common stock and class B common stock are entitled to separate class votes on
amendments to our certificate of incorporation that would alter or adversely
affect the powers, preferences or special rights of the shares of their
respective classes. In addition, it is possible that differences in the
liquidity between the two classes may develop, which could result in price
differences. We refer you to "Description of Capital Stock."

OUR ANTI-TAKEOVER PROVISIONS MAY DELAY OR PREVENT A CHANGE OF CONTROL OF OUR
COMPANY, WHICH COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK

The existence of some provisions in our corporate documents and Delaware law
may delay or prevent a change in control of our company, which could adversely
affect the price of our common stock. Our certificate of incorporation and
bylaws contain some provisions that may make the acquisition of control of our
company more difficult, including provisions relating to the nomination,
election and removal of directors and limitations on actions by our
stockholders. In addition, Delaware law also imposes some restrictions on
mergers and other business combinations between us and any holder of 15% or more
of our outstanding common stock. Viacom, however, is generally exempted from
these provisions and will have special rights so long as it owns at least a
majority of the combined

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voting power of our two outstanding classes of common stock. We refer you to
"Description of Capital Stock" for a summary of these anti-takeover provisions.

In addition, we have entered into a tax matters agreement with Viacom with
respect to several tax matters relating to this offering and the split-off,
which will require, among other things, that, until two years after the
completion of the split-off, we cannot voluntarily enter into certain
transactions, including any merger transaction or any transaction involving the
sale of our capital stock, without the consent of Viacom. In addition, we have
agreed under this tax matters agreement to indemnify Viacom for any tax
liability incurred as a result of the failure of the split-off to qualify as a
tax-free transaction due to a takeover of our company or any other transaction
involving our capital stock, assets or businesses regardless of whether or not
such transaction is within our control. We refer you to "Related Party
Transactions -- Agreements Between Viacom and Us -- Tax Matters Agreement."

OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY FOLLOWING THE OFFERING, AND YOU
COULD LOSE ALL OR PART OF YOUR INVESTMENT AS A RESULT

We, Viacom and the underwriters will negotiate to determine the initial
public offering price. You may not be able to resell your shares at or above the
initial public offering price due to a number of factors. These factors, some or
all of which are beyond our control, include:

- actual or anticipated fluctuations in our operating results;

- changes in expectations as to our future financial performance or changes
in financial estimates of securities analysts;

- success of our operating and growth strategies;

- operating and stock price performance of other comparable companies; and

- realization of any of the risks described in these Risk Factors.

In addition, the stock market recently has experienced extreme volatility
that often has been unrelated or disproportionate to the operating performance
of particular companies. These broad market and industry fluctuations may
adversely affect the trading price of our common stock, regardless of our actual
operating performance.

18
<PAGE>
SEPARATION FROM VIACOM

SET FORTH IN THIS SECTION IS VIACOM'S CURRENT INTENTION AS TO OUR POSSIBLE
SEPARATION FROM VIACOM. VIACOM HAS THE SOLE DISCRETION TO DETERMINE THE TIMING
AND ALL TERMS OF ANY SPLIT-OFF AND IS UNDER NO OBLIGATION TO EFFECT THE
SPLIT-OFF. WE CANNOT ASSURE YOU AS TO WHETHER OR NOT OR WHEN THE SPLIT-OFF WILL
OCCUR, OR AS TO THE TERMS OF THE SPLIT-OFF.

OVERVIEW

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. On September 29, 1994, Blockbuster
Entertainment Corporation was merged with and into Viacom. Since the merger, our
business and operations have been conducted by various subsidiaries of Viacom.
Recently, our business and operations were either (1) merged into Blockbuster
Inc. or (2) purchased by Blockbuster Inc. or one of its subsidiaries.
Blockbuster Inc., an indirect subsidiary of Viacom, was incorporated under a
different name on October 16, 1989 in Delaware.

Viacom has announced that, if it receives a favorable tax ruling from the
Internal Revenue Service, it currently intends to distribute all of its holdings
in our common stock to stockholders who tender shares of Viacom common stock in
an exchange offer described below. This transaction is intended to qualify for
tax-free treatment under Section 355 of the Internal Revenue Code. Viacom has
the sole discretion to determine if and when such split-off will occur and all
terms of such split-off. If Viacom determines to make the distribution, it will
occur some time after the later of (1) September 29, 1999, the five-year
anniversary of the merger of Viacom and Blockbuster Entertainment Corporation
and (2) unless the underwriters consent to an earlier date, 180 days after the
completion of this offering. For additional information of the risks associated
with Viacom not completing the split-off, we refer you to "Risk Factors -- Risk
Factors Relating to Our Separation from Viacom."

Viacom is not obligated to consummate the split-off, and neither Viacom nor
we have any intention of purchasing or redeeming the shares issued in this
offering if the split-off is not consummated. In addition, if the split-off is
ultimately consummated, Viacom does not have any obligation with respect to the
timing or any of the terms of the split-off. We refer you to "Risk Factors --
Risk Factors Relating to Our Separation from Viacom -- Viacom has no obligation
to complete the split-off."

The split-off is intended to establish us as a stand-alone entity with
objectives separate from those of other businesses of Viacom. We and Viacom
believe that the split-off will resolve management, systemic, competitive and
other problems that have arisen from the operation of various different
businesses under a common parent corporation. For example, because Paramount
Pictures Corporation, an affiliate of Viacom, is in the motion picture business
in competition with other studios, we believe these other studios that supply us
with movies view our affiliation with Paramount Pictures as a conflict of
interest. Similarly, because Paramount Pictures distributes movies to our
competitors, Viacom believes our competitors, who are Paramount Pictures'
customers, view Paramount Pictures as having a conflict of interest. In
addition, although we have no specific plans, we believe that the split-off will
allow us to facilitate the expansion of our business by making acquisitions by
issuing our stock and by entering into partnerships and other agreements. The
split-off will also allow us to modify our compensation structure to be more in
line with that used by other retailers and provide incentives to our employees
that are more closely linked to our performance.

PRE-OFFERING TRANSACTIONS

CONSOLIDATION OF BLOCKBUSTER SUBSIDIARIES. In September and November 1998,
numerous U.S. subsidiaries of Viacom International Inc., a wholly owned
subsidiary of Viacom, each of which were directly or indirectly involved in our
business, were merged with and into our current legal entity, which is named
"Blockbuster Inc." On or about June 23, 1999, we and/or some of our subsidiaries
purchased

19
<PAGE>
stock or assets from affiliates of Viacom in order to acquire the non-U.S.
operations of our business that we did not already own at that time for a
purchase price of about $222 million. We paid about $65 million of this purchase
price from borrowings under the credit agreement. We paid the remaining portion
of the purchase price with cash that was contributed to us from our parent,
Viacom International Inc.

DIVIDEND NOTE AND ACQUISITION NOTES. On December 31, 1998, we declared a
dividend in the form of a promissory note in the principal amount of $1.4
billion to Viacom International Inc. (the "Dividend Note"). In addition, in the
first quarter of 1999, we issued promissory notes in the aggregate principal
amount of about $77 million to Viacom International Inc. in order to obtain
funds for an acquisition of video stores (the "Acquisition Notes"). We paid the
Dividend Note and the Acquisition Notes, together with any accrued and unpaid
interest, with the proceeds of the borrowings under the credit agreement
described below.

CREDIT AGREEMENT. On June 21, 1999, we entered into a $1.9 billion term and
revolving credit agreement with a syndicate of lenders. For a more complete
description of the credit agreement, we refer you to "Description of Credit
Agreement." On June 23, 1999, we borrowed $1.6 billion under this credit
agreement, all of which was used to:

- pay a portion of the purchase price to affiliates of Viacom to acquire the
non-U.S. operations of our business that we did not already own;

- repay the Dividend Note and the Acquisition Notes, together with any
accrued and unpaid interest; and

- pay the fees and expenses related to the origination of the credit
agreement to the syndicate of lenders.

We refer you to "Use of Proceeds."

AGREEMENTS BETWEEN VIACOM AND US. In order to complete this offering and
the split-off, we and Viacom have entered into a number of agreements. In
addition, there are other agreements between Viacom and us not related to either
this offering or the split-off. We refer you to "Related Party Transactions --
Agreements Between Viacom and Us."

THE OFFERING

Immediately after the completion of this offering, Viacom will own none of
the outstanding shares of our class A common stock and 100% of the outstanding
shares of our class B common stock, which will represent about 82.3% of the
equity value and about 95.9% of the combined voting power of our outstanding
common stock, or about 80.2% and about 95.3%, respectively, if the underwriters
exercise their over-allotment options in full. Until such time as Viacom holds
less than 50% of the combined voting power of all classes of our common stock
outstanding, Viacom will be able to control the vote on all matters submitted to
our stockholders, including the election of directors and the approval of
extraordinary corporate transactions. We refer you to "Risk Factors -- Risk
Factors Relating to Our Separation from Viacom -- After the completion of this
offering, we will be controlled by Viacom." We are conducting this offering as
one of the steps to effectuate a potential split-off.

POST-OFFERING TRANSACTIONS

EXCHANGE OFFER. Viacom currently intends to offer to exchange its shares of
our common stock for shares of Viacom's class A common stock and Viacom's class
B common stock, but has no obligation to do so. In connection with the request
for a tax ruling from the Internal Revenue Service, Viacom has represented that
National Amusements, Inc., the largest single stockholder of Viacom, will not
participate in the exchange offer.

20
<PAGE>
USE OF PROCEEDS

The net proceeds to be received by us from the sale of 31,000,000 shares of
class A common stock in this offering are estimated to be about $496.3 million,
or about $571.6 million if the underwriters exercise their over-allotment
options in full, after deducting underwriting discounts and commissions and
estimated offering expenses. All of the net proceeds from this offering will be
used to repay a portion of the $600 million revolving loan, one of the three
tranches under our credit agreement, maturing on June 19, 2000.

Borrowings under the credit agreement accrue interest at a rate equal to the
interest rates prevailing on the date of determination in the London interbank
market for the interest period selected by us, plus a margin over this rate. For
a more complete description of the credit agreement, we refer you to
"Description of Credit Agreement."

We have used or will use the borrowings under the credit agreement:

- to pay about $65 million which is a portion of the purchase price to
affiliates of Viacom to acquire the non-U.S. operations of our business
that we did not already own;

- to repay a promissory note issued by us, as a dividend, to Viacom
International Inc. in the principal amount of $1.4 billion plus accrued
and unpaid interest;

- to repay promissory notes issued by us, for an acquisition of video
stores, to Viacom International Inc. in the aggregate principal amount of
about $77 million plus accrued and unpaid interest;

- to pay the fees and expenses of about $15 million related to the
origination of the credit agreement to the syndicate of lenders; and

- for working capital and general corporate purposes.

21
<PAGE>
DIVIDEND POLICY

Following this offering, our dividend practices with respect to our common
stock will be determined and may be changed from time to time by our board of
directors. Under Delaware law and our certificate of incorporation, our board of
directors is not required to declare dividends on our common stock. We currently
intend to pay dividends on a quarterly basis, at an initial quarterly rate of
$0.02 per share for each class of our common stock, commencing with a
declaration in October 1999 for payment in November 1999. Our board of directors
is free to change our dividend practices at any time from time to time and to
decrease or increase the dividend paid, or to not pay a dividend, on our common
stock on the basis of our results of operations, financial condition, cash
requirements and future prospects and other factors deemed relevant by our board
of directors. Furthermore, our credit agreement limits our ability to pay
dividends. We refer you to "Description of Credit Agreement" for additional
information.

22
<PAGE>
CAPITALIZATION

The following table sets forth our cash and cash equivalents, short-term
borrowings and capitalization:

(1) at March 31, 1999; and

(2) giving pro forma effect to:

- the borrowings under the credit agreement and the application of the
amounts borrowed thereunder;

- this offering and the application of the net proceeds to be received
from the sale of the shares of class A common stock offered hereby at
an assumed public offering price of $17.00 per share, after deducting
the underwriting discounts and commissions and the estimated offering
expenses; and

- the conversion of Viacom's net equity investment in our company into
144,000,000 shares of class B common stock.

We refer you to "Use of Proceeds" and "Description of Credit Agreement" for
additional information relating to the application of the net proceeds from this
offering and the credit agreement.

<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------
PRO FORMA
ADJUSTED FOR
THIS
HISTORICAL OFFERING(1)
----------- ---------------
<S> <C> <C>
(DOLLARS IN MILLIONS)

Cash and cash equivalents............................................................. $ 75.0 $ 75.0
----------- ---------------
----------- ---------------

Debt: (2)

Short-term borrowings, including current portion of credit agreement and capital
lease obligations................................................................. 22.3 126.0
----------- ---------------

Long-term debt:

Notes payable to Viacom........................................................... 1,690.4 --

Long-term debt, third party credit agreement, less current portion................ -- 1,000.0

Capital lease obligations, less current portion................................... 134.2 134.2
----------- ---------------

Total long-term debt, less current portion...................................... 1,824.6 1,134.2
----------- ---------------

Total debt...................................................................... 1,846.9 1,260.2
----------- ---------------

Stockholders' equity:

Class A common stock, par value $.01 per share, 400,000,000 shares authorized,
31,000,000 shares issued and outstanding pro forma (3) (4)........................ -- 0.3

Class B common stock, par value $.01 per share, 500,000,000 shares authorized,
144,000,000 shares issued and outstanding pro forma (4)........................... -- 1.4

Additional paid-in capital.......................................................... -- 6,324.2

Viacom's net equity investment...................................................... 5,723.8 --

Accumulated other comprehensive loss-foreign currency translation adjustment........ (61.6) (61.6)
----------- ---------------

Total stockholders' equity (4).................................................. 5,662.2 6,264.3
----------- ---------------

Total capitalization.................................................................. $ 7,509.1 $ 7,524.5
----------- ---------------
----------- ---------------
</TABLE>

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

(1) We refer you to "Unaudited Pro Forma Consolidated Financial Data."

(2) For a description of our borrowings, we refer you to note 7 of our
consolidated financial statements for the three years ended December 31,
1998 and notes 3 and 6 of our interim consolidated financial statements.

(3) Excludes 144,000,000 shares of class A common stock issuable upon
conversion of the class B common stock and 25,000,000 shares reserved for
the exercise of options granted under our employee compensation plans. We
refer you to "Management."

(4) The pro forma amounts assume that the underwriters have not exercised their
over-allotment options. If the underwriters exercise their over-allotment
options in full, the number of issued and outstanding shares of class A
common stock will increase to 35,650,000. In addition, it is estimated that
total stockholders' equity will increase $75.3 million, with a
corresponding decrease in the amount outstanding under our credit
agreement. We refer you to "Use of Proceeds."

23
<PAGE>
DILUTION

As of March 31, 1999, we had a net tangible book value of $(306.3) million
or $(2.13) per share. After giving effect to our sale of 31,000,000 shares of
class A common stock offered hereby (assuming the underwriters do not exercise
their over-allotment options) at an assumed public offering price of $17.00 per
share, after deducting the underwriting discounts and commissions and estimated
offering expenses, our pro forma net tangible book value as of March 31, 1999
would have been about $190.0 million or $1.09 per share. This represents an
immediate increase in net tangible book value of $3.22 per share to the existing
stockholder and an immediate dilution of $15.91 per share to new investors. The
following table illustrates this per share dilution.

<TABLE>
<CAPTION>
PER SHARE
-----------
<S> <C>
Assumed public offering price per share............................................ $ 17.00
-----------
Net tangible book value before this offering (1)................................. (2.13)
Increase attributable to new investors........................................... 3.22
-----------
Pro forma net tangible book value after this offering.............................. 1.09
-----------
Dilution per share to new investors (2)............................................ $ 15.91
-----------
-----------
</TABLE>

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

(1) Assuming the transactions described in "Prospectus Summary -- Separation
from Viacom" and "Separation from Viacom -- Pre-Offering Transactions" had
occurred on March 31, 1999, this represents our net tangible book value
which is calculated by subtracting total liabilities from tangible assets,
as of March 31, 1999 divided by the number of shares of class B common stock
owned by Viacom.

(2) If the underwriters' over-allotment options are exercised in full, the
dilution per share to new investors will be $15.52 per share.

The following table summarizes, as of March 31, 1999, the relative
investment of the existing stockholder and new investors, giving pro forma
effect to the sale by us of the shares of class A common stock offered in this
offering.

<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED CONSIDERATION AVERAGE
------------------------ ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------- --------- ----------- --------- -----------
(IN
MILLIONS)
<S> <C> <C> <C> <C> <C>
Existing Stockholder............................. 144,000,000 82.3% $ 5,768.0 91.6% $ 40.06(1)
New Investors.................................... 31,000,000 17.7 527.0 8.4 17.00
------------- --------- ----------- --------- -----------
Total........................................ 175,000,000 100.0% $ 6,295.0 100.0% $ 35.97
------------- --------- ----------- --------- -----------
------------- --------- ----------- --------- -----------
</TABLE>

The foregoing computations do not include 25,000,000 shares of class A
common stock issuable upon the exercise of options granted under our employee
compensation plans. We refer you to "Management."

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

(1) Assuming the transactions described in "Prospectus Summary -- Separation
from Viacom" and "Separation from Viacom -- Pre-Offering Transactions" had
occurred on March 31, 1999, this represents our net book value which is
calculated by subtracting total liabilities from total assets, as of March
31, 1999 divided by the number of shares of class B common stock owned by
Viacom.

24
<PAGE>

SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA
FINANCIAL AND OPERATING DATA

The following table sets forth our selected consolidated historical and pro
forma financial data as of the dates and for the periods indicated. The selected
statement of operations and balance sheet data for the years ended December 31,
1996 through 1998 are derived from our audited consolidated financial
statements. The selected statement of operations data for the nine months ended
September 30, 1994, the three months ended December 31, 1994, the year ended
December 31, 1995 and the three months ended March 31, 1998 and 1999 and the
selected balance sheet data as of December 31, 1994 and 1995 and March 31, 1998
and 1999 are derived from our unaudited consolidated financial statements
prepared by us, which in our opinion, include all normal, recurring adjustments
necessary for a fair presentation of the financial position at such dates and
the results of operations for such respective periods. The financial information
herein may not necessarily reflect results of operations, financial position and
cash flows of our company in the future or what the results of operations,
financial position and cash flows would have been had we been a separate,
stand-alone entity during the periods presented.

The pro forma financial data have been derived from the unaudited pro forma
consolidated financial data which were prepared by us to illustrate the
estimated effects of the transactions to reorganize our company and the
application of the net offering proceeds. For a more complete description of
these transactions we refer you to "Unaudited Pro Forma Consolidated Financial
Data" and notes thereto included elsewhere in this prospectus. In addition, the
unaudited pro forma consolidated financial data do not purport to represent what
the results of operations or financial position of our company would actually
have been if the transactions to reorganize our company and the application of
the net offering proceeds had in fact occurred on such dates or to project the
results of operations or financial position of our company for any future period
or date.

The following data should be read in conjunction with, and are qualified by
reference to, the consolidated financial statements and related notes thereto,
the "Unaudited Pro Forma Consolidated Financial Data" and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.

25
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
NINE MONTHS THREE MONTHS
ENDED ENDED OR AT YEAR ENDED OR AT DECEMBER 31, OR AT MARCH 31,
SEPTEMBER 29, DECEMBER 31, ------------------------------------------ --------------------
1994(1) 1994 1995 1996(2) 1997(3) 1998(4) 1998 1999
------------- --------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AND WORLDWIDE STORE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 1,468.0 $ 546.3 $ 2,403.3 $ 2,942.1 $ 3,313.6 $ 3,893.4 $ 931.2 $ 1,113.0
Gross profit.................. 1,030.9 431.0 1,705.4 1,928.4 1,953.1 1,937.0 604.6 671.2
Operating expenses............ 742.9 273.6 1,275.2 1,660.8 2,167.7 2,296.2 537.6 622.6
Operating income (loss)....... 288.0 157.4 430.2 267.6 (214.6) (359.2) 67.0 48.6
Interest expense, net, and
other items................. (16.6) (2.4) (11.0) (18.4) (54.7) (35.5) (6.0) (28.6)
Income (loss) before income
taxes....................... 271.4 155.0 419.2 249.2 (269.3) (394.7) 61.0 20.0
Benefit (provision) for income
taxes....................... (127.1) (71.8) (227.7) (167.4) (30.0) 59.4 (45.2) (23.4)
Equity in income (loss) of
affiliated companies, net of
tax......................... 1.7 -- (48.6) (4.0) (18.9) (1.3) -- --
Net income (loss)............. $ 146.0 $ 83.2 $ 142.9 $ 77.8 $ (318.2) $ (336.6) $ 15.8 $ (3.4)

Net income (loss) per share--
basic and diluted (6)....... $ 0.58 $ 0.99 $ 0.54 $ (2.21) $ (2.34) $ 0.11 $ (0.02)
Weighted average shares
outstanding--basic and
diluted (6)................. 144 144 144 144 144 144 144

BALANCE SHEET DATA:
Cash and cash equivalents..... $ 55.2 $ 100.3 $ 58.6 $ 129.6 $ 99.0 $ 72.9 $ 75.0
Rental library, net........... 291.1 519.5 676.0 734.5 441.2 750.2 457.3
Intangibles, net.............. 6,147.1 6,531.3 6,309.6 6,192.7 6,055.6 6,161.0 6,074.3
Total assets.................. 8,249.7 8,570.9 8,794.6 8,731.0 8,274.8 8,617.0 8,300.5
Long-term debt, less current
portion (7)................. 296.3 168.3 249.0 331.3 1,715.2 352.2 1,824.6
Stockholders' equity (7)...... 7,274.9 7,737.2 7,784.4 7,617.6 5,637.9 7,603.8 5,662.2

WORLDWIDE STORE DATA:
Company-operated stores at end
of period................... 3,067 3,692 4,472 5,105 5,283 5,076 5,438
Franchised and joint venture
stores at end of period..... 1,002 821 845 944 1,098 942 1,061
Total stores at end of
period...................... 4,069 4,513 5,317 6,049 6,381 6,018 6,499
Same store revenues increase
(decrease)(8)............... 5.1% (1.8)% 13.3% 7.6% 17.0%

<CAPTION>
PRO FORMA
AS
ADJUSTED
THREE
PRO FORMA AS MONTHS
ADJUSTED ENDED
YEAR ENDED OR AT
DECEMBER 31, MARCH 31,
1998(5) 1999(5)
------------ ----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 3,893.4 $ 1,113.0
Gross profit.................. 1,937.0 671.2
Operating expenses............ 2,296.2 622.6
Operating income (loss)....... (359.2) 48.6
Interest expense, net, and
other items................. (110.8) (23.1)
Income (loss) before income
taxes....................... (470.0) 25.5
Benefit (provision) for income
taxes....................... 88.8 (25.5)
Equity in income (loss) of
affiliated companies, net of
tax......................... (1.3) --
Net income (loss)............. $ (382.5) $ 0.0
Net income (loss) per share--
basic and diluted (6)....... $ (2.19) $ 0.00
Weighted average shares
outstanding--basic and
diluted (6)................. 175 175
BALANCE SHEET DATA:
Cash and cash equivalents..... N/A $ 75.0
Rental library, net........... N/A 457.3
Intangibles, net.............. N/A 6,074.3
Total assets.................. N/A 8,315.9
Long-term debt, less current
portion (7)................. N/A 1,134.2
Stockholders' equity (7)...... N/A 6,264.3
WORLDWIDE STORE DATA:
Company-operated stores at end
of period...................
Franchised and joint venture
stores at end of period.....
Total stores at end of
period......................
Same store revenues increase
(decrease)(8)...............
</TABLE>

- ------------------------------
N/A - Not Applicable

(1) The statement of operations data for the nine months ended September 29,
1994 represents Blockbuster Entertainment Corporation as an independent
company relating solely to the videocassette and video game rental business
prior to its acquisition by Viacom. In September 1994, Blockbuster
Entertainment Corporation merged with and into Viacom. All financial data
subsequent to September 29, 1994 reflects Viacom's basis of accounting
established in purchase accounting effective with its acquisition and now
reflected on our consolidated financial statements.

(2) During 1996 we recognized a restructuring charge of $50.2 million primarily
relating to our corporate relocation and elimination of third party
distributors.

(3) During 1997 we recognized charges totaling $250 million primarily related to
inventory write-downs, closure of underperforming stores, write-offs
attributable to international joint ventures and additional expenses
incurred in connection with our corporate relocation.

(4) During 1998 we changed our method of amortizing our videocassette and video
game rental inventory. This newly adopted method represents a more
accelerated method of amortization. The adoption of this new method of
amortization was accounted for as a change in accounting estimate effected
by a change in accounting principle and, accordingly, we recorded a non-cash
charge of $424.3 million recognized as cost of sales.

(5) For information regarding the pro forma adjustments made to our historical
financial data, we refer you to "Unaudited Pro Forma Consolidated Financial
Data."

(6) As described in note 1 to our consolidated financial statements, our company
was recapitalized to provide for class A common stock and class B common
stock. In accordance with SEC Staff Accounting Bulletin No. 98, the
capitalization of the class B common stock has been retroactively reflected
for the purposes of presenting historical net income (loss) per share for
periods prior to this offering. Pro forma weighted average shares
outstanding reflect all shares of class B common stock issued and
outstanding which are owned by Viacom and the class A common stock to be
issued in this offering, assuming the underwriters have not exercised their
over-allotment options, as if these shares had been outstanding since the
beginning of each respective period.

(7) This reflects the December 31, 1998 declaration of a $1.4 billion dividend
payable to Viacom International Inc. in the form of an interest-bearing
promissory note.

(8) A store is included in the same store revenue calculation after it has been
open and owned by us for more than 52 weeks. An acquired store becomes part
of the same store base in the 53rd week after acquisition and conversion.
The percentage change is computed by comparing total net revenues for same
stores as defined above at the end of the applicable reporting period with
total net revenues from these same stores for the comparable period in the
prior year.

26
<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

The unaudited pro forma consolidated statements of operations of our company
for the year ended December 31, 1998 and the three months ended March 31, 1999,
and the unaudited pro forma consolidated balance sheet as of March 31, 1999 have
been prepared based on our consolidated financial statements and interim
consolidated financial statements and related notes presented elsewhere in this
prospectus. This data is based on various assumptions and includes the
adjustments explained in the related notes. The unaudited pro forma consolidated
statements of operations and the unaudited pro forma consolidated balance sheet
have been prepared as if the transactions described in the following paragraph
had occurred as of the beginning of the respective periods presented, and as of
March 31, 1999, respectively.

On December 31, 1998, we declared a dividend payable to Viacom International
Inc. in the form of an interest-bearing promissory note of $1.4 billion.
Additionally, in the first quarter of 1999, promissory notes were issued to
Viacom International Inc. in the aggregate principal amount of about $77 million
in order to obtain funds for the acquisition of video stores. Prior to this
offering, the following transactions occurred:

- we purchased some non-U.S. operations of our business from affiliates of
Viacom for an aggregate purchase price of about $222 million using about
$65 million of proceeds of the credit agreement discussed below and about
$157 million in contributed capital from Viacom;

- we entered into a $1.9 billion credit agreement;

- we borrowed about $1.6 billion under the credit agreement and the proceeds
were used as follows:

(1) to pay about $65 million which is a portion of the purchase price to
affiliates of Viacom to acquire the non-U.S. operations of our
business that we did not already own;

(2) to repay the Dividend Note of $1.4 billion and the Acquisition Notes
of about $77 million;

(3) to pay about $43 million in accrued and unpaid interest due Viacom
under the Dividend Note and Acquisition Notes; and

(4) to pay the fees and expenses of about $15 million relating to the
origination of the credit agreement.

- we and Viacom entered into a transition services agreement with respect to
cash management, accounting, legal, management information systems,
financial and tax services as well as employee benefit plan and insurance
administration.

We refer you to "Description of Credit Agreement," "Use of Proceeds" and
"Related Party Transactions -- Agreements Between Viacom and Us."

The unaudited pro forma consolidated financial data do not purport to
represent what the results of operations or financial position of our company
would actually have been if this offering and the other transactions described
above had in fact occurred on such dates or to project the results of operations
or financial position of our company for any future date or period. This data
should be read in conjunction with the consolidated financial statements and
related notes, the interim consolidated financial statements and the related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus.

We believe the estimates and assumptions used to prepare the unaudited pro
forma consolidated financial data provide a reasonable basis for presenting the
significant effects of this offering and the transactions discussed above, and
that the pro forma adjustments give appropriate effect to the estimates and
assumptions and are properly applied in the unaudited pro forma consolidated
financial data.

27
<PAGE>

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------
PRO FORMA
ADJUSTED FOR
PRO FORMA OFFERING THIS
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS OFFERING
--------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues................................... $ 3,893.4 $ $ 3,893.4 $ $ 3,893.4
Cost of sales.............................. 1,956.4 1,956.4 1,956.4
Operating expenses, excluding amortization
of intangibles(1)........................ 2,126.0 2,126.0 2,126.0
Amortization of intangibles................ 170.2 170.2 170.2
--------- ----------- ----------- ------ ------------
Operating income (loss).................... (359.2) (359.2) (359.2)
(108.4)(2)
Interest expense and other items, net...... (35.5) (3.1)(3) (147.0) 36.2(5) (110.8)
--------- ----------- ----------- ------ ------------
Income (loss) before income taxes.......... (394.7) (111.5) (506.2) 36.2 (470.0)
Benefit (provision) for income taxes....... 59.4 43.5(4) 102.9 (14.1)(6) 88.8
Equity in loss of affiliated companies, net
of tax................................... (1.3) (1.3) (1.3)
--------- ----------- ----------- ------ ------------
Net income (loss).......................... $ (336.6) $ (68.0) $ (404.6) $ 22.1 $ (382.5)
--------- ----------- ----------- ------ ------------
--------- ----------- ----------- ------ ------------
Net income (loss) per share -- basic and
diluted.................................. $ (2.34) $ (2.19)(7)
--------- ------------
--------- ------------
Weighted average shares outstanding --
basic and diluted........................ 144 175(7)
--------- ------------
--------- ------------

THREE MONTHS ENDED MARCH 31, 1999
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $ 1,113.0 $ $ 1,113.0 $ $ 1,113.0
Cost of sales.............................. 441.8 441.8 441.8
Operating expenses, excluding amortization
of intangibles(1)........................ 579.6 579.6 579.6
Amortization of intangibles................ 43.0 43.0 43.0
--------- ----------- ----------- ------ ------------
Operating income (loss).................... 48.6 48.6 48.6
(2.0)(2)
Interest expense, net...................... (28.6) (0.8)(3) (31.4) 8.3(5) (23.1)
--------- ----------- ----------- ------ ------------
Income (loss) before income taxes.......... 20.0 (2.8) 17.2 8.3 25.5
Benefit (provision) for income taxes....... (23.4) 1.1(4) (22.3) (3.2)(6) (25.5)
--------- ----------- ----------- ------ ------------
Net income (loss).......................... $ (3.4) $ (1.7) $ (5.1) $ 5.1 $ 0.0
--------- ----------- ----------- ------ ------------
--------- ----------- ----------- ------ ------------
Net income (loss) per share -- basic and
diluted.................................. $ (0.02) $ 0.00(7)
--------- ------------
--------- ------------
Weighted average shares outstanding --
basic and diluted........................ 144 175(7)
--------- ------------
--------- ------------
</TABLE>

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

(1) We believe that additional general and administrative expense resulting from
the transition services agreement and from the addition of personnel to
fulfill certain functions previously provided by Viacom will not differ
materially from the allocated general and administrative expense from Viacom
of $12.5 million for the year ended December 31, 1998 and $3.1 million for
the three months ended March 31, 1999.

28
<PAGE>

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

(UNAUDITED)

(2) This reflects additional interest expense primarily relating to the funding
of the $1.6 billion in borrowings under the credit agreement to fund
promissory notes payable to Viacom International Inc. and the partial
funding of the purchase from affiliates of Viacom of the non-U.S. operations
of our business that we did not already own. The additional interest expense
was calculated by multiplying the $1.6 billion of debt outstanding during
the periods presented, assuming the bank borrowings were outstanding at the
beginning of each respective period, by an average annual interest rate of
7.3% for the year ended December 31, 1998 and 6.7% for the three months
ended March 31, 1999. These amounts were reduced by the historical related
party interest cost of $8.4 million for the year ended December 31, 1998 and
$24.8 million for the three months ended March 31, 1999. This rate
represents the average of the one-month LIBOR rate as of the end of each
month in each respective period plus 1.75%.

(3) This represents amortization of deferred bank fees incurred in connection
with our credit agreement.

(4) This reflects the income tax benefit associated with adjustments described
in footnotes (2) and (3) above.

(5) This reflects the reduction in interest expense as a result of the use of
all of the net proceeds of this offering to repay $496.3 million of $1.6
billion in borrowings under the credit agreement. If interest rates were to
increase or decrease by 0.125 of 1%, our company's related interest expense
would be expected to increase or decrease by about $1.4 million annually and
$0.3 million quarterly.

(6) This reflects the income tax provision associated with the adjustment in
footnote (5) above.

(7) The pro forma basic net income (loss) per share includes both the class A
common stock and class B common stock expected to be outstanding as of the
date of this offering, assuming the underwriters have not exercised their
over-allotment options. The pro forma diluted net income (loss) per share
does not differ from basic net income (loss) per share as the exercise price
of employee stock options expected to be outstanding will be equal to the
initial public offering price. Therefore, no dilution is expected.

29
<PAGE>

PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 1999

(UNAUDITED)

ASSETS

<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA OFFERING ADJUSTED FOR
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS THIS OFFERING
----------- --------------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Cash and cash equivalents............. $ 75.0 $ $ 75.0 $ $ 75.0
Receivables, net...................... 132.5 132.5 132.5
Merchandise inventories............... 276.6 276.6 276.6
Prepaid assets........................ 146.4 146.4 146.4
----------- ------- ------------- ------- ---------------
Total current assets............ 630.5 630.5 630.5
Rental library, net................... 457.3 457.3 457.3
Deferred income taxes................. 74.3 74.3 74.3
Property and equipment, net........... 1,005.3 1,005.3 1,005.3
Intangibles, net...................... 6,074.3 6,074.3 6,074.3
Other assets.......................... 58.8 15.4(1) 74.2 74.2
----------- ------- ------------- ------- ---------------
Total assets.................... $ 8,300.5 $ 15.4 $ 8,315.9 $ -- $ 8,315.9
----------- ------- ------------- ------- ---------------
----------- ------- ------------- ------- ---------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable...................... $ 350.8 $ $ 350.8 $ $ 350.8
Accrued expenses...................... 325.7 325.7 325.7
Current portion of long-term debt and
capital lease obligations........... 22.3 22.3 22.3
Short-term borrowings................. -- 600.0(1) 600.0 (496.3)(4) 103.7
Deferred income taxes................. 11.1 11.1 11.1
----------- ------- ------------- ------- ---------------
Total current liabilities....... 709.9 600.0 1,309.9 (496.3) 813.6
Notes payable to Viacom............... 1,690.4 (1,690.4)(1)
Long-term debt, less current
portion............................. 1,000.0(1) 1,000.0 1,000.0
Capital lease obligations, less
current portion..................... 134.2 134.2 134.2
Other liabilities..................... 103.8 103.8 103.8
----------- ------- ------------- ------- ---------------
Total liabilities............... 2,638.3 (90.4) 2,547.9 (496.3) 2,051.6

Stockholders' equity:
Class A common stock, par value $.01
per share; 400,000,000 shares
authorized, 31,000,000 shares
issued and outstanding pro
forma............................. -- -- 0.3(3) 0.3
Class B common stock, par value $.01
per share; 500,000,000 shares
authorized, 144,000,000 shares
issued and outstanding pro
forma............................. -- 1.4(2) 1.4 1.4
Additional paid-in capital.......... -- 5,828.2(2) 5,828.2 496.0(3) 6,324.2
Viacom's net equity investment...... 5,723.8 105.8(1) -- --
(5,829.6)(2)
Accumulated other comprehensive
loss-foreign currency translation
adjustment........................ (61.6) (61.6) (61.6)
----------- ------- ------------- ------- ---------------
Total stockholders' equity...... 5,662.2 105.8 5,768.0 496.3 6,264.3
----------- ------- ------------- ------- ---------------
Total liabilities and
stockholders' equity.......... $ 8,300.5 $ 15.4 $ 8,315.9 $ -- $ 8,315.9
----------- ------- ------------- ------- ---------------
----------- ------- ------------- ------- ---------------
</TABLE>

30
<PAGE>

PRO FORMA CONSOLIDATED BALANCE SHEET

MARCH 31, 1999

(UNAUDITED)

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

(1) This reflects the application of $1.6 billion in borrowings under the credit
agreement to primarily repay the $1.477 billion in promissory notes payable
to Viacom International Inc., pay about $22.3 million in accrued but unpaid
interest (classified as Notes payable to Viacom) due Viacom International
Inc. at March 31, 1999, pay about $15.4 million in bank fees incurred
pursuant to the credit agreement with the remaining $85.3 million used to
pay a portion of the purchase price to affiliates of Viacom for the non-U.S.
operations of our business that we did not already own (reflected as a
partial retirement of historical intercompany debt in the accompanying
unaudited pro forma balance sheet). At March 31, 1999, the historical
intercompany debt due Viacom for some of our non-U.S. operations was about
$191.1 million. Accordingly, about $105.8 million (intercompany debt at
March 31, 1999 of $191.1 million less the partial payment of $85.3 million)
has been recognized as an increase in Viacom's net equity investment in the
accompanying pro forma consolidated balance sheet.

(2) This reflects conversion of Viacom's net equity investment in our company
into 144,000,000 shares of class B common stock.

(3) This reflects the receipt of $496.3 million in net proceeds from this
offering. Proceeds are calculated based on the assumed sale of 31,000,000
shares at $17.00 per share, net of underwriting discounts and commissions of
$25.0 million, and estimated offering expenses of $5.7 million. The pro
forma adjustments assume that the underwriters have not exercised their
over-allotment options. If the underwriters exercise their over-allotment
options in full, the number of issued and outstanding shares of class A
common stock will increase to 35,650,000 and it is estimated that
stockholders' equity will increase $75.3 million with a corresponding
decrease to the amount outstanding under our credit agreement. We refer you
to "Use of Proceeds."

(4) This reflects the use of all of the net proceeds from this offering to repay
$496.3 million of $1.6 billion in borrowings under the credit agreement as
described in "Use of Proceeds."

31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS.

GENERAL

Blockbuster entered into the video rental business in 1985 and is the
world's leading retailer of rentable home videocassettes, DVDs and video games.
Our 6,500 stores offer a wide selection of entertainment products for rent or
purchase. Our business model was significantly modified in 1997 to refocus on
videocassette rental, improving the customer experience and satisfying customer
demand earlier for newly released videos. During 1998, our customers' responses
were very favorable with a revenue increase of 17.5%, an increase in same store
revenues of 13.3% and an increase in domestic rental transactions of about 14%
on a same store basis as compared to 1997.

The consolidated financial statements for the periods presented do not fully
reflect the trends in our business as we had significantly different business
models during these periods. In addition, the periods presented include
significant charges which relate to these business model changes. As a result
and as further explained below, our results of operations for those periods are
not comparable.

In connection with our merger with Viacom in 1994, we valued our
videocassette rental library at fair market value, which formed the basis for
subsequent amortization of this inventory over a period of up to 36 months. Such
fair market value proved, on average, to be lower than the cost of rental
videocassettes acquired after the merger. As a result, amortization was lower
with respect to rental videocassettes acquired in the 1994 merger than rental
videocassettes purchased after the merger. This lower amortization favorably
affected results in 1996 and, to a lesser extent, in 1997. Amortization in 1996
and in 1997 also increased as a result of increased purchases of videocassettes.

In 1996, we decided to offer not only our traditional video rental and
related merchandise but various other merchandise categories, including
clothing, books and magazines. We also decided to move our corporate
headquarters from Ft. Lauderdale, Florida to Dallas, Texas and to build an
850,000 square foot distribution center to handle our existing and new products
and eliminate third party distribution. These changes resulted in a $50.2
million charge.

Following significant management changes in 1997, we determined that the new
merchandise lines that had been added in 1996 were not as profitable as our core
rental business. As a result, we refocused our merchandise lines and in the
second quarter of 1997, we recorded charges amounting to $250 million, $100.8
million of which related to a reduction in the carrying value of some of our
retail merchandise inventory.

In recognizing that we could not purchase enough videocassettes at the
"full" cost to satisfy customer demand without significantly increasing our
risk, we changed our business model. In 1998, in order to increase the quantity
and selection of newly released video titles and satisfy our customers' demand
for newly released videos earlier, we entered into revenue-sharing agreements
with the major movie studios. Prior to our change to a revenue-sharing business
model, our videocassette rental library was purchased at "full" cost, generally
between $60 and $70 per videocassette for major theatrical releases that were
priced for rental in the United States. The implementation of revenue-sharing
dramatically affected our cost of sales as we changed our business model from a
primarily fixed to a primarily variable cost approach. Starting in the second
quarter of 1998, revenue-sharing payments to the movie studios became a
significant component of our cost of sales. In addition, we shortened the period
over which we amortize the up front cost of acquiring most newly released
videocassettes to three months. In connection with this change in method of
accounting for our videocassette rental library, we recorded a $424.3 million
charge to reflect a reduction in the carrying value of this library.

32
<PAGE>

We have a substantial amount of intangible assets on our consolidated
financial statements. As of March 31, 1999, we had net intangible assets of
$6,074.3 million, which represented about 73% of our total assets and about 107%
of our stockholders' equity. Our intangible assets consist primarily of
goodwill. This goodwill was primarily created when Viacom acquired our business
and operations in 1994 for a purchase price in excess of the fair market value
of our tangible net assets at that time. This goodwill was originally recorded
on Viacom's financial statements in connection with Viacom's acquisition of our
business and operations and is now recorded as an asset on our consolidated
financial statements. This goodwill generally represents our BLOCKBUSTER name.
We evaluate on a regular basis whether or not events and circumstances have
occurred to indicate that all or a portion of the carrying amount of these
intangible assets may require an adjustment or a change to the amortization
period.

RESULTS OF OPERATIONS

The following table sets forth results of operations and other financial
data.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT MARGIN AND WORLDWIDE STORE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................ $ 2,942.1 $ 3,313.6 $ 3,893.4 $ 931.2 $ 1,113.0
Cost of sales........................................... 1,013.7 1,360.5 1,956.4 326.6 441.8
--------- --------- --------- --------- ---------
Gross profit............................................ 1,928.4 1,953.1 1,937.0 604.6 671.2
Operating expenses...................................... 1,660.8 2,167.7 2,296.2 537.6 622.6
--------- --------- --------- --------- ---------
Operating income (loss)................................. 267.6 (214.6) (359.2) 67.0 48.6
Interest expense........................................ (22.0) (30.8) (27.7) (6.9) (29.2)
Interest income......................................... 3.6 3.7 4.0 0.9 0.6
Other items, net........................................ -- (27.6) (11.8) -- --
--------- --------- --------- --------- ---------
Income (loss) before income taxes....................... 249.2 (269.3) (394.7) 61.0 20.0
Benefit (provision) for income taxes.................... (167.4) (30.0) 59.4 (45.2) (23.4)
Equity in loss of affiliated companies, net of tax...... (4.0) (18.9) (1.3) -- --
--------- --------- --------- --------- ---------
Net income (loss)....................................... $ 77.8 $ (318.2) $ (336.6) $ 15.8 $ (3.4)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
CASH FLOW DATA:
Cash flows from operating activities.................... $ 985.0 $ 991.3 $ 1,234.5 $ 242.3 $ 166.5
Cash flows from (used for) investing activities......... (1,235.1) (1,188.1) (1,022.2) (232.6) (325.4)
Cash flows from (used for) financing activities......... 208.8 269.3 (241.1) (65.9) 135.6

OTHER DATA:
Depreciation............................................ $ 165.5 $ 253.8 $ 212.7 $ 52.3 $ 51.8
Amortization of intangibles............................. 166.2 168.7 170.2 42.6 43.0
EBITDA(1)............................................... 599.3 207.9 23.7 161.9 143.4
Net income (loss) plus intangible amortization, net of
tax(1)(2)............................................. $ 239.6 $ (155.0) $ (172.5) $ 56.8 $ 37.8
MARGINS:
Rental margin(3)........................................ 74.1% 69.6% 54.6% 71.9% 65.7%
Merchandise margin(4)................................... 19.3 7.4 19.8 22.1 19.7
Gross margin(5)......................................... 65.5 58.9 49.8 64.9 60.3
WORLDWIDE STORE DATA:
Same store revenues increase (decrease)(6).............. 5.1% (1.8)% 13.3% 7.6% 17.0%
Total stores at end of period........................... 5,317 6,049 6,381 6,018 6,499
</TABLE>

SEE FOOTNOTES ON THE FOLLOWING PAGE

33
<PAGE>
- ------------------------

(1) "EBITDA" and "Net income (loss) plus intangible amortization, net of tax"
are presented here to provide additional information about our operations.
These items should be considered in addition to, but not as a substitute for
or superior to, operating income, net income, cash flow and other measures
of financial performance prepared in accordance with generally accepted
accounting principles. EBITDA may differ in the method of calculation from
similarly titled measures used by other companies.

(2) Intangible amortization, net of tax, included in this item is primarily
related to goodwill.

(3) Rental gross profit as a percentage of rental revenues.

(4) Merchandise gross profit as a percentage of merchandise revenues.

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

(6) This represents the increase (decrease) over the prior comparable period.

SPECIAL ITEM CHARGES

During the fourth quarter of 1996, we recorded a $50.2 million restructuring
charge associated with the relocation of our headquarters to Dallas, Texas and
the elimination of third party distributors.

During the second quarter of 1997, we recorded a $250 million special item
charge principally associated with a write-down of excess inventory of $100.8
million, operating charges for domestic and international reorganization, store
closings and additional corporate relocation costs. This special item charge
also included write-offs attributable to our joint venture operations in Japan
recorded as equity in loss of affiliated companies, net of tax.

During the second quarter of 1998, we recorded a $424.3 million special item
charge associated with a change in the method of accounting for videocassettes
and video game rental inventory.

The following is a summary of the impact of the above-described special item
charges on our operating results during the periods presented.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Operating income................................... $ (50.2) $ (220.3) $ (424.3) $ -- $ --
Net income......................................... (30.1) (174.7) (273.1) -- --
</TABLE>

Excluding the above-described special item charges, operating results would
have been as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues................................................ $ 2,942.1 $ 3,313.6 $ 3,893.4 $ 931.2 $ 1,113.0
Cost of sales........................................... 1,013.7 1,259.7 1,532.1 326.6 441.8
--------- --------- --------- --------- ---------
Gross profit............................................ 1,928.4 2,053.9 2,361.3 604.6 671.2
Operating expenses...................................... 1,610.6 2,048.2 2,296.2 537.6 622.6
--------- --------- --------- --------- ---------
Operating income, excluding special item charges........ $ 317.8 $ 5.7 $ 65.1 $ 67.0 $ 48.6
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

34
<PAGE>
FIRST QUARTER ENDED MARCH 31, 1999 COMPARED TO FIRST QUARTER ENDED MARCH 31,
1998

REVENUES. Revenues of $1,113.0 million for the first quarter of 1999
increased $181.8 million, or 19.5%, from $931.2 million for the first quarter of
1998 primarily due to an increase of 17.0% in same store revenues, an increase
of about 14% in domestic rental transactions on a same store basis and the net
addition of 362 company-operated stores. Revenue growth consisted primarily of
an increase of $180.8 million, or 23.4%, in rental revenues to $952.0 million
for the first quarter of 1999, principally due to the increase in rental
transactions driven by:

- a substantial increase in the quantity and selection of newly released
videos provided through revenue-sharing agreements;

- the impact of our advertising campaigns aimed at marketing the improved
customer experience; and

- the implementation of more competitive pricing and rental terms.

Rental revenues include base rental fees and extended viewing fees. Extended
viewing fees of $179.4 million for the first quarter of 1999 increased $37.7
million, or 26.6%, from $141.7 million for the first quarter of 1998 due to the
increase in rental transactions. As a percentage of total revenues, extended
viewing fees remained relatively constant in the first quarter of 1999 at 16.1%
as compared to 15.2% for the first quarter of 1998. Base rental fees and
extended viewing fees vary from market to market.

COST OF SALES. Cost of sales of $441.8 million for the first quarter of
1999 increased $115.2 million from $326.6 million for the first quarter of 1998.
Cost of sales as a percentage of total revenues increased to 39.7% in the first
quarter of 1999 from 35.1% in the first quarter of 1998. This increase was
primarily attributable to an increase in cost of rental revenues of $110.5
million from the first quarter of 1998 to the first quarter of 1999.

During the first quarter of 1998, our new business model of revenue-sharing
with the studios was not fully implemented. The increased cost of rental
revenues in the first quarter of 1999 was principally related to increases in
revenue-sharing payments made to movie studios and increased rental revenues.
Pursuant to the change in accounting adopted on April 1, 1998, revenue-sharing
payments were expensed as incurred and rental tape amortization was accelerated.
During the first quarter of 1999, payments made pursuant to our revenue-sharing
agreements increased $123.6 million as compared to the first quarter of 1998.
This increase is partially offset by a decrease in rental tape amortization of
$13.1 million.

GROSS PROFIT. Gross profit of $671.2 million for the first quarter of 1999
increased $66.6 million from $604.6 million for the first quarter of 1998. Gross
profit as a percentage of total revenues, or gross margin, decreased to 60.3% in
the first quarter of 1999 from 64.9% in the first quarter of 1998. Gross margin
for the first quarter of 1998 and the first quarter of 1999 are not comparable
because of the change in accounting implemented in the second quarter of 1998
related to our new business model.

OPERATING EXPENSES. Total operating expenses of $622.6 million in the first
quarter of 1999 increased $85.0 million from $537.6 million in the first quarter
of 1998. Total operating expenses decreased as a percentage of total revenues to
55.9% in the first quarter of 1999 from 57.7% in the first quarter of 1998. The
increase in total operating expenses resulted from the following:

GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense,
which includes expenses incurred at the store and corporate level, decreased
as a percentage of total revenues to

35
<PAGE>
42.4% in the first quarter of 1999 from 44.1% in the first quarter of 1998.
General and administrative expense of $472.1 million in the first quarter of
1999 increased $61.4 million from $410.7 million in the first quarter of
1998. The dollar increase in general and administrative expense primarily
resulted from compensation increases of $32.2 million related to hiring
additional personnel to support our store growth. Occupancy cost increased
$7.1 million largely as a result of an increase in the number of stores.
Other corporate and store expenses increased $22.1 million due primarily to
the growth in our business.

ADVERTISING EXPENSE. Advertising expense of $55.7 million in the first
quarter of 1999 increased $23.7 million from $32.0 million in the first
quarter of 1998. As a percentage of total revenues, advertising expense
increased to 5.0% in the first quarter of 1999 from 3.4% in the first
quarter of 1998. This reflects our continued investment in advertising and
marketing which increased beginning in the second quarter of 1998.

INTEREST EXPENSE. Interest expense of $29.2 million in the first quarter of
1999 increased $22.3 million from $6.9 million in the first quarter of 1998
reflecting interest expense associated with a $1.4 billion dividend note issued
to Viacom on December 31, 1998 and other promissory notes issued to Viacom in
January 1999 related to the purchase of video stores.

PROVISION FOR INCOME TAXES. The provision for income taxes of $23.4 million
for the first quarter of 1999 decreased $21.8 million from $45.2 million for the
first quarter of 1998 primarily due to the decrease in pre-tax income.

NET INCOME (LOSS). For the reasons described above, net loss of $3.4
million for the first quarter of 1999 reflected a decrease in net income of
$19.2 million from net income of $15.8 million for the first quarter of 1998.

COMPARISON OF 1998 TO 1997

REVENUES. Revenues of $3,893.4 million in 1998 increased $579.8 million, or
17.5%, from $3,313.6 million in 1997 largely as a result of a 13.3% growth in
our same store revenues which increased primarily as a result of an increase of
about 14% in our domestic rental transactions on a same store basis and the net
addition of 178 company-operated stores. Revenue growth consisted primarily of
increases in rental transactions driven by:

- a substantial increase in the quantity and selection of newly released
videos provided through revenue-sharing agreements;

- the impact of our advertising campaigns aimed at marketing the improved
customer experience;

- the implementation of more competitive pricing and rental terms; and

- the increased popularity of game rentals.

Extended viewing fees of $583.9 million in 1998 increased $180.1 million, or
44.6%, from $403.8 million in 1997 largely as a result of increases in rental
transactions and fee increases in January 1998, which were partially offset by
longer base rental periods. As a percentage of total revenues, extended viewing
fees increased to 15.0% in 1998 from 12.2% in 1997.

Merchandise sales also contributed to revenue growth increasing $24.0
million, or 4.0%, over the prior year largely as a result of the video release
of TITANIC, an increase in the number of company-operated stores and improved
merchandising campaigns in some markets.

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<PAGE>
COST OF SALES. Cost of sales of $1,956.4 million in 1998 increased $595.9
million from $1,360.5 million in 1997. Cost of sales as a percentage of total
revenues increased to 50.2% in 1998 from 41.1% in 1997. Excluding the special
item charges of $424.3 million in 1998 and $100.8 million in 1997, cost of sales
increased $272.4 million primarily as a result of revenue-sharing payments to
movie studios and cost of merchandise sales. Commencing on April 1, 1998, we
substantially increased our purchases of videocassette rental product through
revenue-sharing arrangements with the movie studios. Pursuant to our new
business model and our change in accounting method adopted on April 1, 1998,
revenue-sharing payments are expensed as incurred and the cost of rental product
amortization has been accelerated. Payments made pursuant to our revenue-sharing
agreements increased $314.3 million in 1998 as compared to 1997. Partially
offsetting the increased expense due primarily to revenue-sharing is a decrease
in rental tape amortization of $88.3 million. This decrease is due to the
decline in the up front costs of rental product purchased pursuant to
revenue-sharing. Our total cost of merchandise sold of $495.5 million increased
$46.4 million in 1998 from $449.1 million in 1997.

GROSS PROFIT. Gross profit as a percentage of revenues, or gross margin,
decreased to 49.8% in 1998 from 58.9% in 1997. Excluding the special item
charges of $424.3 million in 1998 and $100.8 million in 1997, gross profit
decreased as a percentage of revenues to 60.6% in 1998 from 62.0% in 1997. Gross
margins for 1998 and 1997 are not comparable because of the special item charges
recorded in the second quarter of each year and the change in accounting
implemented in the second quarter of 1998 related to our new business model.
Merchandise margins declined in 1998 as compared to 1997 due to increased
markdowns and promotional activities during 1998.

OPERATING EXPENSES. Total operating expenses of $2,296.2 million in 1998
increased $128.5 million from $2,167.7 million in 1997. Total operating expenses
as a percentage of total revenues decreased to 59.0% in 1998 from 65.4% in 1997.
The increase in total operating expenses resulted from the following:

GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense,
which includes expense incurred at the store and corporate level, decreased
as a percentage of total revenues to 44.5% in 1998 from 48.5% in 1997.
Excluding the special item charge of $74.4 million related to relocation and
occupancy costs in 1997, general and administrative expense of $1,732.3
million in 1998 increased $201.0 million from $1,531.3 million in 1997 due
to compensation increases of $81.3 million, a $73.9 million increase in
other corporate and store expenses and a $45.8 million increase in occupancy
cost. Store labor cost increased because of an increase in the number of
store personnel, the increase in the number of company-operated stores and
an increase in minimum wage from $4.75 per hour to $5.15 per hour which
became effective in September 1997. The increase in the number of store
personnel reflects our commitment to better serve our customers and support
our revenue growth. The increase in occupancy cost was primarily
attributable to an increase in the number of stores.

ADVERTISING EXPENSE. Advertising expense of $181.0 million in 1998
increased $41.5 million from $139.5 million in 1997. As a percentage of
total revenues, advertising expense increased to 4.6% in 1998 from 4.2% in
1997. This increase was primarily due to additional promotional and
advertising activity in order to increase customer awareness of the greater
quantity and selection of newly released videos, our improved customer
service, and the improved selection of BLOCKBUSTER FAVORITES.

DEPRECIATION. Depreciation expense of $212.7 million in 1998 decreased
$41.1 million from $253.8 million in 1997. Excluding the special item charge
of $45.1 million in 1997 associated with domestic and international
reorganization and store closings, depreciation expense increased $4.0
million in 1998 from 1997 reflecting net store growth.

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<PAGE>
Excluding the 1998 and 1997 special item charges, total operating expenses
increased $248.0 million in 1998 from 1997.

INTEREST EXPENSE. Interest expense of $27.7 million in 1998 decreased $3.1
million from $30.8 million in 1997.

OTHER ITEMS, NET. Other items of $11.8 million in 1998 decreased $15.8
million from $27.6 million in 1997 largely due to the recognition of non-cash
expenses of $10.5 million and $27.1 million in 1998 and 1997, respectively, to
write-down non-strategic investments to their net realizable value.

BENEFIT (PROVISION) FOR INCOME TAXES. We recognized a benefit for income
taxes of $59.4 million in 1998 as compared to a provision for income taxes of
$30.0 million in 1997. This change was primarily attributable to the mix of
domestic and foreign income or losses. We did not recognize a benefit for
foreign losses, as it is more likely than not that the benefit will not be
realized. Goodwill associated with Viacom's acquisition of our business and
operations and which is now recorded on our finanical statements is not
amortizable for tax purposes. Excluding the non-deductible amortization of
intangibles, the annual effective tax rates would have been 24.6% in 1998 and
(25.8%) in 1997.

EQUITY IN LOSS OF AFFILIATED COMPANIES, NET OF TAX. The equity in loss of
affiliated companies, net of tax, decreased primarily due to the fact that we
recognized a pre-tax charge of $29.4 million in 1997 associated with our
investment in our Japanese joint venture.

NET INCOME (LOSS). For the reasons described above, net loss of $336.6
million in 1998 increased $18.4 million from a loss of $318.2 million in 1997.
Excluding the special item charges in 1998 and 1997, net loss declined $80.0
million to $63.5 million in 1998 from $143.5 million in 1997.

COMPARISON OF 1997 TO 1996

REVENUES. Revenues of $3,313.6 million in 1997 increased $371.5 million, or
12.6%, from $2,942.1 million in 1996 principally due to the net addition of 633
company-operated stores over the prior year but was offset by a 1.8% decline in
same store revenues and a lower number of rental transactions. Rental revenues
increased $277.1 million, or 11.6%, driven by the increase in company-operated
stores but were much lower than anticipated as a result of fewer active
customers and rental transactions.

Extended viewing fees of $403.8 million in 1997 increased $59.2 million, or
17.1%, from $344.6 million in 1996 primarily as a result of increases in rental
transactions. As a percentage of total revenues, extended viewing fees increased
to 12.2% in 1997 from 11.7% in 1996.

Merchandise sales increased $102.7 million, or 20.9%, over the prior year
due to improved product offerings in our significant international markets.

COST OF SALES. Cost of sales of $1,360.5 million in 1997 increased $346.8
million from $1,013.7 million in 1996. Cost of sales as a percentage of total
revenues increased to 41.1% in 1997 from 34.5% in 1996. Excluding the special
item charge of $100.8 million in 1997, cost of sales increased $246.0 million
primarily due to an increase of amortization expense in 1997 as compared to 1996
resulting from a smaller percentage of our amortization expense in 1997 being
attributable to the lower cost of videocassette rental library acquired in 1994.

GROSS PROFIT. Gross profit as a percentage of total revenues, or gross
margin, decreased to 58.9% in 1997 from 65.5% in 1996. Excluding the special
item charge of $100.8 million in 1997, gross profit

38
<PAGE>
decreased to 62.0% in 1997 from 65.5% in 1996. Gross margins for 1997 and 1996
are not comparable because of the special item charges recorded in the second
quarter of 1997.

OPERATING EXPENSES. Total operating expenses of $2,167.7 million in 1997
increased $506.9 million from $1,660.8 million in 1996. Total operating expenses
as a percentage of total revenues increased to 65.4% in 1997 from 56.4% in 1996.
The increase in total operating expenses resulted from the following:

GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
as a percentage of total revenues increased to 48.5% in 1997 from 39.5% in
1996. Excluding the $74.4 million special item charge in 1997, general and
administrative expense of $1,531.3 million in 1997 increased $367.7 million
from $1,163.6 million in 1996 due to compensation increases of $135.2
million, a $111.5 million increase in other corporate and store expenses and
a $121.0 million increase in occupancy cost. The increase in compensation
expense was due primarily to increases in the minimum wage in late 1996 from
$4.25 per hour to $4.75 per hour and in late 1997 from $4.75 per hour to
$5.15 per hour and an increase in the number of company-operated stores. In
addition, in connection with our relocation to Dallas, we incurred higher
salary expense due to the hiring of temporary employees until positions were
filled in Dallas. We also paid higher salaries overall due to the strong
labor demand in the Dallas market. The increase in occupancy cost was
primarily attributable to an increase in the number of stores.

ADVERTISING EXPENSE. Advertising expense of $139.5 million in 1997
increased $24.2 million from $115.3 million in 1996. As a percentage of
total revenues, advertising expense increased to 4.2% in 1997 from 3.9% in
1996. This increase was primarily due to increased promotions designed to
increase customer traffic.

DEPRECIATION. Depreciation expense of $253.8 million in 1997 increased
$88.3 million from $165.5 million in 1996. Excluding the $45.1 million
special item charge in 1997, depreciation expense increased $43.2 million in
1997 principally due to the purchases of equipment, fixtures and leasehold
improvements associated with our store growth and the accelerated
depreciation on the warehouse equipment located at our former distribution
center in Garland, Texas.

RESTRUCTURING CHARGE. We incurred a $50.2 million restructuring charge
in 1996 associated with the relocation of our headquarters to Dallas, Texas
and the elimination of third party distributors.

Excluding the 1997 and 1996 special item charges, total operating expenses
increased $437.6 million in 1997 from 1996.

INTEREST EXPENSE. Interest expense of $30.8 million in 1997 increased $8.8
million from $22.0 million in 1996. This increase is primarily due to an
increase in interest bearing debt owed to Viacom incurred to help finance our
international operations.

OTHER ITEMS, NET. Other items of $27.6 million in 1997 reflect a non-cash
write-down of investments to their estimated net realizable value. During 1997,
as part of our strategic initiatives, management made the decision to dispose of
investments that did not relate to our core business.

BENEFIT (PROVISION) FOR INCOME TAXES. We recognized provisions for income
taxes of $30.0 million in 1997 and $167.4 million in 1996. The decrease was
primarily attributable to the mix of domestic and foreign income or losses. We
did not recognize a benefit for foreign losses, as it is more likely than not
that the benefit will not be realized. In addition, goodwill associated with
Viacom's acquisition of our business and operations and which is now reflected
on our financial statements is not amortizable for

39
<PAGE>
tax purposes. Excluding the non-deductible amortization of intangibles, the
annual effective tax rates would have been (25.8)% in 1997 and 41.8% in 1996.

EQUITY IN LOSS OF AFFILIATED COMPANIES, NET OF TAX. Equity in loss of
affiliated companies, net of tax, increased $14.9 million in 1997 over the prior
year. This increase was primarily due to a pre-tax charge of $29.4 million in
1997 associated with our investment in our Japanese joint venture.

NET INCOME (LOSS). For the reasons described above, in 1997, we recognized
a net loss of $318.2 million as compared to net income of $77.8 million in 1996.
Excluding the special item charges in 1997 and 1996, 1997 reflects a net loss of
$143.5 million as compared to net income of $107.9 million in 1996.

GENERAL ECONOMIC TRENDS, QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY

We anticipate that our business will be affected by general economic and
other consumer trends. Our business 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:

- the number, timing and performance of new or acquired stores;

- public acceptance and interest in newly released videos;

- our mix of products rented and sold;

- our expansion into new markets and geographic locations;

- additional and existing competition and their pricing actions;

- marketing programs and new release acquisition costs;

- seasonality, particularly in April and May, due in part to improved
weather and Daylight Savings Time, and in September and October, due in
part to the start of school and the introduction of new television
programs;

- special events, such as the Olympics and the World Cup;

- changing technologies; and

- other factors affecting retailers in general.

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<PAGE>

The following table sets forth quarterly statement of operations data for
the nine quarters ended March 31, 1999. This quarterly information includes the
special item charges recognized in the second quarter of each of 1997 and 1998
discussed above and described in notes 3 and 4 of our consolidated financial
statements and in our opinion, includes all normal recurring adjustments
necessary for a fair presentation of the information for the periods covered.
This data should be read in conjunction with the consolidated financial
statements and the notes thereto. The quarterly operating results are not
necessarily indicative of the operating results for any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30(1) SEPTEMBER 30 DECEMBER 31
--------- ----------- ------------- ------------
(IN MILLIONS, EXCEPT PERCENTAGE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Revenues..................................................... $ 823.8 $ 765.3 $ 817.7 $ 906.8
Gross profit................................................. 538.3 370.5 504.5 539.8
Operating income (loss)...................................... 71.2 (263.6) (14.8) (7.4)
Net income (loss)............................................ (19.3) (227.3) (37.8) (33.8)
Net income (loss) plus intangible amortization,
net of tax................................................. 21.5 (186.5) 3.0 7.0

Same store revenues increase (decrease) (2).................. (1.2)% (2.3)% (1.5)% (1.0)%

1998
Revenues..................................................... $ 931.2 $ 890.0 $ 985.4 $ 1,086.8
Gross profit................................................. 604.6 100.2 591.7 640.5
Operating income (loss)...................................... 67.0 (456.9) 5.4 25.3
Net income (loss)............................................ 15.8 (318.0) (21.5) (12.9)
Net income (loss) plus intangible amortization,
net of tax................................................. 56.8 (277.0) 19.6 28.1

Same store revenues increase (2)............................. 7.6% 12.6% 18.2% 14.5%

1999
Revenues..................................................... $ 1,113.0
Gross profit................................................. 671.2
Operating income (loss)...................................... 48.6
Net income (loss)............................................ (3.4)
Net income (loss) plus intangible amortization,
net of tax................................................. 37.8

Same store revenues increase (2)............................. 17.0%
</TABLE>

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

(1) The table below presents the second quarter of 1997 and 1998 excluding
special item charges:

<TABLE>
<CAPTION>
QUARTER ENDED JUNE
30,
--------------------
1997 1998
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Revenues................................................................................... $ 765.3 $ 890.0
Gross profit............................................................................... 471.3 524.5
Operating income (loss).................................................................... (43.3) (32.6)
Net income (loss).......................................................................... (52.6) (44.9)
Net income (loss) plus intangible amortization, net of tax................................. (11.8) (3.9)
</TABLE>

(2) This represents the increase (decrease) over the prior comparable period.

41
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY PRIOR TO AND UPON OUR SEPARATION FROM VIACOM

Our capital investments and acquisitions have been financed with a
combination of cash flow from operations and advances from Viacom. We generate
cash from operations predominantly from the rental of videocassettes and we have
substantial operating cash flow because most of our revenue is received in cash
and cash equivalents. Under Viacom's centralized cash management system, Viacom
deposits sufficient cash in our bank accounts to meet our daily obligations and
withdraws excess funds from those accounts. These transactions are included in
advances from Viacom in the consolidated balance sheets and consolidated
statements of cash flows. Excess operating cash flow and additional funding from
Viacom had been used primarily for opening and acquiring new stores, the
refurbishment, remodeling and relocation of existing stores and the purchase of
videocassette inventory.

In October 1998, BLOCKBUSTER MUSIC stores were sold to Wherehouse. Some of
the leases transferred in connection with this sale had previously been
guaranteed either by Viacom or its affiliates. The remaining lease terms expire
on various dates through 2007. We have agreed to indemnify Viacom with respect
to any amount paid under these guarantees. At the time of the sale, the
contingent liability for base rent was about $84 million on an undiscounted
basis, with respect to these guarantees. We have not recognized any reserves
related to this contingent liability. If Wherehouse defaults, related payments
could be funded from operating cash flow.

We expect to fund our future anticipated cash requirements, including the
anticipated cash requirements for capital expenditures and payments of principal
and interest on any borrowings, with funds generated from our operations in
addition to various external funds which may be available to us. The external
sources of funds may include future issuances of debt, equity or other
securities. We believe that such internally and externally generated funds will
provide us with adequate liquidity and capital necessary for the next twelve
months.

CASH FLOWS

OPERATING ACTIVITIES. Net cash flows from operating activities decreased
$75.8 million from $242.3 million for the first quarter of 1998 to $166.5
million for the first quarter of 1999 primarily due to the first quarter 1999
net loss of $3.4 million as compared to net income of $15.8 million for the
first quarter of 1998. Significant changes in non-cash items include a $13.2
million decrease in amortization and depreciation expenses and a decrease in
deferred income taxes of $25.3 million. Revenue-sharing payments reduce cash
flow from operating activities. However, this reduction is partially offset by a
decline in videocassette purchases included in investing activities.

Net cash flows from operating activities increased $243.2 million from
$991.3 million in 1997 to $1,234.5 million in 1998 primarily due to stronger
operating results, excluding the non-cash items, and improved payment terms with
vendors, partially offset by prepayments for revenue-sharing and an increased
investment in retail merchandise inventory.

Net cash flow from operating activities increased $6.3 million from $985.0
million in 1996 to $991.3 million in 1997 and was primarily attributable to
slowing of our investment in merchandise inventory in 1997, reflecting our
change in focus from retail to rental.

INVESTING ACTIVITIES. Net cash used for investing activities increased
$92.8 million from $232.6 million for the first quarter of 1998 to $325.4
million for the first quarter of 1999 as a result of a $21.3 million increase in
capital expenditures for new store openings in 1999 and a $83.2 million increase
in cash used for store acquisitions as compared to the first quarter of 1998.

Net cash used for investing activities decreased $165.9 million from
$1,188.1 million in 1997 to $1,022.2 million in 1998 primarily due to the lower
up front costs associated with revenue-sharing titles

42
<PAGE>
compared to traditional pricing of $42.1 million. Capital expenditures of $175.0
million decreased $87.2 million due to a reduction in new store openings in 1998
as compared to 1997. Cash used for acquisitions of $34.2 million decreased $44.8
million as a result of our change in focus from expansions through acquisitions
to enhancing existing store performance.

Net cash used for investing activities decreased $47.0 million from $1,235.1
million in 1996 to $1,188.1 million in 1997. This decrease was primarily due to
a $61.5 million decrease in capital expenditures attributable to the reduction
in new store openings and a $75.4 million decrease in cash used for
acquisitions. These decreases were partially offset by increased rental library
purchases of $108.7 million and cash received primarily from the disposition of
our Ft. Lauderdale headquarters of $19.1 million.

The major components of investing activities are detailed below:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- --------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
Cash flows from investing activities:
Rental library purchases............................. $ (751.5) $ (860.2) $ (818.1) $ (194.9) $ (181.0)
Capital expenditures................................. (323.7) (262.2) (175.0) (38.5) (59.8)
Cash used for acquisitions........................... (154.4) (79.0) (34.2) (1.8) (85.0)
Other................................................ (5.5) 13.3 5.1 2.6 0.4
---------- ---------- ---------- --------- ---------
Net cash flow from (used for) investing
activities........................................... $ (1,235.1) $ (1,188.1) $ (1,022.2) $ (232.6) $ (325.4)
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>

Our capital expenditures include store equipment and fixtures, remodeling of
some existing stores, implementation and upgrading of office and store
technology and the opening of new store locations. Each new store opening
requires initial capital expenditures, including leasehold improvements,
inventory, equipment and costs related to site locations, lease negotiations and
construction permits. We plan to evaluate and pursue new sites within the video
rental industry in both the United States and in international markets and will
require capital and/or ongoing infrastructure enhancements to support our
expansion strategies in developing markets and for acquisitions.

We currently anticipate that capital expenditures of about $330.0 million
will be incurred in 1999, of which $213.0 million is anticipated to relate to
new, relocated and, remodeled stores and the conversion of acquired stores,
$25.0 million is anticipated to relate to an upgraded store point of sale system
to provide better service to our customers, and the balance of which relates to
general corporate purposes. We expect the total investment per new store to
approximate $0.4 million, which includes rental and merchandise inventory,
leasehold improvements, signage and furniture, fixtures and equipment. However,
the cost of opening a new store can vary based on size, construction costs in a
particular market and other factors.

FINANCING ACTIVITIES. Net cash flow from financing activities increased
$201.5 million to $135.6 million in the first quarter of 1999 as compared to the
use of funds of $65.9 million in the first quarter of 1998 primarily as a result
of additional net borrowings from Viacom.

Net cash flow from financing activities decreased $510.4 million from $269.3
million in 1997 to a net cash use of $241.1 million in 1998 as a result of
repayment made to Viacom.

Net cash flow from financing increased $60.5 million from $208.8 million in
1996 to $269.3 million in 1997 as a result of advances from Viacom.

On December 31, 1998, we declared a $1.4 billion dividend in the form of
promissory note to Viacom International Inc. In the first quarter of 1999, we
issued other promissory notes of about

43
<PAGE>
$77 million to Viacom International Inc. relating to our purchase of video
stores. We will pay both these notes, including accrued and unpaid interest as
well as any other notes owed to Viacom International Inc. or its affiliates,
with the proceeds of the borrowings under the credit agreement described below.

On June 21, 1999, we entered into a $1.9 billion term and revolving credit
agreement with a syndicate of lenders. On June 23, 1999, we borrowed $1.6
billion under the credit agreement, all of which was used to:

- pay a portion of the purchase price to affiliates of Viacom to acquire the
non-U.S. operations of our business that we did not already own;

- repay debt owed to Viacom International Inc. and its affiliates; and

- pay fees and expenses related to the origination of the credit agreement.

The credit agreement is intended to replace our reliance on Viacom's centralized
cash management system. Upon completion of this offering and after giving effect
to the foregoing financing transactions, we expect to have outstanding about
$1.1 billion of long-term indebtedness whether or not the underwriters exercise
their over-allotment options. For a more complete description of the credit
agreement, we refer you to "Description of Credit Agreement."

We believe that cash flow from operations and future borrowings will provide
us with adequate liquidity and capital necessary to continue to fund our daily
operations and expansion strategy in the next two to three years. Depending upon
our growth opportunities and other factors, we may, from time to time, consider
the issuance of debt, equity or other securities, to refinance debt or for
general corporate purposes. However, we cannot assure you that we will be able
to access capital markets in the future on terms that are satisfactory to us.

OTHER FINANCIAL MEASUREMENTS: WORKING CAPITAL

At March 31, 1999, we had cash and cash equivalents of $75.0 million.
Working capital, however, reflected a deficit of $79.4 million due to the
accounting treatment of our videocassette rental library. Under generally
accepted accounting principles, videocassette rental inventories are accounted
for as non-current assets and are excluded from the computation of working
capital. The acquisition cost of videocassette rental inventories, however, is
reported as a current liability and, accordingly, is included in the computation
of working capital. Consequently, we believe working capital is not as
significant a measure of financial condition for companies in the home video
industry as it is for companies in some other industries. Because of this
accounting treatment, we may, from time to time, operate with a working capital
deficit.

At December 31, 1997 and 1998, we had cash and cash equivalents of $129.6
million and $99.0 million, respectively. Working capital reflected a deficit of
$85.2 million and $214.5 million, respectively.

AVAILABILITY OF FOREIGN NET OPERATING LOSSES

Foreign net operating losses, which are fully reserved, may not be available
to us after the split-off. At December 31, 1998, our foreign net operating
losses were $42.5 million.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks including interest rates on our debt
and foreign exchange rates.

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<PAGE>
INTEREST RATE RISK

Historically, we have had no material interest rate risk associated with
debt used to finance our operations due to limited borrowings and our
relationship with Viacom. Subsequent to this offering, we intend to manage our
interest rate exposure using a mix of fixed and floating interest rate debt and,
if appropriate, financial derivative instruments.

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.

On January 1, 1999, eleven member countries of the European Union
established fixed conversion rates between their existing, or local, currencies
and one common currency, the euro. The euro trades on currency exchanges and may
be used in business transactions. Conversion to the euro eliminates currency
exchange risk between the participating member countries. Beginning January
2002, new euro-denominated bills and coins will be issued, and local currencies
will be withdrawn from circulation.

Our operations outside the United States constitute 20.6% of our total
revenues. Our operations in Europe constitute 11.0% of the total revenues. The
majority of these sales are from Great Britain, which has not adopted the euro.

Numerous issues are raised by the euro currency conversion, including the
need to adapt computer and financial systems and business processes and
equipment. Due to these uncertainties, we cannot reasonably estimate the
long-term effects one common currency may have on pricing, costs, and the
resulting impact, if any, on financial condition.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. The SOP is effective for financial statements
for fiscal years beginning after December 15, 1998. We adopted SOP 98-5
effective January 1, 1998. Adoption of SOP 98-5 had no material effect on our
consolidated financial statements.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") effective for fiscal years beginning after June
15, 2000. We anticipate that due to our limited use of derivative instruments,
the adoption of SFAS 133 effective January 1, 2001 will not have a material
effect on our consolidated financial statements.

YEAR 2000 COMPLIANCE

OVERVIEW

The widespread use of computer programs that rely on two-digit dates to
perform computations and decision-making functions may cause computer systems to
malfunction prior to or in the year 2000 and lead to significant business delays
and disruptions in the United States and internationally. We have implemented a
year 2000 program in order to identify, assess and mitigate our year 2000 risks.
As part of our program, we have hired independent consultants to assist in the
review and oversight of our program, as well as to perform some testing
operations. In addition, we have established a project management team to
monitor our program.

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<PAGE>
We are reviewing our year 2000 issues based upon three areas: applications,
infrastructure and business partners.

Applications cover the software systems resident on mainframe,
mid-range, network and personal computers. We define an application as one
or a collection of programs directly related to a common system. For
example, a financial application may include all the general ledger and
accounts receivable software code used to process information. In addition,
our applications have been segregated into critical and non-critical
applications. Critical applications are software systems which, if not
operational, could have a material impact on our business operations.

Infrastructure includes computers, data and voice communications
networks, and other equipment which use embedded chip processors such as
inventory movement systems, telephone systems and others.

Business partners include franchisees, third party vendors, customers
and other service providers whose systems may interface with us or whose own
operations are important to our daily operations.

These three areas have been addressed using a five phase program: inventory,
assessment, remediation, testing and contingency planning.

- Phase 1 inventories the respective applications, hardware and business
partners.

- Phase 2 assesses the possible impact of a year 2000 error on the
continuing operation of each identified application, hardware system or
business partner relationship and subsequently determines the risk of year
2000 noncompliance to operations and assigns priorities.

- Phase 3 establishes and implements specific plans for the remediation of
applications and hardware systems and for the determination of business
partners' compliance.

- Phase 4 tests each application and hardware system and reviews business
partners' compliance under the plans established in phase 3, to ensure
that year 2000 issues no longer exist.

- Phase 5 establishes and implements contingency plans in the event internal
or external systems are not compliant.

Changes may occur to our operations during the implementation of our year
2000 program or subsequent to the completion of each phase. Therefore, we may
periodically revise our plans. We continue to review and test systems for year
2000 compliance as changes occur.

STATE OF READINESS

Our year 2000 progress, as of June 30, 1999, is as follows:

APPLICATIONS

We have completed the inventory and assessment phases. We have identified 16
critical domestic and six critical international applications which primarily
relate to point-of-sale, warehousing and distribution and finance/payroll.
Substantially all of the critical and non-critical worldwide applications have
been remediated and tested and the remaining applications are scheduled for
completion before the end of the third quarter of 1999.

INFRASTRUCTURE

We have completed the domestic and international inventory and assessment
phases. In addition, we have completed the remediation and testing phases with
respect to substantially all of the systems

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with embedded processors. Remediation of the remaining hardware systems will be
completed during the third quarter of 1999.

BUSINESS PARTNERS

During the course of business operations, we rely on third party business
partners to distribute products and to provide services. These business partners
include financial institutions, governmental agencies and utilities. The
disruption of the ability to receive services or to distribute our products
could adversely affect our financial condition. Although we have little or no
control over the remediation and testing of these third party systems, we are
taking appropriate action to determine the level of year 2000 compliance of
third parties. These actions include, but are not limited to, requesting written
confirmation of a business or business system's year 2000 compliance; directly
meeting with business management; and performing additional independent tests.
We have identified 11 critical business partners and have requested written
confirmation from all of these partners as to their year 2000 compliance. Each
of these 11 business partners has responded to our request for information. One
has indicated it is year 2000 compliant and the others have indicated they
expect to be year 2000 compliant before December 31, 1999.

We have substantially completed the inventory and assessment phases of our
business partners and have tested for the compliance of all of our critical
business partners. The determination of third party year 2000 compliance will
continue through the end of the year.

CONTINGENCY PLANS AND RISKS

As the remediation, testing and review of each application, infrastructure
item and business partners occurs, we are determining the need for contingency
plans. Where appropriate, plans addressing both operational and technical
alternatives are being developed. This phase has begun and will continue through
the end of 1999.

Our goal is to achieve timely and substantial year 2000 compliance, with
remediation work assigned based upon how critical each system is to our
business. Due to the general uncertainty inherent in the year 2000 problem,
resulting in part from the uncertainty of compliance by third parties upon which
we rely, we are unable to determine at this time what the consequences of the
year 2000 problem will be. Our year 2000 program can only minimize, but cannot
eliminate, the risks of third party non-compliance. If we, or one of these third
parties upon which we rely, fail to adequately address the year 2000 problem, it
could disrupt our business. The possible consequences of a failure include
incomplete or inaccurate accounting, recording or processing of rentals and
sales of videocassettes, video games and other products and the reporting of
this information; delays or failures in ordering, shipment and distribution of
videocassettes, video games and other products; the creation of uncertainty
about our customer database; or inability to consummate credit and debit card
and check transactions. We will continue to devote the necessary resources to
complete our year 2000 program and contingency plans and believe that such
completion will significantly mitigate operational and financial risks.

COSTS

Costs of our year 2000 program have been expensed as incurred. The estimated
costs to complete our year 2000 program are currently expected to total about
$11 million, $9.4 million of which has been incurred through June 30, 1999. We
do not expect this to have a material adverse effect on our results of
operations, financial position or liquidity.

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DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION

This prospectus contains forward-looking statements relating to our
operations that are based on our current expectations, estimates and projections
about us and the home video industry. Words such as "expects," "intends,"
"plans," "projects," "believes," "estimates" and other similar expressions are
used to identify such forward-looking statements. These statements are not
guarantees of future performance and involve risks, uncertainties and
assumptions that are difficult to predict. Further, some forward-looking
statements are based upon assumptions as to future events that may not prove to
be accurate. Therefore, actual outcomes and results may differ materially from
what is expressed or forecasted in such forward-looking statements. We undertake
no obligation to update publicly any forward-looking statement for any reason,
even if new information becomes available or other events occur in the future.

A number of important factors could cause actual results to differ
materially from those indicated by such forward-looking statements. Such factors
include, among others, those set forth in this prospectus under the heading
"Risk Factors."

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VIDEO INDUSTRY OVERVIEW

DOMESTIC HOME VIDEO INDUSTRY

According to Paul Kagan Associates, the U.S. videocassette and DVD rental
and sales industry grew from $15.7 billion in revenue in 1997 to $17.1 billion
in 1998 and is expected to reach $22.0 billion in 2002. Paul Kagan Associates
estimates that, in 1998, 83.5 million, or 81.5%, of the 102.5 million total U.S.
households owned a VCR. The number of VCRs that were sold in the United States
in 1998 was estimated by Paul Kagan Associates to be 18.8 million, a 3.5%
increase from 1997, which represents the largest number of VCRs sold in any
single year. In addition, Paul Kagan Associates estimates that about 900,000 DVD
players were sold in the United States during 1998. According to Paul Kagan
Associates, the VCR and DVD markets will continue to grow as the number of
multi-VCR households is expected to increase from 37.0 million in 1998 to 43.8
million by 2002 and the number of VCRs and DVD players sold in 2002 is expected
to reach 21.5 million.

As part of a November 1997 survey, the Video Software Dealers Association
revealed that each week nearly one-quarter of all U.S. households make a trip to
their video store, and each month almost three-fourths of all U.S. households
with children rent at least one videocassette. We believe that the following
factors, among others, make video rental a preferred medium of entertainment for
millions of customers:

- the opportunity to browse among a very broad selection of movies;

- the control over viewing, such as the ability to control start, stop,
pause, fast-forward and rewind;

- the opportunity to view recently released movies prior to their
availability for viewing in the home through other mediums such as
pay-per-view, pay television, basic cable television and network and
syndicated television; and

- the opportunity to entertain one or more people for a reasonable price.

The home video industry is highly fragmented. However, the home video
industry has experienced consolidation in recent years, as video store chains
have gained significant market share from single store operators. Based upon
information disclosed by Video Store Magazine and Paul Kagan Associates, the
five largest video store chains have a 41% market share of all U.S. consumer
video rentals in 1998. Dun & Bradstreet, as cited by the Video Software Dealers
Association, estimates that by the first quarter of 1999 there were about 24,590
independent video stores in the United States, down from about 26,960 in the
first quarter of 1998. About 49% of all locations that rent video titles are
currently operated by single store owners. In addition, according to the Video
Software Dealers Association, more than 14,000 of these single store operators
generate annual revenues of less than $220,000. We believe that small stores and
chains in the home video industry will continue to consolidate with national and
regional chains and that such consolidation will offer us numerous acquisition
opportunities. We believe that there are several competitive advantages in being
a large home video chain, including marketing efficiencies, brand recognition,
access to more copies of each videocassette through direct revenue-sharing
agreements, sophisticated information systems, greater access to prime real
estate locations, greater access to capital, and competitive pricing made
possible by size and operating efficiencies. Even if there is significant
consolidation, however, we expect that the home video industry will remain
fragmented.

Historically, the major studios or their licensees released movies to video
stores at wholesale prices generally between $60 and $70 per videocassette for
major theatrical releases that were priced for rental in the United States. The
studios still release movies at relatively high wholesale prices unless the
movie is subject to a revenue-sharing agreement or a quantity discount program
or is designated by the studios as a sell-through movie. The studios attempt to
maximize total revenue from newly released

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video titles by maintaining the high wholesale price during the first four
months to one year after a movie is released. Thereafter, in order to promote
sales to consumers, the major studios release the movies at a substantially
lower price, generally at retail for about $10 to $20 per videocassette.

Since the late 1980s, revenue-sharing agreements have been available to home
video chains and independent video dealers through deals brokered by
distributors such as Rentrak Corporation and SuperComm, Inc. More recently, the
major studios have entered into revenue-sharing agreements directly with several
large video chains. Under these new agreements, video stores share with the
studios an agreed-upon percentage of the video stores' rental revenue for a
limited period of time in exchange for minimal up-front payments for the
videocassettes by the video stores. This percentage generally declines over a
period of weeks following the initial release of the movie. The video stores
also agree to take a minimum number of copies of each movie that is released by
a studio in any U.S. movie theater. The video stores may also agree to take a
minimum number of movies that are not released by a studio in any U.S. movie
theater. The revenue-sharing agreements, subject to limitations and exceptions,
allow the video stores to sell previously viewed tapes to their customers.

We believe that the revenue-sharing agreements have the following
significant benefits to participating video stores:

- they provide these stores with the opportunity to substantially increase
the quantity and selection of newly released video titles that they stock;

- they increase revenues as a result of the increase in total number of
transactions per store and number of videocassettes rented per
transaction; and

- they align the studios' economic interests more closely with the interests
of the video stores.

In addition, we believe that revenue-sharing has increased the revenues
received on an annual basis by the studios through increased rental activity on
new releases as well as greater distribution and revenues on non-hit movies
through minimum output provisions.

In addition to wholesale pricing and revenue-sharing agreements, studios
release some movies at relatively low initial prices, which generally are sold
by retailers for $10 to $20 per videocassette. Because the wholesale price is
relatively low and these movies are not subject to the revenue-sharing
agreements, retailers generally purchase these movies primarily for sale and
such movies are referred to as sell-through movies. These typically consist of
movies for children and other movies that have unique characteristics or other
mass ownership appeal, such as THE RUGRATS MOVIE and TITANIC.

INTERNATIONAL HOME VIDEO INDUSTRY

According to Paul Kagan Associates, the potential market for home video
rentals is growing at a faster pace outside the United States than within the
domestic market. According to Paul Kagan Associates, the number of households
outside of the United States and Canada which own a VCR is expected to grow from
about 264 million in 1996 to about 353 million by 2001. As of March 31, 1999, we
operated in 26 countries outside of the United States.

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 the same sequential windows as the release of movies within
the United States, though the international windows tend to last for a longer
period of time. In general, however, the home video industry outside of the
United States does not mirror the home video industry within the United States.
For example, most countries have different systems of supply and distribution of
movie titles. Revenue-sharing agreements, which have proliferated within the
U.S. home video industry among large home video chains, generally have not yet
spread into markets

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outside of the United States. In addition, competition in most international
markets generally tends to be more fragmented, with few large home video chains.

MOVIE STUDIO DEPENDENCE ON VIDEO RENTAL INDUSTRY

According to Paul Kagan Associates, total U.S. movie studio and independent
supplier revenue increased about 11% per year from $9.0 billion in 1994 to $13.8
billion in 1998. Paul Kagan Associates also indicates that the video rental
industry is the largest single source of U.S. revenue to movie distributors,
representing about $6.7 billion, or 48.5%, of the $13.8 billion of movie revenue
in 1998. The following table represents Paul Kagan Associates' estimates of
revenues of total movie distributor revenue.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN MILLIONS)
U.S. home video........................ $ 4,612 $ 5,264 $ 6,181 $ 6,311 $ 6,690
Other U.S. revenue..................... 4,398 5,359 5,942 6,431 7,108
--------- --------- --------- --------- ---------
Total U.S. revenue................. 9,010 10,623 12,123 12,742 13,798
--------- --------- --------- --------- ---------

International home video............... $ 3,443 $ 4,230 $ 4,464 $ 4,406 $ 4,185
Other international revenue............ 4,515 4,964 6,010 6,400 6,904
--------- --------- --------- --------- ---------
Total international revenue........ 7,958 9,194 10,474 10,806 11,089
--------- --------- --------- --------- ---------

Total revenue.................... $ 16,968 $ 19,817 $ 22,597 $ 23,548 $ 24,887
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

Of the many movies produced by major studios and released in the United
States each year, relatively few are profitable for the studios based on box
office revenues alone. In addition to purchasing box office hits, video rental
stores, including those operated by us, purchase movies on videocassette and DVD
that were not successful at the box office, thus providing the movie studios
with a reliable source of revenue for almost all of their movies. We believe
that the consumer is more likely to view movies which were not box office hits
on a rented videocassette or DVD than on most other formats because video rental
stores provide an inviting opportunity to browse and make an impulse choice
among a very broad selection of movie titles. In addition, we believe the
relatively low cost of video rentals encourages consumers to rent films they
might not pay to view at a theater.

Historically, new technologies have led to the creation of additional
distribution channels for movie studios. Movie studios seek to maximize their
revenues by releasing movies in sequential release date "windows" to various
movie distribution channels. After the initial theatrical release, studios make
their movies available to video stores for a specified period of time. This
window is exclusive against most other forms of non-theatrical movie
distribution, such as pay-per-view, premium television, basic cable and network
and syndicated television. The current length of the window for video stores
varies, typically ranging from 30 to 90 days for domestic video stores and from
120 to 180 days for international video stores. Thereafter, movies are made
sequentially available to other television distribution channels. This method of
sequential release allows the movie studios to increase their total revenue
while minimizing the adverse effect on the revenue derived from previously
established channels. With the advent of revenue-sharing and the incremental
revenues associated with such agreements, most movie studios have lengthened the
video store window for many box office hits.

HOME VIDEO GAME INDUSTRY

The home video game industry has historically been affected by changing
technology, limited hardware platform life cycles and hit-or-miss software
titles. In addition, video games typically generate most of their rental revenue
during the first twelve months after their release. We believe that during

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this time period, the differential between the retail price and a rental price
of a new video game is typically high enough to make rentals an attractive
alternative to the customer. According to Adams Media Research and VidTrac, the
total domestic home video game market generated about $2.0 billion in software
sales and $495 million in rental revenue in 1997. These markets grew to about
$2.7 billion and about $800 million in 1998, respectively, which represents a
36.8% and 61.7% increase, respectively. Adams Media Research estimates that
video game software sales will reach about $3.4 billion in 2002, a 25% increase
over the $2.7 billion in software sales in 1998.

Based upon estimates of Gerard Klauer Mattison & Co., Inc., we believe that
most of the recent growth in the home video game industry has been fueled by the
success of the Sony PlayStation-TM- and Nintendo 64-TM- and their respective
video games. As of March 31, 1999, the installed base of Sony PlayStation and
Nintendo 64 within the United States was about 15.7 million and 10.6 million
units, respectively. We expect that the home video game industry will continue
to grow with the anticipated U.S. introduction of Sega's Dreamcast-TM- and the
Sony PlayStation II-TM-.

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BUSINESS

We are the world's leading retailer of rentable home videocassettes, DVDs
and video games, with about 6,500 stores in the United States and 26 other
countries as of March 31, 1999. We operate primarily under the highly recognized
BLOCKBUSTER brand name, which, according to The Gallup Organization, achieves
nearly 100% recognition with active movie renters in the United States. Our U.S.
Internet site, WWW.BLOCKBUSTER.COM, provides information about our stores and
products, delivers content regarding certain movies and entertainment programs
and serves as our electronic commerce venue. Our revenues in 1998 increased
17.5% from 1997, with about 79% of these revenues generated in the United States
and about 21% generated outside of the United States. We believe that over 1
billion movies and video games have been rented worldwide from us or our
franchisees within the last 12 months, and of these rental transactions about
750 million were generated from our U.S. company-operated stores. For the year
ended December 31, 1998, we and our franchisees recorded worldwide revenues of
about $4.7 billion, which includes $3.9 billion from our company operations and
$0.8 billion from our franchised stores.

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. By 1993, Blockbuster Entertainment
Corporation became interested in expanding its business more broadly into
entertainment. In that year, Viacom agreed to acquire Paramount Communications
Inc. in a merger transaction. Following that agreement, an unsolicited offer was
made by a third party to acquire Paramount Communications. In response, Viacom
increased the value of its offer and offered a significantly greater proportion
of cash. In connection with this increase, in October 1993, Blockbuster
Entertainment Corporation agreed to acquire $600 million of Viacom's convertible
preferred stock to assist Viacom in responding to the unsolicited offer. By
January 1994, Viacom and the third party had each further increased their offers
for Paramount Communications. In order to facilitate the increase in Viacom's
offer for Paramount Communications, in January 1994, Viacom entered into an
agreement with Blockbuster Entertainment Corporation pursuant to which
Blockbuster Entertainment Corporation agreed to be acquired by and merged with
and into Viacom. This merger provided Viacom with access to Blockbuster
Entertainment Corporation's considerable financial resources. The board of
directors of Blockbuster Entertainment Corporation determined that this merger
was consistent with, and in furtherance of, the long-term business strategy of
Blockbuster Entertainment Corporation at that time and was in the best interests
of its stockholders. Specifically, according to the proxy statement filed by
Blockbuster Entertainment Corporation, its board of directors believed that the
merger would provide an opportunity for the stockholders of Blockbuster
Entertainment Corporation to be stockholders of a fully integrated entertainment
and communications company. They believed that this combined company would be
competitive globally and better positioned for strategic growth in many
significant fields of the entertainment and communications industries,
especially if these industries continued to consolidate. Accordingly, the board
of directors of Blockbuster Entertainment Corporation voted for, and recommended
that the stockholders of Blockbuster Entertainment Corporation vote in favor of,
the merger. The aggregate purchase price paid on September 29, 1994 for
Blockbuster Entertainment Corporation, which included businesses that have since
been disaggregated, was about $7.6 billion. Extrapolating from an assumed public
offering price of $17.00 per share, the aggregate value of our common stock at
the time of the initial public offering would be about $3.1 billion, assuming
that the underwriters exercise their over-allotment options in full. Assuming
this offering price and assuming the use of proceeds from this offering, as
described in "Use of Proceeds," including the exercise of the underwriters'
over-allotment options in full, we would have about $1.0 billion of debt
outstanding under our credit agreement at the time of this offering.

Since the merger, our business and operations have been conducted by various
indirect subsidiaries of Viacom. In the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section, we discuss the general
development of our business over the last several years. In

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this section, we describe our current business model and strategy. Recently, our
business and operations were either (1) merged into Blockbuster Inc. or (2)
purchased by Blockbuster Inc. and/or one of its subsidiaries. Blockbuster Inc.,
an indirect subsidiary of Viacom, was incorporated under a different name on
October 16, 1989 in Delaware.

Our brand recognition and leading market position have allowed us to create
one of the strongest entertainment franchises in the United States. Based on
1998 industry estimates from Paul Kagan Associates, we estimate that our
company-operated and franchised stores attained a U.S. market share in excess of
27%, over three times greater than that of our nearest competitor. We have
developed this leading position based on a business model which provides our
customers with superior convenience, selection and service at attractive prices.
We estimate that about 59% of the U.S. population lives within three miles of
one of our stores. In addition, our customer transaction database contains
information on about 87 million U.S. member accounts of which about 42 million
have been active within the last twelve months.

Of the 26 markets in which we operated outside the United States, we held
leading market positions in Great Britain, Canada and the Republic of Ireland
and Northern Ireland as of March 31, 1999. Historically, the international video
retailing markets have been highly fragmented with varying distribution patterns
in each market. We believe that the economies of scale that we are able to bring
to each market, combined with our worldwide name recognition and established
distribution agreements, provide us with significant international growth
opportunities.

In 1997, John F. Antioco was recruited to serve as our chairman, president
and chief executive officer, selected in part for his significant multi-store
retail experience. Under the management team led by Mr. Antioco, we began to
develop a new business model that refocused on our core rental business. When
substantially implemented in the second quarter of 1998, this business model led
to a significant improvement in customer satisfaction. Most significantly, we
entered into domestic revenue-sharing agreements with various motion picture
studios. The studios include the six major motion picture studios: Buena Vista
Home Video, a division of the Walt Disney Company; Columbia Tri-Star Home Video
Inc.; 20th Century Fox Home Entertainment Inc.; Paramount Pictures Corporation,
an affiliate of Viacom; Universal Studios Home Video; and Warner Home Video.
These agreements are generally referred to as output agreements, because they
require us to distribute most of the rental titles released on videocassette by
these studios. The quantity of each title obtained is generally determined by a
contractual formula.

We refer to these agreements as revenue-sharing agreements because they
provide that we will share our U.S. rental revenue from the videos with the
studio for a stated period of time, generally 26 weeks. These agreements enable
us to provide the most popular newly released video titles to our customers more
quickly, in greater quantity and on a more efficient basis. We believe these
agreements also have the following significant benefits:

- substantially increasing the number of newly released videos in our stores
to better satisfy customer demand;

- contributing to an increase in revenues resulting from an increase in the
total number of transactions and the number of videocassettes rented per
transaction; and

- aligning the studios' economic interests more closely with ours because
they share a portion of the rental revenue with us for a period of time.

In addition to revenue-sharing, we have made other changes that have
increased our same store revenues while providing enhanced revenue opportunities
for the studios. Some of these other changes include improving our product
allocation system to more effectively allocate newly released videos among our
stores based upon the likelihood of rental frequency by store and improving our
direct marketing programs and advertising campaigns. Reflecting this turnaround,
quarterly domestic same store rental revenues increased 8.6%, 17.5%, 20.0%,
20.5%, 23.1% and 12.9% in the six quarters ended June 30, 1999 compared to the
comparable quarters in the prior years.

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BUSINESS MODEL

Our current business model is designed to increase customer traffic and
transaction size by improving customer satisfaction and ultimately generate
higher sales volume per store. We believe our business model gives us an
advantage over other large home video chains and a significant advantage over
our single-store competitors. We are applying key elements of our business model
to our international operations. The key elements of our business model are
discussed below.

BROAD SELECTION AND LARGE NUMBER OF MOVIES

We strive to be the leader in satisfying customer demand by stocking each of
our stores with more copies and a wider variety of newly released movies than
our competitors. In large part, our revenue-sharing agreements and our ability
to self-distribute have allowed us to implement this strategy in the United
States. For the year ended December 31, 1998, which reflects nine months under
our new business model, we obtained on average more than 150% more copies of
each videocassette per store and about 24% more video titles than the prior
year. In addition to newly released video titles, we acquire and offer a broad
selection of time-tested popular movies and a wide variety of independent and
lower-cost movies that are generally only available at our stores for a
specified period of time.

Our goal is to stock each of our stores with a selection and quantity of
merchandise that is optimal for that store. Using our customer transaction
database, we determine on a store-by-store basis the number of copies of each
new release that are to be offered by each store. Our objective is to stock the
top 1,000 most commonly rented popular movies as part of our BLOCKBUSTER
FAVORITES. In addition, we use our customer transaction database to periodically
review each store's inventory of BLOCKBUSTER FAVORITES and identify movie titles
within this category that have not been rented for a period of time. We offer
these previously viewed tapes for sale and replace them with movies that we
believe our customers are interested in renting.

CONVENIENT AND VISIBLE STORES OF OPTIMAL SIZE AND LOCATION

We maintain a strong presence throughout the United States with an estimated
59% of the U.S. population living within three miles of one of our stores. Our
experienced store development team can quickly identify the optimal sites for
our new stores within our targeted markets through the use of our extensive real
estate and customer transaction databases. We have developed three distinct
store formats that are tailored to maximize our penetration in each market.
These three formats include our "new" traditional store format, which is about
4,800 square feet, our seam store format, which is about 2,500-3,500 square
feet, and our store-in-store format, which is about 1,000-1,200 square feet. In
addition to stores, we have begun to deploy video vending machines on an
experimental basis.

In 1998, we began a comprehensive program to remodel our company-operated
stores worldwide. We expect to fit most of our company-operated stores with new
interior signage. We also expect to remodel the interior and exterior of some of
our company-operated stores in order to enhance our customers' shopping
experience.

SUPERIOR AND CONSISTENT CUSTOMER SERVICE

We focus on providing superior service to all of our customers. An essential
aspect of continuing to improve customer service has been our focus on improving
the in-store experience of each customer. We have worked to improve the quality
of our staff through recruitment, compensation, training and employee
appreciation and incentive programs. These programs encourage and empower our
store employees to gain experience and product knowledge in order to effectively
meet the needs of our customers. In addition, our domestic customers are
eligible to participate in our BLOCKBUSTER REWARDS premium membership program,
which allows our customers to earn free rentals. Our most active customers are
automatically enrolled in the BLOCKBUSTER REWARDS Gold program, which offers
additional free rental benefits and the ability to reserve movies. These
programs are designed to develop customer loyalty by encouraging our customers
to rent movies only from our stores.

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COMPETITIVE PRICING

Our goal is to optimize on a store-by-store basis the price at which we rent
our video titles. In 1998, we initiated a dual pricing strategy that
differentiated pricing between newly released video titles and BLOCKBUSTER
FAVORITES, whereby the BLOCKBUSTER FAVORITES were priced lower than the newly
released video titles. We believe that our customers perceive this two-tiered
pricing as more appropriate in light of the differences between the demand for
the newly released video titles and the BLOCKBUSTER FAVORITES. Our customer
transaction database provides us with the ability to adjust our overall pricing
strategy for each U.S. store based on local market conditions, including local
prices established by our competitors. In addition, we have implemented a new
policy in our company-operated stores, setting the base rental term of our
BLOCKBUSTER FAVORITES, our video games and some of our newly released video
titles to a period ranging from two to five evenings. Our customers may keep the
videocassette for a period longer than the base rental term for extended
viewing. There is a base rental fee for the base rental term and an extended
viewing fee for the extended viewing term. The base rental fees and the extended
viewing fees may vary from market to market.

NATIONAL ADVERTISING AND MARKETING PROGRAMS

Our large U.S. store base and our extensive customer database enable us to
be the only home video chain that actively maintains a national advertising and
marketing program, including network television, national promotions and local
television and radio. For the year ended December 31, 1998, we incurred about
$181 million in advertising expenses. In addition, some of our business
partners, including the studios, allow us to direct a significant amount of
their advertising expenditures. Furthermore, the studios incur additional
expenditures to promote their newly released movies.

Our advertising and marketing provide information regarding one or more key
points of difference between ourselves and the competition. We have pursued an
aggressive advertising and marketing campaign in order to promote awareness of
the BLOCKBUSTER name. Our primary goal is to make our name so recognizable that
any time a person wishes to rent a movie, he or she will first consider coming
to one of our stores. Our advertising and marketing tries to convey the message
that a visit to one of our stores will allow the customer to experience the
magic of the movies.

USE THE CUSTOMER TRANSACTION DATABASE

We have developed and utilized an extensive customer transaction database
with about 87 million U.S. member accounts. This database enables us to
effectively operate and market our business. For example, we are able to
directly communicate with our customers on a targeted and customized basis
relating to our products and programs. We are also able to stock each of our
company-operated stores with the quantity and selection of merchandise that is
optimal to that store.

SELF DISTRIBUTION CAPABILITIES

We have constructed and launched a highly automated distribution center in
McKinney, Texas that allows us to distribute substantially all of our products
to our domestic company-operated stores. We believe that our distribution center
gives us a significant competitive advantage over our competitors that use third
party distributors because we are able to process and distribute a greater
quantity of products while reducing costs and improving service to our stores.
In particular, we mechanically repackage our newly released videos to make them
suitable for rental at our stores. Previously, this activity had been performed
manually at each store. In addition, our distribution center gives us the
capacity to accommodate our planned store expansion without incurring
significant expenditures. For example, between 1997 and the end of 1999, we
anticipate that we will have tripled the number of videocassettes processed and
distributed to our stores. We also believe these distribution capabilities were
a major factor in our ability to successfully implement our revenue-sharing
agreements to provide superior movie selection to our customers.

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<PAGE>
GROWTH STRATEGY

We believe that our growth strategy will further establish our company as
the leading home video chain in the world. Our goal is to increase our
systemwide U.S. market share from 27%, for the year ended December 31, 1998, to
over 40% within the next three years and to significantly increase our market
share in those countries outside the United States where we believe it is
profitable to do so. We believe that our growth objectives can be met because:

- the home video industry is highly fragmented both in the United States and
internationally;

- consolidation has already begun and will continue; and

- the advantages created by our new business model positioned us to increase
our market share.

As explained more fully below, our growth will principally be driven by an
increase in our same store revenues, an expansion of both our company-operated
and franchisee-operated store base in the United States and internationally and
by spreading our expenses over a larger revenue base.

INCREASE SAME STORE REVENUES

By implementing each element of our business model, we believe that we will
increase same store revenues by:

- increasing the number of movies or video games that a customer rents on
each visit to our stores;

- continuing to increase our active customer base as we increase our market
share;

- increasing the number of times that active customers visit our stores;

- expanding our offering of rentable home entertainment, such as DVDs and
video games; and

- further increasing the quantity of videocassettes in our stores.

EXPAND DOMESTIC STORE BASE

Based on our current store prototypes, we believe that the potential exists
for 4,000 additional new traditional video stores in the United States. We
expect to add about 475 new company-operated stores in the United States in 1999
and about 500 new company-operated stores in the United States in each of 2000
and 2001. We plan to open most of these new stores in the 70 largest markets in
the United States. With the use of our extensive customer transaction database
and real estate database, our experienced store development team identifies
markets with growth opportunities and responds to these opportunities with the
appropriate store location and store format, which store format ranges from
about 1,000 to 4,800 square feet. We believe that through our site selection
process and flexible store formats, our new stores will generate sufficient
revenue to recover our capital investment in a short period of time without
significantly reducing the revenues of our existing stores.

EXPAND INTERNATIONAL STORE BASE

Our international strategy is focused on expanding in markets in which we
already have an established market position and in less mature markets.
Although, as of March 31, 1999, we operated stores in 26 markets outside of the
United States, about 92% of our international rental revenue was generated by
our top seven international markets. These markets are Great Britain, Canada,
the Republic of Ireland together with Northern Ireland, Mexico, Australia, Spain
and Taiwan. We believe that the growth opportunities in these markets are
significant because they are highly fragmented and our respective market share
in each of these countries is generally estimated by us to be less than 40%. We
expect to open over 400 new company-operated stores in these seven markets over
the next three years. We also plan to open over 100 new company-operated stores
over the next three years in international markets other than our top seven
markets. As in the United States, we use different store prototypes in response
to local real estate and market conditions. In addition, we have developed and
use a new country entry model that targets development of a specified range of a
number of company-

57
<PAGE>
operated stores and franchised stores, at which point economies of scale can be
used to reduce corporate overhead costs and national advertising expenses.

EXPAND WORLDWIDE FRANCHISE PROGRAM

Over the next three years, we expect to add about 200 franchised stores per
year to our franchised U.S. store base and about 125 franchised stores per year
to our international store base. This includes joint ventures in which we own a
minority interest. We also intend to convert company-operated stores in smaller
markets into franchised stores by selling these stores to franchisees. These
franchisees would also commit to develop additional new franchised stores in
their respective markets. As of March 31, 1999, our franchisees operated 640
U.S. franchised stores and 421 international franchised stores. For the year
ended December 31, 1998, we had revenues of $60.7 million relating to our
franchise operations, or about 1.6% of our 1998 revenues. In order to accomplish
this objective, we have refined our franchise approval process, hired personnel
exclusively dedicated to the development of new franchises and launched a
campaign to attract prospective franchisees. In order to increase the
attractiveness of our U.S. franchise program, by the end of 1999 we expect to
make our revenue-sharing agreements with the studios available to our U.S.
franchisees, which will provide them with an option to increase their quantity
and selection of movies.

APPLY THE BENEFITS OF GREATER SIZE

Our leading market position enables us to derive significant economies of
scale and operating efficiencies that are not necessarily available to our
smaller competitors. We are able to achieve efficiencies on both a store level
basis and a systemwide basis. On a store level basis, the increase in the volume
of transactions and the consequent increase in revenues per store as a result of
our business model provides us with the opportunity to reduce our labor costs as
a percentage of revenues. On a systemwide basis, we believe that we can reduce
our distribution costs and selling, general and administrative expenses as a
percentage of our revenues.

PURSUE STRATEGIC ACQUISITIONS

For the year ended December 31, 1998, we acquired 51 video stores. Thus far
in 1999, we have acquired or are under contract to acquire about 155 video
stores. We will continue to review potential acquisitions, including
acquisitions of video rental chains and stores operated by our franchisees as
well as acquisitions in complementary businesses that will enable us to take
advantage of the highly recognized BLOCKBUSTER brand name, our extensive
customer transaction database and our existing distribution system.

PURSUE NEW TECHNOLOGIES AND PRODUCTS

Our leading market position and recognizable brand name allow us to take
advantage of developing technologies and products related to rentable home
entertainment. For example, we are aggressively seeking to develop our online
retailing. We currently are redesigning our U.S. Internet site,
WWW.BLOCKBUSTER.COM, to capitalize on:

- our existing customer relationships;

- our extensive customer transaction database;

- recognition of the BLOCKBUSTER brand name;

- our studio relationships;

- our distribution center capabilities; and

- our existing store base.

We expect to increase our online retail sales of videocassettes, DVDs,
compact discs and BLOCKBUSTER

GIFTCARDS. We also expect to begin online sales of previously viewed tapes,
video games, previously played video games and other entertainment products.

58
<PAGE>
In addition, we have already tracked the success of DVDs in the marketplace
and have introduced DVDs for rental and sale in about 750 domestic stores and in
some markets outside of the United States. As DVDs become more widely accepted
by the public, we intend to rent and sell DVDs in all of our stores.

CUSTOMER TRANSACTION DATABASE

We have developed and utilize an extensive customer transaction database
with about 87 million U.S. member accounts and about 7 million Canadian member
accounts. This database has tracked customer names, addresses, phone numbers,
transaction histories, demographic information and, recently, e-mail addresses.
We also maintain customer transaction databases in each of the countries in
which we operate outside of the United States and Canada. As of March 1999, the
following chart summarizes the number of our systemwide U.S. member accounts
that have been active for the periods shown:

[Bar graph which shows that:

1. about 17.8 million customers rented or purchased a product from one of our
stores within the last 30 days;

2. about 28.4 million customers rented or purchased a product from one of our
stores within the last three months;

3. about 34.5 million customers rented or purchased a product from one of our
stores within the last six months;

4. about 39.1 million customers rented or purchased a product from one of our
stores within the last nine months;

5. about 42.2 million customers rented or purchased a product from one of our
stores within the last year; and

6. about 86.8 million customers have rented or purchased a product from one of
our stores.]

We consider our customer transaction database to be one of our core assets,
which we currently use to:

- communicate with and market directly to our customers on a national basis;

- develop programs to reward our most loyal customers;

- strategically locate potential new store sites based on demographics and
unique trade areas; and

- customize and improve the allocation of merchandise on a store-by-store
basis, based on local demographics and prior rental history of our
customers.

Over time, we believe we will use the information we collect and the
relationships we have developed with our customers through our database to:

- evaluate new industry trends such as DVDs and the digital broadcast
system;

- further develop and enhance our promotional and marketing strategy through
e-mail and other channels of distribution;

- help customers choose and rent movies by analyzing their previous viewing
history;

- promote our internet site and services; and

- capitalize on new home delivery systems for filmed entertainment as these
systems become economically viable.

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<PAGE>
MERCHANDISING

We offer a wide selection of movies and video games for rent and purchase.
We stock each of our company-operated stores with the quantity and selection of
merchandise that we believe is optimal for that particular store.

The breakdown of the domestic revenues generated from the rental and sale of
such products for the year ended December 31, 1998 is as follows:

[Pie graph which shows a breakdown of our domestic revenue as follows:

1 about 71.1% of our domestic revenues was generated by movie rentals;

2 about 9.4% of our domestic revenues was generated by video game rentals;

3 about 5.2% of our domestic revenues was generated by previously viewed tapes
and previously played video game sales;

4 about 7.0% of our domestic revenues was generated by sell-through movie
sales; and

5 about 7.3% of our domestic revenues was generated from the rental and sale
of other items.]

VIDEOCASSETTE AND VIDEOCASSETTE PLAYER RENTALS. Our typical traditional
domestic store generally carries about 5,550 different movie titles available
for rent, which include about 650 newly released video titles and about 4,900
BLOCKBUSTER FAVORITES. About 81% of 1998 domestic rental revenues were from the
rentals of newly released movies. In some of our stores, we rent videocassette
players. Under our revenue-sharing agreements, we are able to make available a
substantial number of additional copies of each newly released video in order to
satisfy our customers' demand shortly after the movie is released. In addition,
we are able to offer substantially more newly released video titles which
increases the variety of movies available in our stores. Our average customer
rents two videocassettes every time he or she visits one of our stores. Our
stores outside of the United States generally carry fewer movies due to their
smaller store sizes.

VIDEOCASSETTE SALES. We generally offer sell-through movies for sale for
about $10 to $20 per videocassette. These typically consist of:

- classic movies that we believe have ownership appeal;

- childrens' movies; and

- new releases that are priced for sell-through.

We also offer for sale previously viewed tapes to the public after the end of
their useful lives as rental products. These previously viewed tapes are
generally rewrapped and are sold at low prices.

DVDS AND DVD PLAYERS. We currently rent and sell about 300 different DVD
titles, about two-thirds of which are available for rent and one-third of which
are available for sale in about 850 domestic stores and in some markets outside
of the United States. We also rent DVD players in these stores. As DVDs become
more widely accepted in the marketplace we expect to increase the number of our
stores that rent and sell DVDs.

VIDEO GAMES AND VIDEO GAME CONSOLES. We rent video games for use with Sony
PlayStation-TM-, Nintendo-TM- and other video game platforms in all of our
domestic stores and many of our international stores. In these stores, we also
sell previously played video games and rent the video game consoles. In
addition, we sell new games in most of our stores in markets outside of the
United States.

OTHER PRODUCTS. For the convenience of our customers, we sell VCR
accessories, such as blank videocassettes and videocassette cleaning equipment,
and a limited selection of snacks and beverages in

60
<PAGE>
all of our stores. Occasionally, we sell licensed products to complement our
selection of movies. Also, we sell music compact discs and cassette tapes in
some of our stores and on our U.S. Internet site.

STORES AND STORE OPERATIONS

SITE SELECTION. We have developed a comprehensive model that we use to find
suitable locations for company-operated stores and markets for franchise stores.
We seek to locate our company-operated 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 are
targeting the remaining markets for the opportunity to develop franchises.
Accordingly, we are targeting the 70 largest markets in the United States to
develop company-operated stores, and we are targeting the remaining markets for
new franchise development.

Within each targeted market, we identify potential sites for new and
replacement stores by evaluating market dynamics, some of which include
population demographics, psychographics, customer penetration levels and
competition. We use our extensive real estate database and customer transaction
database to continuously monitor market conditions and select strategic store
locations. Our experienced store development team is capable of securing store
leases and preparing sites for operation, a process that typically takes about
six months. We use our knowledge of market areas and rely upon the familiarity
of our brand name to enhance our ability to obtain prime store locations,
negotiate favorable lease terms with landlords and enter into multiple store
leases.

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<PAGE>
STORE DEVELOPMENT. For the periods presented, the following table
summarizes opened stores, acquired stores, closed stores, and sold stores.

OUR WORLDWIDE STORE COUNT INFORMATION
<TABLE>
<CAPTION>
NUMBER OF FRANCHISED
NUMBER OF AND/OR JOINT VENTURE TOTAL
COMPANY-OPERATED STORES STORES STORES
----------------------------------- ------------------------------------- -----------
DOMESTIC INTERNAT'L TOTAL DOMESTIC INTERNAT'L TOTAL DOMESTIC
----------- ----------- --------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STORES AT 12/31/94.............. 2,065 1,002 3,067 725 277 1,002 2,790
Opened........................ 313 142 455 86 56 142 399
Acquired...................... 195 165 360 -- 3 3 195
Closed........................ (33) (154) (187) (18) (29) (47) (51)
Sold.......................... (3) -- (3) (150) (129) (279) (153)
----- ----- --------- ----- ----- --------- -----
STORES AT 12/31/95.............. 2,537 1,155 3,692 643 178 821 3,180
Opened........................ 367 211 578 78 92 170 445
Acquired...................... 200 98 298 2 -- 2 202
Closed........................ (36) (58) (94) (17) (10) (27) (53)
Sold.......................... (2) -- (2) (71) (50) (121) (73)
----- ----- --------- ----- ----- --------- -----
STORES AT 12/31/96.............. 3,066 1,406 4,472 635 210 845 3,701
Opened........................ 345 163 508 82 94 176 427
Acquired...................... 57 258 315 7 -- 7 64
Closed........................ (114) (69) (183) (14) (10) (24) (128)
Sold.......................... (7) -- (7) (19) (41) (60) (26)
----- ----- --------- ----- ----- --------- -----
STORES AT 12/31/97.............. 3,347 1,758 5,105 691 253 944 4,038
Opened........................ 174 165 339 53 141 194 227
Acquired...................... 46 5 51 -- 21 21 46
Closed........................ (70) (121) (191) (24) (10) (34) (94)
Sold.......................... -- (21) (21) (22) (5) (27) (22)
----- ----- --------- ----- ----- --------- -----
STORES AT 12/31/98.............. 3,497 1,786 5,283 698 400 1,098 4,195
Opened........................ 60 51 111 13 22 35 73
Acquired...................... 86 -- 86 -- -- -- 86
Closed........................ (25) (17) (42) (2) (1) (3) (27)
Sold.......................... -- -- -- (69) -- (69) (69)
----- ----- --------- ----- ----- --------- -----
STORES AT 3/31/99............... 3,618 1,820 5,438 640 421 1,061 4,258
----- ----- --------- ----- ----- --------- -----
----- ----- --------- ----- ----- --------- -----

INTERNAT'L TOTAL
----------- ---------
<S> <C> <C>
STORES AT 12/31/94.............. 1,279 4,069
Opened........................ 198 597
Acquired...................... 168 363
Closed........................ (183) (234)
Sold.......................... (129) (282)
----- ---------
STORES AT 12/31/95.............. 1,333 4,513
Opened........................ 303 748
Acquired...................... 98 300
Closed........................ (68) (121)
Sold.......................... (50) (123)
----- ---------
STORES AT 12/31/96.............. 1,616 5,317
Opened........................ 257 684
Acquired...................... 258 322
Closed........................ (79) (207)
Sold.......................... (41) (67)
----- ---------
STORES AT 12/31/97.............. 2,011 6,049
Opened........................ 306 533
Acquired...................... 26 72
Closed........................ (131) (225)
Sold.......................... (26) (48)
----- ---------
STORES AT 12/31/98.............. 2,186 6,381
Opened........................ 73 146
Acquired...................... -- 86
Closed........................ (18) (45)
Sold.......................... -- (69)
----- ---------
STORES AT 3/31/99............... 2,241 6,499
----- ---------
----- ---------
</TABLE>

We plan to open most of our new company-operated stores in the 70 largest
markets in the United States. Based upon our current store model, we believe
that there is the potential for 4,000 additional new traditional video stores in
the United States.

Outside the United States, we plan to open most of our new company-operated
stores in the seven markets in which we already have a significant presence. In
addition, we plan to add franchised and joint venture stores in other
international markets.

STORE FORMAT. In the past, we have sought to locate stores in sites that
were convenient and visible to the public. We intend to continue to conveniently
locate our stores by incorporating an "appropriate" store format using our
extensive customer transaction database and real estate database to maximize
revenues without significantly decreasing the revenues of our nearby stores. To
do so, we have designed three store formats:

- NEW TRADITIONAL STORES. These stores are about 4,800 square feet and have
been or will be constructed in markets in which store-to-population ratios
are low and in which we believe market conditions are optimal. On average,
each new traditional store carries about 600 different newly released
video titles and about 4,000 total copies of these movies and about 4,000
different BLOCKBUSTER FAVORITES and about 5,400 total copies of these
movies.

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<PAGE>
- SEAM STORES. These stores are about 2,500-3,500 square feet and have been
or will be constructed in order to compete:

a. in markets that are located in between our traditional stores without
significantly decreasing the market shares of those traditional
stores; and

b. in rural areas.

On average, each seam store carries about 600 different newly released
video titles and about 3,400 total copies of these movies and about 2,600
different BLOCKBUSTER FAVORITES and about 3,700 total copies of these
movies.

- STORE-IN-STORES. These stores are about 1,000-1,400 square feet and have
been or will be constructed within a department store, supermarket or
other store. This strategy is being pursued to further expand our presence
and meet demand in mature markets in which we already have a strong
presence. On average, each store-in-store carries about 500 different
newly released video titles and about 2,400 total copies of these movies
and about 1,400 different BLOCKBUSTER FAVORITES and about 1,800 total
copies of these movies.

We also periodically examine whether the formats of our existing stores are
optimal for their location and may downsize or relocate existing stores as
opportunities arise.

STORE LAYOUT. We design our stores to provide a recognizable distinctive
format offering an extensive selection of products in an attractive design aimed
at capturing the magic of the movies. We believe that our trademark blue and
yellow colors, which dominate most of our stores, make them easily recognizable
to video rental customers. The internal layout of our stores allows our
customers to easily distinguish new video releases, BLOCKBUSTER FAVORITES, DVDs,
video games and other products. Each domestic store typically contains a
perimeter wall, an internal area and a check-out area.

63
<PAGE>
Below is a graphic of our new store layout.

[Diagram of our internal store layout.]

STORE OPERATIONS. Our U.S. company-operated stores generally operate under
substantially similar hours of operation. Domestic stores are open 365 days a
year, with daily hours generally from 10:00 a.m. to 12:00 midnight. The hours of
operation for franchised stores vary widely depending on the franchise.
Typically, each U.S. store employs 16 people, including two assistant store
managers and one store manager. A large part of the in-store experience depends
upon the knowledge of our staff. We carry out periodic customer service audits
at all of our stores to understand, satisfy and exceed our customers'
expectations. In addition, as store traffic and same store revenues have
increased, we have been able to achieve significant labor savings through higher
productivity. We have achieved additional labor savings because our distribution
center efficiently packages videocassettes, a task that was previously done
manually. International store operations vary by country.

STORE LOCATIONS. At March 31, 1999, in the United States and its
territories, we operated 3,618 stores and our franchisees operated 640 stores.
The following map sets forth the number of domestic stores we operated,
including stores operated by our franchisees, as of March 31, 1999:

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<PAGE>
[Map of U.S.A. and its territories showing our total number of stores
(Company-operated and franchised stores) in each state and territory as
follows:]

<TABLE>
<CAPTION>
TOTAL
STATE OR TERRITORY(1) STORES(2)
- ----------------------------------------------------------------------------------------------------- -------------
<S> <C>
ALABAMA.............................................................................................. 49
ALASKA............................................................................................... 12
ARIZONA.............................................................................................. 78
ARKANSAS............................................................................................. 17
CALIFORNIA........................................................................................... 514
COLORADO............................................................................................. 100
CONNECTICUT.......................................................................................... 49
DELAWARE............................................................................................. 8
DISTRICT OF COLUMBIA................................................................................. 7
FLORIDA.............................................................................................. 325
GEORGIA.............................................................................................. 171
HAWAII............................................................................................... 19
IDAHO................................................................................................ 8
ILLINOIS............................................................................................. 203
INDIANA.............................................................................................. 70
IOWA................................................................................................. 24
KANSAS............................................................................................... 49
KENTUCKY............................................................................................. 40
LOUISIANA............................................................................................ 66
MAINE................................................................................................ 5
MARYLAND............................................................................................. 108
MASSACHUSETTS........................................................................................ 104
MICHIGAN............................................................................................. 141
MINNESOTA............................................................................................ 46
MISSISSIPPI.......................................................................................... 28
MISSOURI............................................................................................. 86
MONTANA.............................................................................................. 7
NEBRASKA............................................................................................. 27
NEW HAMPSHIRE........................................................................................ 19
NEW JERSEY........................................................................................... 97
NEW MEXICO........................................................................................... 22
NEW YORK............................................................................................. 249
NEVADA............................................................................................... 37
NORTH CAROLINA....................................................................................... 106
NORTH DAKOTA......................................................................................... 6
OHIO................................................................................................. 155
OKLAHOMA............................................................................................. 51
OREGON............................................................................................... 39
PENNSYLVANIA......................................................................................... 137
PUERTO RICO.......................................................................................... 43
RHODE ISLAND......................................................................................... 24
SOUTH CAROLINA....................................................................................... 63
SOUTH DAKOTA......................................................................................... 5
TENNESSEE............................................................................................ 68
TEXAS................................................................................................ 455
UTAH................................................................................................. 41
VERMONT.............................................................................................. 5
VIRGINIA............................................................................................. 119
VIRGIN ISLANDS....................................................................................... 2
WASHINGTON........................................................................................... 63
WEST VIRGINIA........................................................................................ 11
WISCONSIN............................................................................................ 73
WYOMING.............................................................................................. 5
GUAM................................................................................................. 2
DOMESTIC STORE TOTAL................................................................................. 4,258
</TABLE>

At March 31, 1999, outside of the United States, we operated 1,820 stores,
and our franchisees and joint ventures in which we own a minority interest
operated 421 stores. The following table sets forth, by country, the approximate
number of stores we operated and stores our franchisees operated as of March 31,
1999.

<TABLE>
<CAPTION>
NUMBER OF FRANCHISED
NUMBER OF COMPANY- OPERATED AND/OR JOINT VENTURE
COUNTRY(1) STORES STORES TOTAL(2)(3)
- ---------------------------------------------------- --------------------------- ----------------------- ---------------
<S> <C> <C> <C>
Great Britain....................................... 661 -- 661
Canada.............................................. 351 -- 351
Ireland (Republic) and Northern Ireland............. 220 -- 220
Australia........................................... 130 82 212
Mexico.............................................. 128 18 146
Italy............................................... -- 128 128
Spain............................................... 94 2 96
Brazil.............................................. -- 64 64
Chile............................................... 57 -- 57
Taiwan.............................................. 59 -- 59
Argentina........................................... 49 -- 49
Denmark............................................. 44 -- 44
Japan(4)............................................ -- 38 38
China (Hong Kong)................................... 14 -- 14
Portugal............................................ -- 15 15
Colombia............................................ -- 14 14
</TABLE>

65
<PAGE>

<TABLE>
<CAPTION>
NUMBER OF
COMPANY-
OPERATED NUMBER OF FRANCHISED
COUNTRY(1) STORES AND/OR JOINT VENTURE STORES TOTAL(2)(3)
- --------------------------------------------------------- --------------- ------------------------------- -----------
<S> <C> <C> <C>
Venezuela................................................ -- 12 12
Israel................................................... -- 12 12
New Zealand.............................................. 11 -- 11
Thailand................................................. -- 10 10
Peru..................................................... -- 9 9
Ecuador.................................................. -- 6 6
Panama................................................... -- 6 6
El Salvador.............................................. -- 4 4
Uruguay.................................................. 2 -- 2
Poland................................................... -- 1 1
----- --- -----
International Store Total................................ 1,820 421 2,241
----- --- -----
----- --- -----
</TABLE>

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

(1) We reached an agreement with a franchisee to begin to operate in the
Philippines by the end of 1999.

(2) This does not include stores leased or owned but not operating.

(3) In addition to the stores listed in the chart, as of March 31, 1999, there
were 37 video vending machines being tested in Spain, Canada and Great
Britain.

(4) Subsequent to March 31, 1999, we sold our interest in our Japanese joint
venture.

ADVERTISING AND MARKETING

Worldwide, in the year ended December 31, 1998, we incurred about $181
million in advertising expenses, which include about $142 million in the United
States and about $39 million internationally. In addition, some of our business
partners, including the studios, allow us to direct a significant amount of
their advertising expenditures. Furthermore, the studios also incur additional
expenditures to promote their newly released movies.

NATIONAL AND LOCAL ADVERTISING CAMPAIGN. In 1998, we launched a national
advertising campaign in order to support our business model. We are the only
home video chain that actively maintains a national advertising campaign. This
campaign consists of network and local television, local advertising and local
radio. We use our customer transaction database to target our direct mailings at
different customer groups. We expect to incur about $235 million in advertising
expenses in 1999, an increase of about 30%. We expect this increase to include
more television, outdoor and transit advertising.

The design of our national and local advertising campaign is based upon our
proprietary research. This is done on a national basis, and we also focus our
efforts on a local basis in order to adjust to each local environment. We obtain
information from our customer transaction database, our real estate database and
outside research agencies. We have concentrated on the following factors to
formulate and adjust our advertising:

- our market share;

- our level of store development and brand awareness relative to our
competitors within the relevant market;

- local demographics; and

- other local competitive issues.

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<PAGE>
Our advertising campaign focuses on the two areas discussed below.

- OUT-OF-STORE ADVERTISING. We advertise on television, transit and other
like media. We also use our research to customize our direct mailings to
address overall demographic trends and individual customer transaction
history.

- IN-STORE ADVERTISING. We use leading edge graphics and visual
merchandising in our stores in order to give our customers the feeling
that a trip to our stores captures the magic of the movies.

INNOVATIVE MARKETING PROGRAMS. Because of our large store base and our
leading brand awareness throughout the United States and many other markets, we
have been able to implement the following programs in the United States and the
same or similar programs in many of our international markets.

- NATIONAL PROMOTIONS. In 1999, we have planned several one-of-a-kind
national promotional events, each several weeks in duration, designed to
attract customers and increase the number of times that active customers
visit our stores due to the event's novelty and "prize" appeal. To date,
these are the only nationally advertised events in our industry. For
example, in our "Trip-a-day Giveaway" program, each day between January
19, 1999 and March 1, 1999, we gave a different customer a free trip to
places such as Las Vegas or the Cannes Film Festival. In addition, for the
last five years, we have sponsored the internationally televised
BLOCKBUSTER ENTERTAINMENT AWARDS, in which over 25 million votes were cast
in 58 categories in our stores and on our U.S. website in 1999. On June
16, 1999, the BLOCKBUSTER ENTERTAINMENT AWARDS were televised within the
United States to a television audience of over 6 million households and
have been or are scheduled to be televised in over 60 other countries.

- NEW RELEASE GUARANTEES. Because of the substantial number of copies of
videocassettes that we are able to provide in our stores, we are able to
offer a guarantee that some of our selected newly released video titles
will be in stock or the customer will receive a coupon that can be
redeemed for a free rental of that movie within the following 30 days.

- BLOCKBUSTER REWARDS PROGRAM. This premium membership program is designed
to offer benefits to our customers and enhance customer loyalty by
encouraging our customers to rent movies only from our stores. The program
was implemented in February of 1999 and as of March 31, 1999, there were
over 2.5 million U.S. customer accounts enrolled in the BLOCKBUSTER
REWARDS program. In general, for a $9.95 fee, our customers can join the
BLOCKBUSTER REWARDS program and earn free movie or video game rentals,
exclusive promotional offers and other benefits. Some high-volume renters
are automatically enrolled as BLOCKBUSTER REWARDS Gold members, which
earns them additional benefits such as additional free movie or video game
rentals and the ability to reserve movies by telephone. We have recently
implemented a version of this program in Mexico.

- BLOCKBUSTER GIFTCARDS. Our national point-of-sale system in the United
States allows us a unique opportunity to offer our customers the
opportunity to purchase stored value BLOCKBUSTER GIFTCARDS which can be
redeemed at any of our stores nationwide. The BLOCKBUSTER GIFTCARD is a
plastic prepaid card available in amounts ranging from $5 to $50. Some of
the cards have attractive designs, such as movie images, and are marketed
as "Limited Edition Cards." The BLOCKBUSTER GIFTCARDS are also currently
available in Great Britain and Canada. For the year ended December 31,
1998, we sold $121 million of BLOCKBUSTER GIFTCARDS, which was a 16.9%
increase in sales compared to the year ended December 31, 1997.

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- CROSS-PROMOTIONAL MARKETING PROGRAMS. On an ongoing basis, since 1997, we
have implemented cross-promotional marketing programs with such other
well-known companies as Coca-Cola, Taco Bell, General Motors and Burger
King. As a result of our participation in these programs, we benefit from
marketing by our business partners that features our brand.

- COMMUNITY SERVICE. We also sponsor and promote leadership events in many
of the communities in which we operate. For example, as part of our
"Community Service Videos" program, we provide free videocassettes in some
of our stores on subjects, such as breast cancer. We also offer annually
our KIDPRINT program in most of our U.S. stores. Under this complimentary
program, parents can have one of our staff members videotape their child's
mannerisms, appearance and voice for emergency identification purposes.

INTERNET: WWW.BLOCKBUSTER.COM

We have several Internet sites worldwide. The primary objective of our sites
is to drive traffic to our video stores with content regarding promotions such
as BLOCKBUSTER REWARDS. In addition, our U.S. Internet site also conducts
electronic commerce and provides information about us and some of the products
that we offer in our stores. This site also offers previews of movies soon to be
released in our stores. In addition, we sell on our U.S. Internet site
videocassettes, DVDs, compact discs and BLOCKBUSTER GIFTCARDS. For a complete
discussion of our online strategy, we refer you to "-- Growth Strategy -- Pursue
New Technologies and Products."

During the fourth quarter of 1999, we expect to introduce features to our
U.S. Internet site that we expect will attract online users. Some of these
features will include:

- increased electronic commerce offerings and capabilities;

- entertainment news and information;

- increased site and search speed;

- information about movies;

- integrated promotions between our in-store and online businesses; and

- suggestions of movies based upon a customer's evaluation of selected
films.

SUPPLIERS

The following is a description of the suppliers of our domestic
company-operated stores and our franchised stores. Our international stores are
supplied by a variety of suppliers.

SUPPLIERS OF VIDEOCASSETTES AND DVDS

COMPANY-OPERATED STORES. Our U.S. stores receive a substantial portion of
their videocassettes under the revenue-sharing agreements. We have entered into
domestic revenue-sharing agreements with, among others, all of the major
studios. Under these agreements, we share our U.S. rental revenues with the
studios for a limited period of time, generally 26 weeks.

In addition to this revenue-sharing component, common to each agreement is
some provision for disposition of the video products at the conclusion of the
rental period. This may involve sale of the product by us as a previously viewed
tape, return of the tape to the studio, destruction of the tape, or some
combination of these elements.

Most revenue-sharing agreements also have a minimum payment requirement, all
or part of which is associated with either the number of videocassettes we
purchase or domestic box office receipts and

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the then current number of our stores. Such agreements also generally require us
to take a minimum number of copies of each qualifying movie released by the
supplier.

This revenue-sharing concept is relatively new to us and our industry and we
believe the terms of these agreements are critical to our competitive position.
While the terms of our revenue-sharing agreement vary from studio to studio, we
believe, basing this belief upon various assumptions, that the overall economic
revenue-sharing model is designed to achieve gross margins of about 60% on the
rental product we obtain under these agreements. We cannot assure you, however,
that we can achieve such gross margins under our revenue-sharing agreements.
None of these agreements is exclusive to us and the studios are free to enter
into similar or better agreements with our competitors.

The agreements with the studios expire by their terms at various times over
the next four years beginning in the fourth quarter of the year 2000. We have
already renewed one of the agreements with a studio and are currently engaged in
negotiations with another studio to extend our agreement.

For most of our revenue-sharing videocassettes, the major studios send the
master videocassettes to a duplicator for copying and then they are shipped to
our distribution center. In addition, we purchase sell-through movies,
direct-to-video movies and movies sold at traditional wholesale prices, as well
as DVDs, from major studios, independent studios and independent suppliers,
generally pursuant to negotiated agreements.

FRANCHISED STORES. We require each franchisee to comply with guidelines
that set forth the minimum amount and selection of movies to be kept in its
store's inventory. Franchisees typically obtain videocassettes and DVDs from
their own suppliers. However, if we have purchased the exclusive distribution
rights to a movie, the franchisee may obtain that movie from us. By the end of
1999, we expect to make our revenue-sharing agreements with the studios
available to our U.S. franchisees, which will provide them with an option to
increase their quantity and selection of movies.

OTHER SUPPLIERS

SUPPLIERS OF VIDEO GAMES. For our company-operated stores, we purchase
video game software primarily from five suppliers: Sony, Nintendo, Midway,
Acclaim, and Electronic Arts. These suppliers deliver the video game software
and video game accessories to our distribution center. We then distribute the
video game software and video game accessories to our stores. Franchisees are
responsible for obtaining video games from their own suppliers.

SUPPLIERS OF VCRS, DVD PLAYERS AND VIDEO GAME CONSOLES. In our
company-operated stores, we purchase our VCRs primarily from Ingram
Entertainment Incorporated, DVD players primarily from Phillips Electronics and
video game consoles primarily from Phillips Sales and Nintendo. Franchisees are
responsible for obtaining VCRs, DVD players and video game consoles from their
own suppliers.

SUPPLIERS OF FOOD AND BEVERAGES AND ACCESSORIES. Other than our specially
branded microwave popcorn and accessories, which are distributed by our U.S.
distribution center, suppliers distribute all of our snacks and beverages
directly to our company-operated stores. Franchisees are responsible for
obtaining snacks and beverages and accessories from their own suppliers.

DISTRIBUTION AND INVENTORY MANAGEMENT

In the first quarter of 1998, we began operation of our new,
state-of-the-art distribution center in McKinney, Texas, which is near our
corporate headquarters. Our 850,000 square foot distribution center is a highly
automated, centralized facility that we use to restock products, repackage
videocassettes and process returns, as well as to provide some office space. It
supports all of our company-operated stores in the United States. As of March
31, 1999, we employed about 830 employees at the distribution center. Our
distribution center operates six days a week, 24 hours a day.

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DISTRIBUTION. At our distribution center, we receive substantially all of
our videocassettes and video games. We repackage the newly released
videocassettes to make them suitable for rent at our stores, a process which had
previously been done manually by our store employees before we built our
distribution center. In addition, we repackage previously viewed tapes to make
them available for sale. Our distribution center is also designed to be able to
handle individual customer orders, which would be necessary if we decided to
distribute our products sold on our U.S. Internet site directly to our
customers. Currently, our Internet sales are distributed by independent
distributors.

We distributed, and our company-operated stores received, about 86 million
units of our products last year from our distribution center. About 34.5 million
of those units were videocassettes repackaged for rental at our stores. The
distribution center has allowed us to significantly decrease our distribution
costs compared to the costs we previously incurred using third-party
distributors. While we currently process a high volume of products due to our
successful implementation of our revenue-sharing agreements, we can support a
significant increase in sales volume without significant additional investment.
As we add more volume to our distribution center, we will be able to further
take advantage of our cost efficiencies. The February 1999 issue of MODERN
MATERIALS HANDLING, a leading trade publication, has recognized our distribution
center for its "distribution excellence."

We use a network of third-party warehouses for delivery to our stores. We
ship our products to these warehouses, located strategically throughout the
United States, that in turn deliver them to our stores. Franchisees generally
obtain their products directly from suppliers, except for accessories, supplies
and movies to which we have exclusive distribution rights, which domestic
franchisees receive from our distribution center. Distribution of our products
to our stores in markets outside the United States is coordinated through our
international offices.

INVENTORY MANAGEMENT. Because we have a centralized distribution center, we
are able to keep strict control over the amount and flow of our products at any
given time. We scan all products as they enter, flow through and exit our
distribution center.

Once our products reach our stores, we focus on strict inventory control.
Our sophisticated inventory management system is integrated with our
point-of-sale system, which allows us to manage our inventory on a
store-by-store basis. We allocate our products to our stores based on the
transaction history of each store, and we monitor our stores' in-stock
positions. We also typically take physical inventory at each store on a monthly
basis.

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 videocassette rental
patterns. This information can be organized by store, region, state, country or
for all operations.

We maintain a satellite-based national point-of-sale system in the United
States, which is linked with a datacenter located in our distribution center.
The point-of-sale system tracks all of our products distributed from the
distribution center to each store using scanned bar code information. All 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 datacenter and the customer
transaction database by satellite.

All of our company-operated stores, except in the Republic of Ireland and
Nothern Ireland, and most of our franchisees use our point-of-sale system upon
opening or conversion into a company-operated store. Within the next three
years, we currently plan to update the computers and the software that run the
point-of-sale system in order to decrease the overhead costs of each store and
speed up the checkout process. We currently have a direct link via satellite
with most of our domestic

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company-operated stores and by the end of 1999, our company-operated stores in
Canada will also be linked via satellite. Also by the end of 1999, many of our
domestic franchised stores will be linked via satellite.

In addition, we have established processes for evaluating and managing the
risks and costs that may arise as a result of year 2000 software failures. We
are making necessary modifications to the identified software and we intend to
complete them by August 1999. We do not anticipate that we will incur
significant operating expenses or be required to invest heavily to improve our
computer systems in order to be year 2000 compliant, and we do not anticipate
that business operations will be disrupted. We refer you to "Risk Factors --
Risk Factors Relating to Our Business and Industry -- We May Be Adversely
Affected if Our Year 2000 Remediation Efforts Are Not Successful" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

FRANCHISE OPERATIONS

At March 31, 1999, our franchisees operated 640 stores in the United States
and our franchisees and minority-operated joint ventures operated 421 stores
internationally. Our franchisees generally are responsible for obtaining their
own supplies and coordinating their own distribution system. In the future,
however, we expect our U.S. franchisees to participate in our revenue-sharing
agreements and, as a result, they would rely upon our distribution center to
receive some portion of their videocassettes. Using our distribution center
would allow our franchisees to share in the cost savings that our distribution
center provides to us.

Under our current U.S. franchising program, we enter into a development
agreement and a franchise agreement 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 an approved location or locations within
a defined geographic area and within a specified time. We generally charge the
franchisee a development fee in advance for each store to be developed during
the term of the development agreement. The typical franchise agreement is a
long-term agreement that governs the operations of the store. We generally
require the franchisee to pay us a one-time franchise fee and continuing royalty
fees, service fees and monthly payments for maintenance of the proprietary
software. In addition, we provide optional product and support services to our
franchisees for which we sometimes receive fees. We require our franchisees to
contribute funds for national advertising and marketing programs and we also
require that franchisees spend an additional amount for local advertising. Each
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 employ people to inspect
our franchised stores.

We cannot assure you that our franchisees will be able to achieve
profitability levels in their businesses sufficient to pay our franchise fees.
Furthermore, we cannot assure you that we will be successful in marketing and
selling new franchises or that any new franchisees will be able to obtain
desirable locations and acceptable leases.

INTERNATIONAL OPERATIONS

We are the leading international retailer of rentable home movies and video
games. As a result, we believe we are well positioned to take advantage of the
overall growth in the home video industry outside of the United States. As of
March 31, 1999, we had 2,241 stores operating under "BLOCKBUSTER" and other
names located throughout 26 markets outside of the United States. Of these
stores, 421 were operated through our franchisees and/or joint ventures in which
we own a minority interest.

We have focused on seven priority markets outside of the United States.
Based on the number of stores, our largest market is Great Britain. We began
operations in Great Britain in 1989 and, through

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acquisitions, have grown to over 661 locations, excluding video vending
machines, as of March 31, 1999. We began operations in Canada, our second
largest market, in 1990 and have grown to 351 stores, as of March 31, 1999. In
the Republic of Ireland and Northern Ireland, our third largest market, we
acquired Xtra-vision PLC in 1997 and continue to operate under the XTRA-VISION
brand name due to its strong local brand awareness. As of March 31, 1999, we
have 220 stores in the Republic of Ireland and Northern Ireland. In addition, we
began operations in Mexico in 1991, Australia in 1993, Spain in 1995 and Taiwan
in 1997. For a complete listing of all of our operations outside of the United
States, we refer you to the chart set forth in "-- Stores and Store Operations
- -- Store Locations."

We maintain offices for each major region and most of the countries in which
we operate in order to manage, among other things:

- store development and operations;

- marketing; and

- the purchasing, supplying and distribution of each store's products.

The international home video and video game industry varies from country to
country due to, among other things:

- political and economic systems and risks; and

- legal standards and regulations, such as those relating to foreign
ownership rights, unauthorized copying, intellectual property rights,
labor and employment matters, trade regulation and business practices,
franchising and taxation.

Thus, because of all of these variables, we cannot assure you that we can
operate profitably in these international markets.

COMPETITION

We operate in a highly competitive environment. We believe our most
significant competition comes from (a) non-videocassette providers of home
viewing entertainment and (b) video stores and other retailers that rent or sell
movies.

COMPETITION WITH NON-VIDEOCASSETTE PROVIDERS OF HOME VIEWING
ENTERTAINMENT. These providers include direct broadcast satellite, cable,
digital terrestrial, network and syndicated television. We believe that our most
significant competitive risk in this area comes from direct broadcast satellite
and digital cable television. Further growth in the direct broadcast satellite
and digital cable subscriber bases could cause a smaller number of
videocassettes and DVDs to be rented if viewers were to favor the expanded
number of conventional channels and expanded programming, including sporting
events, offered through these services. We refer you to "Risk Factors -- Risk
Factors Relating to Our Business and Industry -- The widespread availability of
additional channels on satellite and digital cable systems may significantly
reduce public demand for our merchandise." Direct broadcast satellite, digital
cable and "traditional" cable providers not only offer numerous channels of
conventional television, but they also offer pay-per-view movies, which permit a
subscriber to pay a fee to see a selected movie.

COMPETITION WITH VIDEO STORES AND OTHER RETAILERS THAT RENT OR SELL
MOVIES. These retailers include, among others:

- local, regional and national video stores;

- mass merchant retailers;

- supermarkets, pharmacies and convenience stores; and

- Internet sites.

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We believe that the principal factors we face in competing with video stores
are:

- convenience and visibility of store locations;

- quality, quantity and variety of titles;

- pricing; and

- customer service.

OTHER COMPETITION. In some markets, we also compete against the illegal
duplication and sales of movies and video games. In addition to all of the modes
of competition discussed above, we compete for the general public's
entertainment dollar and leisure time activities including with, among others,
movie theaters, Internet-related activities, live theater and sporting events.

We cannot assure you that competing pressures we face will not have a
material adverse effect on us.

We refer you to "Risk Factors -- Risk Factors Relating to Our Business and
Industry -- Our Business May Be Materially Adversely Affected by New
Technologies" for a discussion of competitive risks related to new technology.

PROPERTIES

Our corporate headquarters are located at 1201 Elm Street, Dallas, Texas
75270 and consist of about 219,239 square feet of space leased pursuant to an
agreement that expires on June 30, 2007. The 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 have several main offices that manage our international operations. We
have offices in: Uxbridge, England; Plantation, Florida; Toronto, Ontario;
Melbourne, Australia; and Taipei, Taiwan. In addition, for most countries in
which we operate a store, we maintain an office to coordinate our operations
within that country.

We lease substantially all of our existing store sites, including buildings
and improvements. These leases generally have a term of five to ten years and
provide options to renew for between ten and fifteen additional years. We expect
that most future stores will also occupy leased properties.

INTELLECTUAL PROPERTY

We own a number of trademarks, trade names and service marks including,
among others, BLOCKBUSTER-Registered Trademark-, BLOCKBUSTER
VIDEO-Registered Trademark-, BLOCKBUSTER FAVORITES-TM-, BLOCKBUSTER
GIFTCARD-Registered Trademark-, BLOCKBUSTER GIFTCARDS-Registered Trademark-,
BLOCKBUSTER REWARDS-TM-, BLOCKBUSTER ENTERTAINMENT AWARDS-Registered Trademark-,
KIDPRINT, BLOCKBUSTER MUSIC-Registered Trademark-, XTRA-VISION and the blue and
yellow ticket stub and the blue and yellow awning outside our stores. In
addition, we own the rights to the "blockbuster.com" Internet domain name. We
consider our intellectual property rights to be among our most valuable assets.

LEGAL PROCEEDINGS

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actual damages of those similarly situated, under the Texas Free Enterprise and
Antitrust Act. The dollar amount that the plaintiff is alleging as the actual
damages to himself and those similarly situated is not set forth in his
complaint. We believe that the plaintiff's position is completely without merit,
and we intend to vigorously defend itself in the litigation.

In addition, another party, purporting to act as a class representative on
behalf of itself and all others similarly situated, filed a substantially
similar complaint in the United States District Court for the Western District
of Texas against Viacom and the studios' home video subsidiaries that have
operated under these revenue-sharing agreements with us. This plaintiff is
seeking triple the amount of the alleged actual damages to itself and triple the
amount of alleged actual damages of those similarly situated, as well as
preliminary and permanent injunctive relief prohibiting any unlawful attempt or
conspiracy to monopolize the market for the retail rental of videocassettes. If
Viacom is required to pay any damage award as a result of this litigation,
Viacom may seek indemnification for its losses from us under the release and
indemnification agreement. We refer you to "Related Party Transactions-- Release
and Indemnification Agreement."

We are subject to various other legal proceedings in the course of
conducting our business, including our business as a franchisor. However, we
believe that these proceedings are not likely to result in judgments that will
have a material adverse effect on our business.

REGULATION

DOMESTIC REGULATION

We are subject to various federal, state and local laws that govern the
access and use of our video stores by disabled people and the disclosure and
retention of video rental records. We also must comply with various regulations
affecting our business, including state and local advertising, consumer
protection, credit protection, licensing, zoning, land use, construction,
environmental and minimum wage and other labor and employment 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 (1)
the offer and sale of franchises and (2) franchise relationships. If we want to
offer and sell a franchise, we are required by the rule mentioned above to
furnish each prospective franchisee a current franchise offering circular prior
to the offer or sale of a franchise. In addition, a number of states require
that we, as franchisors, comply with that state's registration or filing
requirements prior to offering or selling a franchise in the state and to
provide a prospective franchisee with a current franchise offering circular
complying with the state's laws, prior to the offer or sale of the franchise.
Although we cannot make any assurances, we intend to maintain a franchise
offering circular 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 such state.

We are required to update our franchise offering circular annually, as well
as to amend it during the course of the year, to reflect material changes
regarding our franchise offering and to comply with changes in disclosure
requirements. The occurrence of any such material changes may, from time to
time, require us to stop offering and selling franchises until our franchise
offering circular is updated and amended. We cannot assure you that our
franchising program will not be adversely affected because compliance with
applicable law necessitates that we cease offering and selling franchises in
some states until our franchise offering circular is revised, updated and
approved by the applicable authorities, or because of our failure or inability
to comply with existing or future franchise sales and disclosure laws.

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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.

Compliance with federal and state franchise laws is costly and
time-consuming, and we cannot assure you that we will not encounter difficulties
or delays in this area or that it will not require significant capital for
franchising activities.

INTERNATIONAL REGULATION

We are subject to various international laws that govern the disclosure and
retention of video rental records. For example, the laws pertaining to the use
of the customer database in some markets outside of the United States are more
restrictive than the relevant laws in the United States.

We must comply with various regulations affecting our business, including
advertising, consumer protection, credit protection, franchising, licensing,
zoning, land use, construction, environmental, labor and employment regulations.

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 not often as extensive and
onerous as laws and regulations applicable in the United States. However, as in
the United States, failure to comply with such laws could limit or preclude our
ability to expand through franchising in those countries.

EMPLOYEES

As of March 31, 1999, we employed about 80,700 persons, including about
61,400 persons employed within the United States and about 19,300 persons
employed outside of the United States. Within the United States, about 58,700
were employed in domestic company-operated stores and 2,700 were employed in
various other operations, including our corporate, administrative and
distribution functions. Of the total number of U.S. employees, about 17,100 were
full-time and 44,300 were part-time. We believe that our employee relations are
good.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Set forth below is information concerning our current executive officers and
directors. There are no family relationships among any officers or directors.
The ages listed below are as of June 30, 1999.

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- ----------- ----------------------------------------------------------------
<S> <C> <C>
John F. Antioco........................ 49 Chairman of the Board of Directors, President and Chief
Executive Officer
Mark T. Gilman......................... 35 Executive Vice President, Chief Development and Franchising
Officer
James Notarnicola...................... 48 Executive Vice President, Chief Marketing Officer
Gary J. Peterson....................... 48 Executive Vice President, Chief Operations Officer
Alva J. Phillips....................... 54 Executive Vice President, Chief Information Officer
Michael K. Roemer...................... 50 Executive Vice President, Domestic Video Operations
Edward B. Stead........................ 52 Executive Vice President, General Counsel and Secretary
Nigel Travis........................... 49 Executive Vice President and President, Worldwide Retail
Operations
Dean M. Wilson......................... 41 Executive Vice President, Merchandising
Larry J. Zine.......................... 44 Executive Vice President, Chief Financial Officer
Philippe P. Dauman..................... 45 Director
Thomas E. Dooley....................... 42 Director
Linda Griego........................... 51 Director
John L. Muething....................... 77 Director
Sumner M. Redstone..................... 76 Director
</TABLE>

JOHN F. ANTIOCO has served as our chairman of the board of directors,
president and chief executive officer since 1997. From 1996 until 1997, Mr.
Antioco served as president and chief executive officer for Taco Bell
Corporation. Mr. Antioco served as chairman of the board of directors of The
Circle K Corporation, an operator of convenience stores, from 1995 until 1996,
and as its president and chief executive officer from 1993 until 1996. Mr.
Antioco joined Circle K as chief operating officer in 1991. Mr. Antioco serves
as chairman of the board of directors of Main Street & Main Inc. and as a
director for CSK Auto Corporation.

MARK T. GILMAN has served as our executive vice president, chief development
and franchising officer, since July 1999. Mr. Gilman served as our executive
vice president, real estate, franchising and new business development, from 1997
until 1999, and served as our senior vice president, strategic systems, from
1996 until 1997. Prior to joining us, during 1996, Mr. Gilman served as senior
vice president, development, for Hollywood Entertainment Corporation, a national
retail video chain, where he was responsible for domestic development and
construction. From 1994 until 1996, Mr. Gilman served as director of operations
development for Wal-Mart Corporation, where he was responsible for developing
real estate and merchandising systems.

JAMES NOTARNICOLA has served as our executive vice president, chief
marketing officer, since June 1998 and served as our executive vice president,
marketing and administration from 1997 until 1998. From 1978 until 1997, Mr.
Notarnicola served in many capacities at 7-Eleven Inc., which was formerly known
as The Southland Corporation, including vice president of marketing, from 1995
until 1997, and general manager of advertising and promotion, from 1990 until
1995.

GARY J. PETERSON has served as our executive vice president, chief
operations officer, since 1998 and served as our executive vice president,
distribution and information systems from 1996 until 1998. From 1993 until 1996,
Mr. Peterson served as chief operating officer for Southeast Frozen Foods, where
he

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<PAGE>
oversaw all operations of the frozen food wholesaler/distributor. Mr. Peterson
has also served as senior vice president of operations services for Thrifty Drug
Stores.

ALVA J. PHILLIPS has served as our executive vice president, chief
information officer, since 1997 and served as our senior vice president of
information services from 1995 until 1997. From 1993 until 1995, Mr. Phillips
was employed by Integrated Systems Solutions Corporation, a wholly-owned
subsidiary of International Business Machines Corporation, where he served as
project manager for the Eckerd Corporation account and oversaw, among other
matters, the development and implementation of a satellite-based store
communications system. From 1988 until 1993, Mr. Phillips served as senior vice
president of management information services for Rite Aid, where he was
responsible for developing in-store pharmacy, merchandising and distribution
systems to support the company's 2,600 store locations.

MICHAEL K. ROEMER has served as our executive vice president, domestic video
operations, since 1998 and served as our senior vice president, domestic video
operations, from 1997 until 1998. From 1995 until 1997, Mr. Roemer served as an
independent consultant for such major companies as Frito Lay, where he assisted
with new product development, distribution and business process planning. Prior
to consulting, Mr. Roemer worked at 7-Eleven Inc., from 1966 to 1995. From 1993
until 1995, in his capacity as senior vice president of merchandising for
7-Eleven, Mr. Roemer oversaw merchandising operations of 7-Eleven stores in the
United States and Canada.

EDWARD B. STEAD has served as our executive vice president and general
counsel since 1997, and as our secretary since 1999. From 1988 until 1996, Mr.
Stead served in various capacities with Apple Computer, Inc., including vice
president and general counsel, from 1989 until 1995, vice president, general
counsel and secretary, from 1993 until 1995, and senior vice president, general
counsel and secretary, from 1995 to 1996. Prior to joining Apple, Mr. Stead
served as senior vice president, general counsel and secretary of Cullinet
Software, Inc. Mr. Stead also served as a member of the legal advisory board of
the National Association of Securities Dealers from 1993 until 1997 and has been
a member of the American Law Institute since 1996.

NIGEL TRAVIS has served as our executive vice president and president,
worldwide retail operations, since 1998 and served as our president,
international operations, from 1997 until 1998. From 1994 until 1997, Mr. Travis
served in various other capacities for us, including senior vice president,
Europe. Prior to joining us, Mr. Travis served as senior vice president and
managing director, Europe, the Middle East and Africa, for Burger King
Corporation. Mr. Travis, a British national, serves as senior non-executive
director of Limelight PLC in the United Kingdom. Mr. Travis was elected as a
director of the Video Software Dealers Association in July 1999.

DEAN M. WILSON has served as our executive vice president, merchandising,
since 1998. From 1995 until 1998, Mr. Wilson held a number of positions with us,
including senior vice president--general merchandising manager, vice
president--retail and director of product international. Mr. Wilson's experience
in the video industry spans over 16 years, with positions in the retail,
distribution and studio aspects of the business. Prior to joining us, from 1990
until 1995, Mr. Wilson was employed by Trans World Entertainment, a music and
video retailer, where he served as divisional merchandise manager of video. Mr.
Wilson began his retail career in the executive training programs with May
Company and Dayton Hudson.

LARRY J. ZINE has served as our executive vice president, chief financial
officer, since 1999. From 1996 until 1999, Mr. Zine served as chief financial
officer for Petro Stopping Centers, L.P., where he was responsible for all
operations. During 1999, Mr. Zine also served as president of Petro. From 1981
until 1996, Mr. Zine worked for The Circle K Corporation, an operator of
convenience stores, and was named executive vice president and chief financial
officer in 1988.

PHILIPPE P. DAUMAN was elected as one of our directors in January 1995. Mr.
Dauman has been deputy chairman of Viacom since January 1996 and its executive
vice president since 1994. From 1993

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<PAGE>
until 1998, Mr. Dauman also served as general counsel and secretary of Viacom.
Mr. Dauman is a director of National Amusements, Inc. and Lafarge Corporation.

THOMAS E. DOOLEY was elected as one of our directors in May 1999. Mr. Dooley
has been deputy chairman of Viacom since 1996 and its executive vice president
since 1994. From 1992 until 1994, Mr. Dooley served as senior vice president,
corporate development, of Viacom.

LINDA GRIEGO was elected as one of our directors in July 1999. Since
December 1997, Ms. Griego has served as president of Zapgo Entertainment Group,
L.L.C., a television programming production company. Ms. Griego has also served
as the managing general partner of Engine Co. No. 28, a restaurant operation,
since 1988. From 1994 to 1997, Ms. Griego served as president and chief
executive officer of Rebuild LA, Inc., an economic development corporation. Ms.
Griego also served as Deputy Mayor for the City of Los Angeles, California from
1991 until 1993.

JOHN L. MUETHING was elected as one of our directors in July 1999. Mr.
Muething has been of counsel to the Cincinnati, Ohio law firm of Keating,
Muething & Klekamp since 1986. He also served as a director of Spelling
Entertainment Group Inc. from 1992 until June 1999.

SUMNER M. REDSTONE was elected as one of our directors in May 1999. Mr.
Redstone has been the chairman of the board of Viacom since 1987 and its chief
executive officer since 1996. Mr. Redstone has served as chairman of the board
of National Amusements, Inc. since 1986 and its president and chief executive
officer since 1967.

COMPOSITION OF OUR BOARD OF DIRECTORS

Our board of directors currently has six members, including our chairman of
the board of directors, Mr. Antioco, three individuals who are currently
executive officers and directors of Viacom, Messrs. Dauman, Dooley and Redstone,
and two outside directors, Ms. Griego and Mr. Muething. Our board of directors
will be divided into three classes serving staggered terms. Directors in each
class will be elected to serve for three-year terms and until their successors
are elected or qualified. Each year, the directors of one class will stand for
election as their terms of office expire. The Class I directors, Messrs. Dauman
and Dooley, will have terms of office expiring in 2000; the Class II directors,
Messrs. Muething and Redstone, will have terms of office expiring in 2001; and
the Class III directors, Mr. Antioco and Ms. Griego, will have terms of office
expiring in 2002. The three directors who are currently executive officers and
directors of Viacom have advised us that they will resign from our board of
directors following the completion of the split-off.

COMMITTEES OF OUR BOARD OF DIRECTORS

Our board of directors has appointed an audit committee, a compensation
committee and a senior executive compensation committee.

AUDIT COMMITTEE. The functions of the audit committee, which consists of
Ms. Griego and Mr. Muething, include:

- reviewing the adequacy of our system of internal accounting controls;

- reviewing the results of the independent accountants' annual audit;

- determining the duties and responsibilities of the internal audit staff;

- reviewing the scope and results of our internal auditing procedures;

- reviewing the audit reports submitted by both the independent accountants
and our internal audit staff; and

- annually recommending independent accountants.

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<PAGE>
COMPENSATION COMMITTEE. The compensation committee consists of Mr. Dauman,
Mr. Dooley, Ms. Griego, Mr. Muething and Mr. Redstone. Except with respect to
matters entrusted to the senior executive compensation committee, the functions
of the compensation committee currently include:

- reviewing our general compensation strategy;

- reviewing the terms of employment agreements for executives earning over a
specified amount; and

- administering our compensation and benefit plans, other than our 1999
long-term management incentive plan and senior executive short-term
incentive plan.

SENIOR EXECUTIVE COMPENSATION COMMITTEE. The functions of the senior
executive compensation committee, which consists of Ms. Griego and Mr. Muething,
include:

- reviewing and approving compensation for executives if their compensation
is, or may become, subject to Section 162(m) of the Internal Revenue Code,
including the terms of employment agreements for such executives;

- administering our senior executive short-term incentive plan, determining
the executives who will participate in the plan, establishing performance
targets and determining specific bonuses for the participants; and

- administering our 1999 long-term management incentive plan and approving
individual grants under this plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

In fiscal 1998, we did not have a compensation committee or any other
committee serving a similar function. Decisions as to the compensation of our
executive officers were made by the senior executive compensation committee or
the compensation committee of the board of directors of Viacom, as applicable.

COMPENSATION OF OUR DIRECTORS

Our directors who do not serve as officers or employees for us or Viacom are
called outside directors and are entitled to receive directors' fees and are
eligible to participate in our 1999 long-term management incentive plan
described below.

DIRECTORS' FEES. Outside directors will receive the following fees:

- an annual retainer of $40,000 for membership on our board of directors:
$20,000 of which will be paid in cash and $20,000 of which will be paid in
class A common stock that will be non-transferable for one year after it
is paid;

- a per meeting attendance fee of $1,000 for each meeting of our board of
directors; and

- a per meeting attendance fee of $1,000 for each meeting of our audit
committee, compensation committee and senior executive compensation
committee, but only if the meeting is held on a day different from the day
of the meeting of our board of directors and our committee member has to
travel to participate in our committee meetings. Only one fee will be paid
for attendance at more than one committee meeting held on the same day.

EQUITY-BASED COMPENSATION. At the time of this offering, each of our
outside directors will receive a one-time grant of stock options to purchase
10,000 shares of our class A common stock pursuant to our 1999 long-term
management incentive plan described below at a per share exercise price that
will be equal to the initial public offering price of a share of our class A
common stock in this offering. The options will vest in four equal installments,
beginning on the first anniversary of the date of the grant.

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<PAGE>
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

No present director or executive officer currently owns any shares of our
common stock, all of which are currently owned by Viacom, other than Mr.
Redstone, to whom beneficial ownership of these shares is attributed. The
following table sets forth the number of shares of each class of Viacom's common
stock beneficially owned on June 30, 1999 by each of our directors, our
executive officers named in the summary compensation table below and all of our
directors and executive officers as a group. Except as otherwise noted, the
individual director or executive officer had sole voting and investment power
with respect to such securities.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF EQUITY SECURITIES
----------------------------------------------------------------------
TITLE OF NUMBER OF NUMBER OF PERCENT
NAME EQUITY SECURITY EQUITY SHARES OPTION SHARES(1) OF CLASS
- ------------------------------------- ------------------ ------------------- ---------------- -----------
<S> <C> <C> <C> <C>
John F. Antioco...................... class A common -- -- *
class B common 5,010(2)(3) 291,666 *

Philippe P. Dauman................... class A common 2,380(3) -- *
class B common 29,778(3) 1,323,332 *

Thomas E. Dooley..................... class A common 4,866(3) -- *
class B common 17,286(3) 1,297,332 *

Linda Griego......................... class A common -- -- *
class B common -- -- *

John L. Muething..................... class A common -- -- *
class B common -- -- *

James Notarnicola.................... class A common -- -- *
class B common 75(3) 20,000 *

Gary J. Peterson..................... class A common -- -- *
class B common 741(3) 34,667 *

Sumner M. Redstone................... class A common 93,658,988(4) -- 66.8%
class B common 104,334,988(4) 1,916,665 18.8%

Edward B. Stead...................... class A common -- -- *
class B common -- -- *

Nigel Travis......................... class A common 40 -- *
class B common 374 26,000 *

Our current directors and officers as
a group other than Messrs. Dauman,
Dooley and Redstone (twelve
persons)........................... class A common 40 -- *
class B common 8,816(3)(5) 441,500 *
</TABLE>

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

* Less than 1%.

(1) This includes shares subject to options to purchase such shares that, on
June 30, 1999, were unexercised but were exercisable within a period of 60
days from that date. All figures in this column reflect an adjustment for
Viacom's two-for-one common stock split effected in March 1999. These shares
are excluded from the column headed "Number of Equity Shares."

(2) This includes 5,000 shares that are held jointly with Mr. Antioco's spouse.

(3) This includes shares and rights equal in value to shares held through
Viacom's 401(k) and/or excess 401(k) plans as of December 31, 1998.

(4) Except for 160 shares of each class of Viacom's common stock owned directly
by Mr. Redstone, all of these shares are owned of record by National
Amusements, Inc. Mr. Redstone is the chairman

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<PAGE>
and the beneficial owner of the controlling interest in National Amusements,
Inc. and, accordingly, beneficially owns all such shares.

(5) In addition to the 5,000 shares disclosed in footnote (2) above, this
includes 1,000 shares that are held by another executive officer jointly
with his spouse.

COMPENSATION OF OUR EXECUTIVE OFFICERS

SUMMARY COMPENSATION TABLE. The following summary compensation table sets
forth information regarding compensation for fiscal 1998 paid to our chief
executive officer and each of our four other most highly compensated executive
officers who were serving as such on December 31, 1998.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- -------------
OTHER SECURITIES ALL
ANNUAL UNDERLYING OTHER
SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) (#)(3) ($)
- ---------------------------------------------- --------- --------- ----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John F. Antioco............................... 1998 1,200,000 4,750,000(4) -- 196,320 323(5)
Chairman of the Board of Directors,
President and Chief Executive Officer

James Notarnicola............................. 1998 374,363 300,000 -- 10,000 2,615(6)
Executive Vice President, Chief Marketing
Officer

Gary J. Peterson.............................. 1998 397,500 300,000 -- 5,000 5,895(6)
Executive Vice President, Chief Operations
Officer

Edward B. Stead............................... 1998 369,923 282,050 19,127(7) -- --
Executive Vice President, General Counsel
and Secretary

Nigel Travis.................................. 1998 361,483(8) 386,618 159,109(8)(9) 10,000 45,234(10)
Executive Vice President and President,
Worldwide Retail Operations
</TABLE>

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

(1) This reflects bonus earned during fiscal 1998. In some instances, we paid
all or a portion of the bonus during the next fiscal year.

(2) In accordance with the rules of the SEC, we have omitted perquisites
totaling less than $50,000.

(3) This reflects options to acquire shares of Viacom's class B common stock.
All figures in this column reflect an adjustment for Viacom's two-for-one
common stock split effected in March 1999.

(4) $1.0 million of Mr. Antioco's 1998 bonus amount represents the 1998
installment of his sign-on bonus.

(5) This consists of our contributions to Viacom's 401(k) plan.

(6) This consists of our contributions to Viacom's 401(k) and excess 401(k)
plans.

(7) This consists of reimbursement for taxes.

(8) Mr. Travis was transferred from our U.K. payroll to our U.S. payroll in
August 1998. Payments made in British pounds have been converted to U.S.
dollars using an average conversion rate from January 1998 through July 1998
of 1.64897 U.S. dollars to 1.00 British pound.

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<PAGE>
(9) This includes $96,219 relating to relocation expenses, $47,285 of
reimbursement for taxes, and other executive perquisites, none of which
exceeds 25% of the total perquisites reported as other annual compensation.

(10) This consists of employer contributions to our U.K. defined contribution
and supplemental plans, but does not include amounts accrued but not
contributed to Mr. Travis' account during 1998. Amounts disclosed reflect a
conversion from British pounds to U.S. dollars at an average conversion rate
for 1998 of 1.65655.

OPTION GRANTS DURING 1998 FISCAL YEAR. The following table provides
information related to options to purchase Viacom's class B common stock granted
during fiscal 1998 to the executive officers named in the summary compensation
table above.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
NUMBER OF
SHARES OF
VIACOM'S % OF TOTAL
CLASS B OPTIONS EXERCISE
COMMON STOCK GRANTED TO OR BASE GRANT DATE
UNDERLYING EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME OPTIONS(1) FISCAL 1998(2) ($/SH)(3) DATE VALUE($)(4)
- ------------------------- ------------- --------------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
August 20,
John F. Antioco.......... 196,320(5) 1.45 30.5625 2008 2,549,961

August 20,
James Notarnicola........ 10,000(5) 0.07 30.5625 2008 129,888

August 20,
Gary J. Peterson......... 5,000(5) 0.04 30.5625 2008 64,944

Edward B. Stead.......... -- -- -- -- --

August 20,
Nigel Travis............. 10,000(5) 0.07 30.5625 2008 129,888
</TABLE>

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

(1) All share numbers have been adjusted to reflect Viacom's two-for-one common
stock split that was effected in March 1999.

(2) This reflects the percentage of total grants to all employees of Viacom. The
percentage of total grants to all of our employees were as follows: Mr.
Antioco, 38.77%; Mr. Notarnicola, 1.98%; Mr. Peterson, 0.99%; Mr. Stead, 0%;
and Mr. Travis, 1.98%.

(3) Exercise prices that were originally equal to the fair market value of
Viacom's class B common stock on the date of grant have been adjusted to
reflect Viacom's two-for-one common stock split that was effected in March
1999.

(4) This is based on the Black-Scholes option pricing model adapted for use in
valuing executive stock options. The actual value, if any, an executive may
realize will depend on the excess of the stock price over the exercise price
on the date the option is exercised. There is no assurance that the value
realized by an executive will be at or near the value estimated by the
Black-Scholes option pricing model. The grant date values presented in the
table were determined, in part, using the following assumptions. No
adjustments were made for non-transferability or risk of forfeiture:

<TABLE>
<S> <C>
Expected volatility.................................................. 32.73%
Risk-free rate of return............................................. 5.45%
Dividend yield....................................................... 0.00%
Time of exercise..................................................... 6 years
</TABLE>

The approach used in developing the assumptions upon which the Black-Scholes
valuation was done is consistent with the requirements of the Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."

(5) The options become exercisable with respect to one-third of the shares
covered thereby on each of August 20, 2000, 2001 and 2002.

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<PAGE>
OPTION EXERCISES DURING 1998 FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES. The following table provides information related to:

- options to purchase Viacom's common stock exercised during fiscal 1998 by
the executive officers named in the summary compensation table above; and

- the number and value of options to purchase Viacom's class B common stock
held at December 31, 1998 by such executive officers.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AS OF DECEMBER 31, OPTIONS AS OF DECEMBER 31,
SHARES 1998(1)(2) 1998($)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE(#)(2) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John F. Antioco...................... -- -- -- 1,196,320 -- 23,013,810

James Notarnicola.................... -- -- -- 90,000 -- 1,804,375

Gary J. Peterson..................... 9,666(3) 145,594 -- 124,334 -- 2,584,201

Edward B. Stead...................... -- -- -- 100,000 -- 2,156,250

Nigel Travis......................... 18,250(4) 94,193 6,000 102,000 117,000 2,044,625
</TABLE>

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

(1) This reflects options to acquire Viacom's class B common stock.

(2) All figures in these columns reflect an adjustment for Viacom's two-for-one
common stock split effected in March 1999.

(3) This reflects the exercise of options to acquire 9,666 shares of Viacom's
class B common stock.

(4) This reflects the exercise of options to acquire 2,060 shares of Viacom's
class A common stock and 16,190 shares of Viacom's class B common stock.

PENSION PLANS

DEFINED BENEFIT PENSION PLAN. We and some of our subsidiaries participate
in a non-contributory qualified defined benefit pension plan and an excess
pension plan for some of our highly compensated employees, both sponsored by
Viacom. Our employees became eligible to participate in these plans effective
January 1, 1996, with credit for past service on and after September 29, 1994
for eligibility and vesting purposes. An eligible employee will receive a
benefit at retirement that is based upon the employee's number of years of
benefit service and average annual compensation, including salary and bonus, for
the highest 60 consecutive months out of the final 120 months immediately
preceding retirement. Under the terms of the excess pension plan, such
compensation is limited to the greater of base salary as of December 31, 1995 or
$750,000. The benefits under Viacom's excess pension plan are not subject to the
Internal Revenue Code provisions that limit the compensation used to determine
benefits and the amount of annual benefits payable under Viacom's qualified
pension plans. At this time, we do not intend to sponsor a defined benefit plan
or an excess benefit plan following the split-off, but expect that our employees
will continue to participate in Viacom's plans until that time. It is
anticipated that Viacom will retain the accrued liability for benefits under
these plans for our employees.

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<PAGE>
The following table illustrates, for representative average annual
pensionable compensation and years of benefit service classifications, the
annual retirement benefit that would be payable to employees under both the
non-contributory defined benefit pension plan and the excess pension plan if
they retired in 1998 at age 65, based on the straight-life annuity form of
benefit payment and not subject to deduction or offset.

PENSION PLAN TABLE

<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 30
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$150,000................................ $ 12,347 $ 24,694 $ 37,041 $ 49,387 $ 61,734 $ 74,081
300,000................................ 25,472 50,944 76,416 101,887 127,359 152,831
450,000................................ 38,597 77,193 115,791 154,387 192,984 231,581
600,000................................ 51,722 103,444 155,166 206,887 258,609 310,331
750,000................................ 64,847 129,694 194,541 259,387 324,234 389,081
900,000................................ 77,972 155,944 233,916 311,887 389,859 467,831
</TABLE>

The number of years of benefit service that have been credited, as of
December 31, 1998, for Messrs. Antioco, Notarnicola, Peterson and Stead are six
months, six months, two years and four months, respectively. Mr. Travis does not
participate in either the pension plan or the excess pension plan sponsored by
Viacom.

EMPLOYMENT AGREEMENTS

Mr. Antioco's employment agreement provides that he will be employed as
chairman and chief executive officer until June 15, 2002 at an annual salary of
$1.3 million, which will be pro-rated for the balance of 1999, and thereafter at
an annual salary of $1.0 million. Mr. Antioco will also receive deferred
compensation, payable the year after he ceases to be an executive officer with
us, in an amount equal to $355,000 for 2000, $455,000 for 2001 and $230,000 for
the portion of 2002 during the employment term. Mr. Antioco's target bonus,
which is payable upon satisfaction of performance objectives determined each
year by our senior executive compensation committee, is set at 125% of his base
salary and deferred compensation. The agreement provides that Mr. Antioco will
receive, upon the completion of this offering, 1,000,000 options to purchase our
class A common stock at a per share exercise price equal to the initial public
offering price. These options will vest over a five-year period, beginning on
the first anniversary of the date of grant. In addition, on each of the first
and second anniversaries of this offering, Mr. Antioco will receive a grant of
options to purchase our class A common stock, issued at fair market value at the
time of grant, with an aggregate exercise price equal to $6.0 million for each
annual grant. These options will vest over a four-year period, beginning on the
first anniversary of the date of grant. In the event of the termination of Mr.
Antioco's employment without cause or voluntary termination for good reason
during the employment term, he will be entitled to receive salary, target bonus,
deferred compensation and agreed upon benefits for the balance of the employment
term, subject to mitigation after the first eighteen months, and his stock
options, including options that would have been granted or that have not vested
by the date of termination, will be exercisable for at least six months after
the date of termination, but not beyond the expiration date of such stock
options.

The employment agreements of each of Messrs. Notarnicola, Peterson, Stead,
and Travis are substantially similar. Mr. Notarnicola's agreement provides that
he will be employed as chief marketing officer until May 31, 2001 at an annual
salary of $420,000, subject to an annual merit increase during the first quarter
of each year. Mr. Peterson's agreement provides that he will be employed as
chief operations officer until May 31, 2002 at an annual salary of $420,000,
subject to an annual merit increase during the first quarter of each year. Mr.
Stead's agreement provides that he will be employed

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<PAGE>

as executive vice president, general counsel and secretary until September 2,
2001 at an annual salary of $375,000, subject to an annual merit increase during
the first quarter of each year. Mr. Travis' agreement provides that he will be
employed as president, retail operations until May 31, 2002 at a salary of
$465,000 for the twelve-month period ending May 31, 2000 and $505,000 for the
twelve-month period ending May 31, 2001, and at a salary to be determined for
the twelve-month period ending May 31, 2002. Each of these agreements provides
for an annual target bonus of 50% of base salary, which is payable upon
satisfaction of performance objectives. Each of these agreements provides that,
in the event of the executive's termination of employment without cause or for
good reason during the employment term, he will be entitled to receive his
salary and target bonus and certain benefits for the balance of the employment
term, subject to mitigation after the first twelve months, and his stock
options, including options that would have vested during the employment term,
will be exercisable for six months after the date of termination, but not beyond
the expiration of such stock options.

1999 LONG-TERM MANAGEMENT INCENTIVE PLAN

In connection with this offering, we have adopted our 1999 long-term
management incentive plan.

GENERAL DESCRIPTION OF THIS PLAN

The following is a description of the material terms of this plan. The full
text of this plan is filed as an exhibit to our registration statement filed
with the SEC. This plan provides for grants of stock options to purchase shares
of class A common stock, stock appreciation rights, restricted shares of class A
common stock, restricted share units and phantom shares, the terms and
conditions of which are described in more detail below. About 8,000 of our
employees are eligible for grants under this plan. Our non-employee directors
and advisors are also eligible for grants under this plan. Where necessary,
compensation relating to awards under this plan is generally intended to qualify
as "qualified performance-based compensation," which is excluded from the $1.0
million limit on deductible compensation set forth in Section 162(m) of the
Internal Revenue Code.

The maximum aggregate number of shares of class A common stock that may be
distributed under this plan, whether reserved for issuance upon grants of stock
options or stock appreciation rights or granted as restricted shares or
restricted share units, is 25,000,000, subject to adjustment. Shares of class A
common stock covered by expired or terminated stock options, stock appreciation
rights, restricted shares and restricted share units that are forfeited under
the terms of this plan or stock appreciation rights or restricted share units
that are exercised for cash will not be counted in applying such limit. The
maximum aggregate number of shares of class A common stock that may be granted
pursuant to awards granted to any participant during the five-year term of this
plan is 5,000,000. Grants under this plan are currently authorized by the senior
executive compensation committee in its sole discretion or, in the case of
grants to our outside directors, by our board of directors, excluding such
outside directors.

ADMINISTRATION

This plan will be administered by our board of directors or by a committee
appointed by our board of directors, both of which will be referred to as our
"committee" throughout the description of this plan. Any committee appointed by
our board of directors to administer this plan will consist of at least two
members of our board of directors. However, with respect to any grant that is
intended to satisfy the requirements of Rule 16b-3 under the Securities Exchange
Act of 1934, our committee will consist of at least that number of directors as
is required from time to time by this rule, and each committee member will
satisfy the requirements of this rule. With respect to any grant that is also
intended to satisfy the exception set forth in Section 162(m) of the Internal
Revenue Code for qualified performance-based compensation, our committee will
consist of at least that number of directors as is required from time to time to
satisfy this exception, and each committee member will satisfy the

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qualification requirements of this exception. With respect to grants in
jurisdictions outside of the United States, our committee will have the
authority to require that any related agreements contain any terms required by
local law in order to constitute valid grants under the laws of such
jurisdictions, even if the terms are more restrictive than the terms set forth
in this plan.

STOCK OPTIONS

Stock options can be either incentive stock options or options that do not
qualify as incentive stock options for federal income tax purposes, called
nonqualified stock options, as determined by our committee.

Subject to some limits described below, our committee determines the number
and kind of stock options granted, the exercise price of the stock options, the
vesting schedule applicable to such stock options, the period during which they
can be exercised and any applicable performance goal requirements. Our committee
may, in its discretion, accelerate the vesting date of any stock option. With
respect to incentive stock options and any options intended to qualify for the
exception set forth in Section 162(m) of the Internal Revenue Code for qualified
performance-based compensation, the exercise price cannot be less than 100% of
the fair market value of a share of class A common stock on the date of grant.
In addition, with respect to any ten percent stockholder, as calculated under
the Internal Revenue Code, the exercise price of an incentive stock option
cannot be less than 110% of the fair market value of a share of class A common
stock on the date of grant. No stock option can be exercised more than ten years
after the date of grant. The exercise price of a stock option must be paid in
full at the time of exercise as follows:

- in cash;

- in the discretion of our committee, in shares of class A common stock or
other company securities designated by our committee;

- in a combination of cash, shares or such other securities; or

- with any other form of valid consideration that is acceptable to our
committee.

If the service of a participant, other than a nonemployee director, ends by
reason of a voluntary termination by such participant or a termination by us
other than a termination for cause, his outstanding stock options may be
exercised, to the extent then exercisable, for a period of six months following
the date of termination. In the event of a participant's death, his stock
options may be exercised to the extent exercisable at the date of death by the
person who acquired the right to exercise such stock options by will or the laws
of descent and distribution for a period of twelve months following the date of
death. In the event of the permanent disability of a participant who is an
employee, his stock options may be exercised to the extent exercisable upon the
date of the onset of such permanent disability for a period of twelve months
following such date. If a nonemployee director ceases to be a member of our
board of directors for any reason, other than due to a termination for cause,
his stock options may be exercised, to the extent then exercisable, for a period
of twelve months following the date of termination. If any participant's service
is terminated for cause, then, unless our committee determines otherwise, all
stock options, whether or not then vested, will be forfeited by the participant
effective as of the date of such termination. In some instances, our committee
has the discretion to set post-termination exercise periods in excess of those
described above. However, in no event may a stock option be exercised following
the earlier to occur of the expiration of the option and the tenth anniversary
of the date of grant.

STOCK APPRECIATION RIGHTS

Our committee may grant stock appreciation rights under this plan only in
tandem with stock options, either at the time of grant of the stock option or by
amendment at any time prior to the

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exercise, expiration or termination of the stock option. Each stock appreciation
right entitles the holder to surrender the related stock option in lieu of
exercise and to receive an amount equal to the excess of the fair market value
of a share of class A common stock on the date the holder exercises the stock
appreciation right over the exercise price of the related stock option. This
amount will be paid in cash or, in the discretion of our committee, in shares of
class A common stock or other of our securities designated by our committee or
in a combination of cash, shares or such other securities. No stock appreciation
right can be exercised unless the related stock option is then exercisable.

RESTRICTED SHARES AND RESTRICTED SHARE UNITS

Our committee may grant restricted shares and restricted share units under
this plan. A "restricted share" is a share of class A common stock granted to
the participant subject to restrictions as determined by our committee. A
"restricted share unit" is a contractual right to receive either a share of
class A common stock, a cash payment equal to the fair market value of a share
of class A common stock or a combination of cash and class A common stock,
subject to terms and conditions as determined by our committee. Any restricted
shares and restricted share units granted under this plan will be subject to a
vesting schedule, including any applicable performance goal requirements,
established by our committee. Our committee may, in its discretion, accelerate
the dates on which restricted shares and restricted share units vest. For
restricted share grants, stock certificates representing the number of
restricted shares granted to a participant will be registered in the
participant's name as of the date of grant but remain held by us. The
participant who receives a restricted share grant will have all rights as a
holder of shares of class A common stock except that the participant will not be
entitled to delivery of certificates until the shares represented thereby have
vested, and the restricted shares cannot be sold, transferred, assigned, pledged
or otherwise encumbered or disposed of until such shares have vested. For
restricted share units that are paid in class A common stock, stock certificates
for the appropriate number of shares of stock, free of restrictions, will be
delivered to the participant when the restricted share units vest.

If the participant's service terminates for any reason or, in the event of
the participant's death or, for participants who are employees, permanent
disability, the unvested restricted shares and restricted share units will be
forfeited as of the date of such event, unless our committee determines
otherwise with respect to some or all of the unvested restricted shares and
restricted share units.

PHANTOM SHARES

The value of any phantom shares granted under this plan will be determined
by reference to the fair market value of a share of class A common stock. Cash
payments made with respect to these phantom shares are based, subject to any
applicable limit on the maximum amount payable, on any increase in value of
shares of class A common stock on specified valuation dates over the initial
value of these shares. This plan empowers our committee to determine the initial
value of the phantom shares. This plan further empowers our committee to
determine the valuation dates applicable to a grant of phantom shares, the
period during which the phantom shares vest and to set a limit on the maximum
amount of appreciation value payable for the phantom shares.

If a participant's service terminates for any reason other than for cause
or, in the event of the participant's death or, for participants who are
employees, permanent disability, then, unless our committee determines
otherwise, the cash payments for such participant's phantom shares will be the
lesser of the appreciation in value determined as of the date of the termination
or event or as of the originally scheduled valuation dates, and these payments
will be made after the originally scheduled valuation dates. All rights with
respect to phantom shares that are not vested as of the date of this termination
or event, as the case may be, will be relinquished by the participant. If a
participant's employment is terminated for cause, all phantom shares, whether or
not vested, will be forfeited by the participant, unless our committee
determines otherwise.

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ADJUSTMENTS

In the event of a merger, consolidation, stock split, dividend,
distribution, combination, reclassification or recapitalization that changes the
character or amount of the class A common stock, our committee will make any
adjustments as it deems appropriate to the following:

- the number and kind of shares of class A common stock subject to any stock
options or stock appreciation rights or the number and kind of restricted
shares, restricted share units or phantom shares granted to each
participant,

- the exercise price of any outstanding stock options or stock appreciation
rights or the initial value of any outstanding phantom shares, and

- the maximum number of shares of class A common stock that may be granted
under the plan or the aggregate number of shares that may be granted to
any participant.

TRANSFER RESTRICTIONS, ETC.

The rights of a participant with respect to the stock options, stock
appreciation rights, restricted shares, restricted share units or phantom shares
granted under this plan are not transferable by the participant other than by
will or the laws of descent and distribution. Except as described above, no
grant under this plan entitles a participant to any rights of a holder of shares
of class A common stock, nor will any grant be construed as giving any employee
or advisor a right to continued service with us nor any non-employee director a
right to be nominated, reelected or retained as a member of our board of
directors.

AMENDMENT AND TERMINATION OF THIS PLAN

This plan may be terminated and may be altered, amended, suspended or
terminated at any time, in whole or in part, by our board of directors, except
that:

- no alteration or amendment will be effective without stockholder approval
if approval is required by law or under the rules of the New York Stock
Exchange, the Nasdaq Stock Market or any stock exchange on which our
common stock is listed; and

- no such termination, suspension, alteration or amendment may adversely
alter or affect the terms of any then outstanding awards without the
consent of the affected participant.

GRANTS AS OF THIS OFFERING

Our senior executive compensation committee has approved the grant of
options to purchase up to 11,600,000 shares of our class A common stock under
our 1999 long-term management incentive plan, including the grants to
individuals listed in the table below. The exercise price of these options will
be equal to the initial public offering price. These options granted to our
employees will vest in five equal installments, beginning on the first
anniversary of the date of grant, while options granted to our outside directors
will vest in four equal installments, beginning on the first anniversary of the
date of grant.

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1999 LONG-TERM MANAGEMENT INCENTIVE PLAN
OPTION GRANTS

<TABLE>
<CAPTION>
NAME NUMBER OF OPTIONS
- ---------------------------------------------------------------------- ------------------
<S> <C>
John F. Antioco....................................................... 1,000,000

James Notarnicola..................................................... 485,000

Gary J. Peterson...................................................... 385,000

Edward B. Stead....................................................... 300,000

Nigel Travis.......................................................... 370,000

All current executive officers, as a group............................ 4,200,000

All current members of our board of directors who
are not executive officers, as a group................................ 20,000

All employees, including current officers,
but excluding directors and executive
officers, as a group.................................................. 7,380,000
</TABLE>

In connection with this offering, some employees and our nonemployee
directors are being given the opportunity to purchase shares of our class A
common stock at a price equal to the initial public offering price pursuant to a
directed share program implemented for this offering. Subject to certain
limitations as to the amount of stock options that can be awarded in connection
with this offering, it is our intention to grant two stock options to each of
our executives in the position of vice president or higher and to our
nonemployee directors for each share of class A common stock that such persons
purchase pursuant to our directed share program. These stock options will be
granted under our 1999 long-term management incentive plan and will have
substantially similar terms to the stock options described in the option grant
table above.

SENIOR EXECUTIVE SHORT-TERM INCENTIVE PLAN

In connection with this offering, we have adopted our senior executive
short-term incentive plan.

GENERAL DESCRIPTION OF THIS PLAN

The following is a description of the material features of this plan. The
full text of this plan is filed as an exhibit to our registration statement
filed with the SEC. This plan provides objective performance-based annual
bonuses for selected senior executives, subject to a maximum limit, as described
in more detail below. Amounts paid under this plan are intended to qualify as
"qualified performance-based compensation," which is excluded from the $1.0
million limit on deductible compensation set forth in Section 162(m) of the
Internal Revenue Code. Awards under this plan are determined by our senior
executive compensation committee.

ADMINISTRATION

This plan is administered by our senior executive compensation committee,
which is authorized to approve awards to selected senior management at the level
of senior vice president or above. This committee must be comprised of at least
two directors, each of whom must be an "outside director" within the meaning of
Section 162(m) of the Internal Revenue Code.

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AWARDS

Under this plan, our committee may establish performance criteria and target
awards for each participant not later than 90 days after the beginning of the
year or, for the fiscal period beginning upon the completion of this offering,
before 25% of the period has elapsed. The performance criteria relate to our
operating income, net earnings and/or cash flow. Operating income is defined as
revenues less operating expenses, other than depreciation, amortization and
non-recurring charges. Net earnings is defined as net earnings from continuing
operations. Cash flow is defined as operating income less cash capital
expenditures and rental library purchases and increases or decreases in working
capital and in other balance sheet investments.

Shortly after the end of each performance period, our committee must certify
whether or not the performance criteria have been achieved. This is subject to
our committee's right, in its sole discretion, to reduce the amount of the award
to any participant to reflect our committee's assessment of the participant's
individual performance or for any other reason. These awards are payable in cash
as soon as practicable thereafter.

To receive payment of an award, the participant must have remained in our
continuous employ through the end of the applicable performance period. However,
if a participant becomes permanently disabled or dies during a performance
period, the participant or his estate shall be awarded, unless his employment
agreement provides otherwise, a pro rata portion of the award earned for the
performance period. This is subject to our committee's right, in its sole
discretion, to reduce the amount of the award to reflect our committee's
assessment of the participant's individual performance prior to the
participant's becoming permanently disabled or the participant's death, as the
case may be, or for any other reason.

MAXIMUM ANNUAL AWARD

This plan provides that the maximum annual award to any participant for any
performance period is determined by multiplying a participant's salary in effect
on the date of the adoption of this plan by eight. Salary is defined as the sum
of (1) the participant's annual base salary, not including any impermissible
discretionary increases, for the year and (2) an amount equal to the annual rate
of any deferred compensation for such year, in each case, as set forth in the
participant's employment agreement in effect on July 15, 1999. However, if the
employment agreement expires prior to the end of any performance period, the
amount of base salary and deferred compensation will relate to the highest
annual amounts that were provided for in the employment agreement. This plan
provides that, in the case of any participant hired after July 15, 1999, the
participant's salary for this purpose would be the sum of (x) the participant's
annual base salary on the date of hire and (y) an amount equal to the annual
rate of any deferred compensation for the year of hire, in each case, as set
forth in the participant's employment agreement in effect on the date of hire.
However, the salary for any participant hired after July 15, 1999 shall not
exceed 1.5 times the highest salary on July 15, 1999 of any participant in this
plan.

ADJUSTMENTS

In the event that, during a performance period, any recapitalization,
reorganization, merger, acquisition, divestiture, consolidation, spin-off,
combination, liquidation, dissolution, sale of assets or other similar corporate
transaction or event, or any other extraordinary item or event not foreseen at
the time of the grant of an award under this plan, or any other event that
distorts the applicable performance criteria occurs involving us or one of our
subsidiaries, our committee will, to the extent consistent with Section 162(m)
of the Internal Revenue Code, adjust or modify, in its sole discretion, the
calculation of operating income, net earnings and/or cash flow, or the
applicable performance goals,

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to the extent necessary to prevent reduction or enlargement of participants'
awards for the performance period attributable to the transaction or event.

TRANSFER RESTRICTIONS, ETC.

The rights of a participant with respect to awards under this plan are not
transferable by the participant other than by will or the laws of descent and
distribution. No award under this plan will be construed as giving any employee
a right to continued employment with us.

AMENDMENT

Our board of directors may at any time alter, amend, suspend or terminate
this plan in whole or in part. However, no alteration or amendment will be
effective without the approval of our stockholders if their approval is required
by law.

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RELATED PARTY TRANSACTIONS

We have set forth below a summary description of the material agreements
between Viacom and us (1) relating to this offering and the split-off and (2)
relating to other matters not concerning this offering or the split-off. Some of
these agreements have been filed with the SEC as exhibits to the registration
statement of which this prospectus is a part.

AGREEMENTS BETWEEN VIACOM AND US RELATING TO THIS OFFERING OR THE SPLIT-OFF

INITIAL PUBLIC OFFERING AND SPLIT-OFF AGREEMENT

GENERAL. We have entered into an initial public offering and split-off
agreement with Viacom, which governs our respective rights and duties with
respect to some offerings of our common stock and other securities, including
this offering and the split-off, and sets forth certain covenants we have agreed
to for various periods following this offering and the split-off. Although
Viacom has announced that it currently plans to complete the split-off, and we
have agreed to cooperate with Viacom in all respects to complete the split-off
or similar transaction, it is not obligated to do so. We cannot assure you as to
whether or not or when the split-off will occur or as to the terms of the
split-off. We refer you to "Risk Factors -- Risk Factors Relating to Our
Separation from Viacom."

OFFERINGS OF SECURITIES OF BLOCKBUSTER AND THE SPLIT-OFF. We have agreed
that we will cooperate with Viacom in all respects to accomplish

- any primary offerings of our common stock and other securities prior to
the split-off or other similar transaction; and

- the split-off or similar transaction.

We have also agreed that, at Viacom's direction, we will promptly take all
actions necessary or desirable to effect these transactions, including the
registration under the Securities Act of Viacom's shares of our capital stock.
Viacom has the sole discretion to determine whether to proceed with all or part
of the split-off and all terms of the split-off, including the form, structure
and terms of any transaction(s) and/or offering(s) to effect the split-off and
the timing of and conditions to the completion of the split-off.

EXPENSES. In general, unless otherwise provided for in the initial public
offering and split-off agreement or any other agreement, we and Viacom will pay
our respective costs and expenses incurred in connection with any offering of
our securities prior to the split-off or other similar transaction, including
this offering, and the split-off.

- EXPENSES RELATING TO PRIMARY OFFERINGS OF SECURITIES OF BLOCKBUSTER. We
have generally agreed to pay all costs and expenses relating to any
primary offerings of our common stock and our other securities prior to
the split-off or other similar transaction, including this offering. In
particular, we will pay the underwriting discounts and commissions.

- EXPENSES RELATING TO THE SPLIT-OFF. Viacom has generally agreed to pay all
costs and expenses relating to the split-off or other similar transaction.

ACCESS TO INFORMATION. Generally, we and Viacom have agreed to provide each
other with, upon written request and subject to specified conditions, and for a
specified period of time, access to information relating to the assets, business
and operations of the requesting party. We and Viacom have agreed to keep our
books and records for a specified period of time. Also, we and Viacom have
agreed to cooperate with the other party to allow access to each others'
employees, to the extent they are necessary, to discuss and explain all
requested information mentioned above and with respect to any claims brought
against the other relating to the conduct of our business prior to completion of
the split-off or similar transaction.

COVENANTS. We have agreed that, for so long as Viacom is required to
consolidate our results of operations and financial position, we will:

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- provide Viacom with financial information regarding our company and our
subsidiaries;

- provide Viacom copies of all quarterly and annual financial information
and other reports and documents we intend to file with the SEC prior to
such filings, as well as final copies upon filing, and to actively consult
with Viacom with respect to any changes made to these reports;

- provide Viacom with copies of our budgets and financial projections, as
well as the opportunity to meet with our management to discuss such
budgets and projections;

- consult with Viacom regarding the timing and content of earnings releases
and cooperate fully and cause our accountants to cooperate fully with
Viacom in connection with any of its public filings;

- not change our auditors without Viacom's prior written consent, and use
our reasonable best efforts to enable our auditors to complete their audit
of our financial statements such that they will date their opinion the
same date that they date their opinion on Viacom's financial statements;

- provide to Viacom and its auditors all information required for Viacom to
meet its schedule for the filing and distribution of its financial
statements;

- make our books and records available to Viacom and its auditors, so that
they may conduct reasonable audits relating to our financial statements;

- adhere to specified accounting standards;

- agree with Viacom on any changes to our accounting policies; and

- agree with Viacom regarding our accounting estimates and principles.

OTHER COVENANTS. The initial public offering and split-off agreement will
also provide that for so long as Viacom beneficially owns 50% or more of our
outstanding shares of common stock, we may not take any action or enter into any
commitment or agreement that may reasonably be anticipated to result, with or
without notice and with or without lapse of time, or otherwise, in a
contravention, or an event of default, by Viacom of:

- any provision of applicable law or regulation, including but not limited
to provisions pertaining to the Internal Revenue Code, or the Employee
Retirement Income Security Act of 1974, as amended;

- any provision of Viacom's certificate of incorporation or by-laws;

- any credit agreement or other material instrument binding upon Viacom; or

- any judgment, order or decree of any governmental body, agency or court
having jurisdiction over Viacom or any of its assets.

ASSIGNMENT AND ASSUMPTION. Under the initial public offering and split-off
agreement, Viacom International Inc. will assign to us its rights and
obligations under the agreement related to the sale of the BLOCKBUSTER MUSIC
video stores to Wherehouse. We have agreed to accept this assignment.

ASSIGNMENT OF EMPLOYMENT AGREEMENTS. The initial public offering and
split-off agreement will provide that Viacom will assign to us immediately
before the completion of the split-off any and all employment agreements between
Blockbuster Entertainment Group, a business unit of Viacom, and the employees
who are parties to those agreements.

OPTIONS. We will grant to Viacom International Inc. a continuing option,
assignable to Viacom and any of its subsidiaries, to purchase, under specified
circumstances, additional shares of our class B common stock or any shares of
our nonvoting capital stock. These options may be exercised immediately prior to
the issuance of any of our equity securities, other than in this offering or
upon the exercise of the underwriters' over-allotment options:

- with respect to our class B common stock, only to the extent necessary to
maintain its then-existing percentage of equity value and combined voting
power of our two outstanding classes of common stock; and

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- with respect to shares of nonvoting capital stock, to the extent necessary
to own 80% of each outstanding class of such stock.

The purchase price of the shares of class B common stock purchased upon any
exercise of the options, subject to specified exceptions, will be based on the
market price of the class A common stock. The purchase price of nonvoting
capital stock will be the price at which such stock may be purchased by third
parties. This option will terminate when Viacom or its affiliates own less than
45% of the equity of our Company.

INDEMNIFICATION PROCEDURES. The initial public offering and split-off
agreement will set forth the procedures that Viacom and we are to undertake if
either of us demanded to be indemnified by the other under any indemnification
right given in any of the agreements between Viacom and us relating to this
offering or the split-off, other than the tax matters agreement referred to
below.

RELEASE AND INDEMNIFICATION AGREEMENT

We and Viacom will enter into a release and indemnification agreement under
which we and Viacom have agreed to indemnify each other and we and Viacom have
agreed to release each other with respect to some matters.

INDEMNIFICATION RELATING TO OUR ASSETS, BUSINESSES AND OPERATIONS. We have
agreed to indemnify and hold harmless Viacom and some of its affiliates and
their respective officers, directors, employees, agents, heirs, executors,
successors and assigns against any payments, losses, liabilities, damages,
claims and expenses and costs arising out of or relating to:

- our past, present and future assets, businesses and operations and other
assets, businesses and operation or managed by us or persons previously
associated with us, except for assets, businesses and operations of
Paramount Parks Inc., Spelling Entertainment Group Inc. and its
subsidiaries, including Republic Entertainment Inc. and Worldvision Inc.,
Showtime Networks Inc., Virgin Interactive Entertainment Limited and
Virgin Interactive Entertainment Inc.; and

- payments, expenses and costs paid by Viacom to a third party associated
with the transfer of our assets, businesses and operations from some of
Viacom entities to Blockbuster Inc. and its subsidiaries.

Viacom has similarly agreed to indemnify us and some of our affiliates and
our and their respective officers, directors, employees, agents, heirs,
executors, successors and assigns for Viacom's past, present and future assets,
businesses and operations, except for assets, businesses and operations for
which we have agreed to indemnify Viacom. In addition, the transition services
agreement, the registration rights agreement and the tax matters agreement
referred to below provide for indemnification between us and Viacom relating to
the substance of such agreements.

INDEMNIFICATION RELATING TO THIS OFFERING AND OTHER OFFERINGS. We have
generally agreed to indemnify Viacom and some of its affiliates against all
liabilities arising out of any material untrue statements and omissions in any
prospectus and any related registration statement filed with the SEC relating to
this offering or any other primary offering of our common stock or our other
securities prior to the date of the split-off or other similar transaction.
However, our indemnification of Viacom does not apply to information relating to
Viacom, excluding information relating to us. Viacom has agreed to indemnify us
for this information.

INDEMNIFICATION RELATING TO THE SPLIT-OFF. We have generally agreed to
indemnify Viacom and some of its affiliates against all liabilities arising out
of any material untrue statements and omissions in any and all registration
statements, information statements and/or other documents filed with the SEC in
connection with the split-off or other similar transaction. However, our
indemnification of Viacom does not apply to information relating to Viacom,
excluding information relating to us. Viacom has agreed to indemnify us for this
information.

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RELEASE RELATING TO ACTIONS BY VIACOM RELATED TO VIACOM'S AND OUR ASSETS,
BUSINESSES AND OPERATIONS. Except for the rights and obligations of Viacom and
us, which relate to the agreements between Viacom and us relating to this
offering or the split-off, we have released Viacom and some of its subsidiaries
and affiliates and their respective officers, directors, employees, agents,
heirs, executors, successors and assigns for all losses for any and all past
actions and failures to take actions relating to Viacom's and our assets,
businesses and operations. Viacom has similarly released us.

TRANSITION SERVICES AGREEMENT

We and Viacom will enter into a transition services agreement under which
Viacom will provide to us agreed-upon cash management, accounting, legal,
management information systems, financial and tax services and employee benefit
plan and insurance administration. These services may be changed upon agreement
between Viacom and us. We will pay Viacom a fee for these services equal to
Viacom's cost in providing these services which will initially be equal to about
$150,000 per month. The fee will be payable monthly in arrears, 15 days after
the close of each month. We believe that the fee for these services is no less
favorable than could have been obtained by us internally or from someone who had
not controlled us. We have also agreed to pay or reimburse Viacom for any
out-of-pocket payments, costs and expenses associated with these services. The
transition services agreement expires upon the closing of the split-off or
similar transaction. We cannot assure you that we will be able to provide these
services internally or find a third party provider on acceptable terms, if at
all, after the expiration of the transition services agreement.

REGISTRATION RIGHTS AGREEMENT

We and Viacom will enter into a registration rights agreement which requires
us upon request of Viacom to use our reasonable best efforts to register under
the applicable federal and state securities laws any of the shares of our equity
securities of or owned by Viacom for sale in accordance with Viacom's intended
method of disposition, and will take such other actions as may be necessary to
permit the sale in other jurisdictions, subject to specified limitations. Viacom
will also have the right to include the shares of our equity securities it
beneficially owns in other registrations of these equity securities we initiate.
Except for our legal and accounting fees and expenses, the registration rights
agreement provides that Viacom will generally pay all or its pro rata portion of
out-of-pocket costs and expenses relating to each such registration that Viacom
requests or in which Viacom participates. Subject to specified limitations, the
registration rights will be assignable by Viacom and its assigns. The
registration rights agreement will contain indemnification and contribution
provisions that are customary in transactions similar to those contemplated by
this prospectus.

TAX MATTERS AGREEMENT

Following this offering, we and some of our subsidiaries will continue to be
included in the consolidated group, of Viacom for U.S. federal income tax
purposes and the combined, consolidated or unitary group of Viacom for various
state and local income tax purposes (the "consolidated group"). Prior to the
completion of this offering, we and Viacom will enter into a tax matters
agreement. For taxable years and portions thereof prior to the date of this
offering, Viacom will pay all taxes for the consolidated group, including any
liability resulting from adjustments to tax returns relating to such taxable
years or portions thereof. We and our subsidiaries will continue to be liable
for all taxes that are imposed on a separate return basis or on a combined,
consolidated or unitary basis on a group of companies that includes only us and
our subsidiaries. The tax matters agreement requires us and Viacom to make
payments to each other equal to the amount of income taxes which would be paid
by us, subject to some adjustments, as if we and each of our subsidiaries
included in the consolidated group were to file our own combined, consolidated
or unitary, or, where only one of our entities is included in the consolidated
group, separate, federal, state and local income tax returns for any taxable
year or portion thereof beginning after the date of this offering in which we
are included in the consolidated group. This includes any amounts determined to
be due as a result of a redetermination

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of the tax liability of the consolidated group arising from an audit or
otherwise. With respect to some tax items attributable to periods following the
date of this offering during which we are included in the consolidated group,
such as foreign tax credits, alternative minimum tax credits, net operating
losses and net capital losses, we will have a right of reimbursement or offset,
which will be determined based on the extent to which, and the time at which,
such credits or losses could have been used by us or our subsidiaries if we had
not been included in the consolidated group. This right to reimbursement or
offset continues regardless of whether we are a member of the consolidated group
at the time the attributes could have been used. We are only entitled to
reimbursement for carryback items that we could use on a stand alone basis to
the extent that such items result in an actual tax savings for the consolidated
group. The tax matters agreement also requires us, if so requested by Viacom, to
surrender some tax losses of our subsidiaries that are resident in the United
Kingdom for 1998 and earlier years to Viacom's United Kingdom subsidiaries
without any right to compensation. We have also agreed to pay Viacom an amount
equal to any tax benefit we receive from the exercise of Viacom stock options by
our employees, including in years that we are no longer included in the Viacom
consolidated group. We will also pay Viacom the amount of any income taxes with
respect to income tax returns that include only us, which returns, as described
below, will be filed by Viacom.

Viacom will continue to have all the rights of a parent of a consolidated
group filing consolidated federal income tax returns. Viacom will have similar
rights provided for by applicable state and local law with respect to a parent
of a combined, consolidated or unitary group. Viacom will be the sole and
exclusive agent for us in any and all matters relating to income taxes of the
consolidated group. Viacom will have sole and exclusive responsibility for the
preparation and filing of all income tax returns or amended returns with respect
to the consolidated group. Viacom will have the sole right to contest or
compromise any asserted tax adjustment or deficiency and to file, litigate or
compromise any claim for refund on behalf of the consolidated group, except that
Viacom shall not be entitled to compromise any such matter in a manner that
would affect our liability under the tax matters agreement without our consent,
which may not be withheld unreasonably. Under the tax matters agreement, Viacom
will have similar authority with regard to income tax returns that we file on a
separate basis and related tax proceedings. Viacom's authority with respect to
periods during which we are included in the consolidated group will continue to
apply even with respect to tax returns that are filed and for proceedings that
are conducted after the split-off, which relate to such periods. This agreement
may result in conflicts of interest between us and Viacom.

Provided that Viacom continues to beneficially own, directly or indirectly,
at least 80% of the combined voting power and the value of our outstanding
capital stock, we will be included for federal income tax purposes in the
consolidated group of which Viacom is the common parent. It is the present
intention of Viacom and its subsidiaries to continue to file a single
consolidated federal income tax return. In certain circumstances, some of our
subsidiaries also will be included with some subsidiaries of Viacom, other than
our subsidiaries, in combined, consolidated or unitary income tax groups for
state and local tax purposes. Each member of the consolidated group for federal
income tax purposes is liable for the federal income tax liability of each other
member of the consolidated group. Similar principles apply with respect to
members of a combined group for state and local tax purposes. Accordingly,
although the tax matters agreement will allocate tax liabilities between us and
Viacom during the period in which we are included in the consolidated group, we
could be liable for the federal income tax liability of any other member of the
consolidated group in the event any such liability is incurred, and not
discharged, by such other member. The tax matters agreement will provide,
however, that Viacom will indemnify us to the extent that, as a result of being
a member of the consolidated group, we become liable for the federal income tax
liability of any other member of the consolidated group, other than our
subsidiaries.

Viacom will obtain a private letter ruling from the Internal Revenue Service
prior to any split-off transaction as described above in "Separation from
Viacom." In connection with seeking such ruling request, some representations
have been and will be made to the Internal Revenue Service regarding

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our business. In the tax matters agreement, we have agreed that during the
two-year period following a split-off we and our subsidiaries will not enter
into some types of transactions, including sales of assets, mergers,
liquidations, stock issuances, and stock redemptions, without the consent of
Viacom unless Viacom receives a ruling from the Internal Revenue Service or an
opinion of counsel to the effect that such transaction will not adversely affect
the tax-free status of the split-off. We will generally be responsible for,
among other things, any taxes imposed on Viacom or its subsidiaries as a result
of the split-off failing to qualify as a tax-free transaction on account of any
breach of our representations or agreements or any action or failure to act by
us or our subsidiaries or any transaction involving our, or our subsidiaries',
assets, stock or business following the split-off, regardless of whether such
transaction is within our control.

OTHER AGREEMENTS

REVENUE-SHARING

We have a revenue-sharing agreement with Paramount Pictures, an affiliate of
Viacom. Under this agreement, which expires in August 2003, we have agreed to
pay, for a limited period of time, an agreed-upon percentage of our rental
revenue for Paramount Pictures videocassettes priced for rental and to make a
minimum payment for these tapes. This percentage declines after a period of
weeks following the initial release of the movie. We have agreed to take a
minimum number of copies of each qualifying movie released by Paramount
Pictures. The agreement allows us to sell the previously viewed tapes to our
customers, although Paramount Pictures has the right to prevent us from selling
a portion of such tapes in exchange for a fee. Our total purchases from
Paramount Pictures, including purchases under this agreement, were $7.6 million,
$77.5 million and $110.1 million for the years ended December 31, 1996, 1997 and
1998, respectively.

PROMOTIONAL SERVICES AND CUSTOMER DATABASE SERVICES AND LICENSE AGREEMENT

We have entered into a promotional services and customer database services
and license agreement with MTV Networks, an affiliate of Viacom. Under this
agreement, for one year, we will provide some promotional and database services
to MTV Networks and grant a license to MTV Networks to use our customer database
internally and/or to sublicense the database for internal use to affiliates of
MTV Networks. In return, MTV Networks will pay us $4.5 million each quarter for
four quarters starting the third quarter of 1999 for a total of $18 million plus
our costs. In addition, during this one year period, MTV Networks will have an
option to pay us an additional $5 million to extend to perpetuity the agreement
regarding the customer database. If MTV Networks exercises this option, it will
provide us, for internal use, with access to MTV Networks' Leisure Time Study, a
proprietary study of how consumers choose among the increasing number of media,
entertainment and other leisure time activities available to them. At any time,
we have the right to terminate this option or MTV Networks' perpetual license
for a fee of $25 million. In such event, our access to MTV Networks' Leisure
Time Study also terminates.

CERTAIN EMPLOYMENT AGREEMENTS

Each of Messrs. Notarnicola, Peterson, Stead and Travis and some of our
other officers have entered into employment agreements with Blockbuster
Entertainment Group, a business unit of Viacom, for the benefit of our company.
As stated above, Viacom will agree, pursuant to the initial public offering and
split-off agreement, to assign these agreements to us on or about the date of
the split-off. For a summary of these agreements with our named executive
officers mentioned above, we refer you to "Management--Employment Agreements."

OTHER AGREEMENTS

There are various other agreements between us and Viacom and its affiliates,
which we believe are not material to us. We believe the terms of these
agreements approximate those which would be available from third parties.

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OTHER RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTION

Mr. Redstone and National Amusements, Inc. own an aggregate of approximately
25.2% of the common stock of Midway Games Inc. During the 1996, 1997 and 1998
fiscal years, we paid about $8.4 million, $12.5 million and $19.1 million,
respectively, for purchases of home video games from Midway. We believe that the
terms of these purchases were no less favorable to us than would have been
obtainable from parties in which there was no such ownership interest. We expect
to purchase video games from Midway in the future.

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PRINCIPAL STOCKHOLDER

All of the 144,000,000 shares of class B common stock outstanding prior to
the completion of this offering are beneficially owned by Viacom. Upon
completion of this offering, Viacom will beneficially own 100% of the class B
common stock. Except for Viacom, we are not aware of any person or group that
will beneficially own more than 5% of the outstanding shares of our common stock
following this offering.

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DESCRIPTION OF CAPITAL STOCK

THE FOLLOWING DESCRIPTION IS ONLY A SUMMARY OF THE MATERIAL PROVISIONS OF
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS. WE REFER YOU
TO THE MORE DETAILED PROVISIONS OF (1) OUR CERTIFICATE OF INCORPORATION AND
BYLAWS, COPIES OF WHICH ARE FILED WITH THE SEC AS EXHIBITS TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART AND (2) APPLICABLE LAW. UNLESS
OTHERWISE INDICATED OR UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL INFORMATION IN
THIS PROSPECTUS GIVES EFFECT TO THE AMENDMENT TO OUR CERTIFICATE OF
INCORPORATION TO CHANGE, AMONG OTHER THINGS, THE AMOUNT AND TYPE OF COMMON STOCK
THAT WE CAN AUTHORIZE.

Our authorized capital stock consists of 1,000,000,000 shares of capital
stock, of which

- 400,000,000 shares are designated as class A common stock, par value $.01
per share;

- 500,000,000 shares are designated as class B common stock, par value $.01
per share; and

- 100,000,000 shares of preferred stock, par value $.01 per share, of which
no shares of preferred stock are outstanding as of the date hereof.

Of the 400,000,000 shares of common stock designated as class A common stock,
31,000,000 shares, or about 17.7% of the equity value of our company, are being
offered in connection with this offering, assuming that the underwriters do not
exercise their over-allotment options. Of the 500,000,000 shares of common stock
designated as class B common stock, 144,000,000 shares, or about 82.3% of the
equity value of our company, will be outstanding and held by Viacom upon
consummation of the offering, assuming the underwriters do not exercise their
over-allotment options. Each of the class A common stock and the class B common
stock constitutes a series of common stock under the General Corporation Law of
the State of Delaware.

COMMON STOCK

VOTING RIGHTS. Holders of class A common stock and holders of class B
common stock generally have identical rights, except:

- holders of class A common stock are entitled to one vote per share; and

- holders of class B common stock are entitled to five votes per share;

with respect to each matter presented to our stockholders on which the holders
of common stock are entitled to vote. The holders of class A common stock and
class B common stock are not entitled to cumulate their votes in the election of
directors. Generally, all matters to be voted on by our stockholders must be
approved by a majority, or, in the case of election of directors, by a
plurality, of the votes entitled to be cast by all shares of class A common
stock and class B common stock present in person or represented by proxy, voting
together as a single class. In particular, amendments to our certificate of
incorporation must generally be approved by a majority of the combined voting
power of both classes of common stock, voting together as a single class.
However, the approval of 75% of the combined voting power is required to amend
some provisions of our certificate of incorporation and bylaws as described
below. In addition, amendments to our certificate of incorporation that would
alter or change the powers, preferences or special rights of either class of
common stock so as to affect them adversely also must be approved by a majority
of the votes entitled to be cast by the holders of the shares affected by the
amendment, voting as a separate class. Holders of class A common stock are not
entitled to vote on any change in the powers or other rights of the class B
common stock that would not adversely affect the rights of class A common stock.
For example, any provision for the conversion of the class B common stock into
class A common stock on a one-for-one basis is not considered to adversely
affect the rights of the class A common stock.

DIVIDENDS. Holders of class A common stock and class B common stock will
share equally in any dividend declared by our board of directors, subject to any
preferential rights of any outstanding

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preferred stock. Dividends consisting of shares of class A common stock and
class B common stock may be paid only as follows:

- shares of class A common stock may be paid only to holders of shares of
class A common stock, and shares of class B common stock may be paid only
to holders of class B common stock; and

- shares shall be paid proportionally with respect to each outstanding share
of class A common stock and class B common stock.

CONVERSION. Each share of class B common stock held by Viacom or any of its
affiliates may be converted into a share of class A common stock at the class B
holder's option prior to the split-off or other similar transaction. However, if
20% or less of the value of our outstanding stock is issued by us in this
offering or otherwise prior to the split-off or similar transaction, each share
of class B common stock will automatically convert into one share of class A
common stock immediately prior to the split-off or other similar transaction,
unless and to the extent that Viacom has received an opinion of counsel that
such conversion provision is likely to prevent or materially delay the issuance
of Internal Revenue Service rulings requested by Viacom or will otherwise create
a significant risk of a material adverse tax consequence to Viacom or its
stockholders. After the split-off or other similar transaction, any outstanding
shares of class B common stock will no longer be convertible into shares of
class A common stock.

OTHER RIGHTS. In the event of a liquidation, dissolution or winding-up of
our company, all holders of common stock, regardless of class, are entitled to
share ratably in any assets available for distributions to holders of shares of
common stock.

The outstanding shares of our common stock are, and the shares of class A
common stock being offered to you will be, upon your payment, validly issued,
fully paid and nonassessable.

PREFERRED STOCK

Our board of directors is empowered, without approval of our stockholders,
to cause shares of preferred stock to be issued from time to time in one or more
series, with the numbers of shares of each series and the designations,
preferences and relative, participating, optional, dividend and other special
rights of the shares of each such series and the qualifications, limitations,
restrictions, conditions and other characteristics thereof as fixed by our board
of directors. Among the specific matters that may be determined by our board of
directors are:

- the designation of each series;

- the number of shares of each series;

- the rate of dividends, if any;

- whether dividends, if any, shall be cumulative or noncumulative;

- the terms of redemption, if any;

- the rights of the series in the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the affairs of our company;

- rights and terms of conversion or exchange, if any;

- restrictions on the issuance of shares of the same series or any other
series, if any; and

- voting rights, if any.

Our board of directors may, without stockholder approval, issue preferred
stock with voting and other rights that could adversely affect all of the rights
of the holders of class A common stock and class B common stock, including, but
without limitation, their voting power. We have no present plans

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to issue any shares of preferred stock. The ability of our board of directors to
issue preferred stock without stockholder approval could have the effect of
delaying, deferring or preventing a change in control of us or the removal of
our existing management.

LIMITATION ON LIABILITY OF DIRECTORS

Our certificate of incorporation provides that our directors will not be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability imposed by law, as in effect
from time to time:

- for any breach of the director's duty of loyalty to us or our
stockholders;

- for any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law;

- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of Delaware corporate law; or

- for any transaction from which the director derived an improper personal
benefit.

The inclusion of this provision in our certificate of incorporation may have
the effect of reducing the likelihood of derivative litigation against our
directors and may discourage or deter stockholders or us from bringing a lawsuit
against our directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefitted us and our stockholders.

ANTI-TAKEOVER EFFECTS OF SOME OF THE PROVISIONS OF OUR CERTIFICATE OF
INCORPORATION AND BYLAWS AND SECTION 203 OF DELAWARE CORPORATE LAW

Some of the provisions of our certificate of incorporation and bylaws and
Section 203 of Delaware corporate law could have the following effects, among
others:

- delaying, deferring or preventing a change in control;

- delaying, deferring or preventing the removal of our existing management;

- deterring potential acquirors from making an offer to our stockholders;
and

- limiting our stockholders' opportunity to realize premiums over prevailing
market prices of our common stock in connection with offers by potential
acquirors.

This could be the case, notwithstanding that a majority of our stockholders
might benefit from such a change in control or offer. The following is a summary
of these provisions.

SOME OF THE PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS

CLASSIFIED BOARD OF DIRECTORS. Our certificate of incorporation and bylaws
provide for our board of directors to be divided into three classes of directors
serving staggered three-year terms. Each class, to the extent possible, will be
equal in number. The size of our board of directors will not be less than three
nor more than twelve. Each class holds office until the third annual
stockholders' meeting for election of directors following the most recent
election of such class, except that the initial terms of the three classes
expire in 2000, 2001 and 2002, respectively.

DIRECTORS, AND NOT STOCKHOLDERS, FIX THE SIZE OF OUR BOARD OF
DIRECTORS. Our certificate of incorporation and bylaws provide that the number
of directors shall be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of our board of directors, but in no event
shall it consist of less than three nor more than twelve.

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DIRECTORS ARE REMOVED FOR CAUSE ONLY. Our certificate of incorporation and
bylaws provide that, on or after the time when Viacom and its affiliates no
longer own more than a majority of the combined voting power of our outstanding
common stock, which we refer to as the "trigger date," our directors may be
removed only for cause by the affirmative vote of the holders of at least a
majority of the combined voting power of our outstanding voting common stock. To
the extent permitted by the laws of the state of Delaware, "cause" shall be
determined by our board of directors. However, prior to the trigger date, our
directors may be removed with or without cause.

BOARD VACANCIES TO BE FILLED BY REMAINING DIRECTORS, AND NOT
STOCKHOLDERS. Our certificate of incorporation and bylaws provide that any
vacancies on our board of directors will be filled by the affirmative vote of
the majority of the remaining directors, even if less than a quorum, or by a
sole remaining director. In any event, no vacancy shall be filled by our
stockholders.

NO STOCKHOLDER ACTIONS BY WRITTEN CONSENT. Our bylaws provide that, on or
after the trigger date, stockholders may not act by written consent in lieu of a
meeting. However, prior to the trigger date, stockholders may act by written
consent.

NO SPECIAL MEETINGS CALLED BY STOCKHOLDERS. Our bylaws provide that, on or
after the trigger date, special meetings of the stockholders may not be called
by the stockholders and instead may be called only by

- any officer at the request of a majority of our board of directors;

- our chairman; or

- our chief executive officer.

However, prior to the trigger date, special meetings may be called by
holders of at least the majority of the combined voting power of our outstanding
common stock.

ADVANCE NOTICE FOR STOCKHOLDER PROPOSALS. Our bylaws contain provisions
requiring that advance notice be delivered to us of any business to be brought
by a stockholder before an annual meeting and providing for procedures to be
followed by stockholders in nominating persons for election to our board of
directors. Generally, such advance notice provisions require that the
stockholder must give written notice to us not less than 120 calendar days
before the date our proxy statement was released to stockholders in connection
with our previous year's annual meeting. Our bylaws provide that the notice must
set forth specific information regarding the stockholder and each director
nominee by the stockholder or other business proposed by the stockholder. Our
certificate of incorporation and bylaws provide that as long as Viacom
beneficially owns 30% or more of the combined voting power of the outstanding
common stock, Viacom is exempt from the foregoing provision.

SUPERMAJORITY VOTE REQUIRED TO AMEND SPECIFIED PROVISIONS. Our certificate
of incorporation and bylaws provide that the provisions described above may only
be amended by holders of at least 75% of the combined voting power of our
outstanding common stock.

SECTION 203 OF DELAWARE CORPORATE LAW

Our company is a Delaware corporation and subject to Section 203 of Delaware
corporate law. Generally, Section 203 prohibits a publicly held Delaware company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the time such stockholder became an interested
stockholder unless, as described below, specified conditions are

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satisfied. Thus, it may make acquisition of control of our company more
difficult. The prohibitions in Section 203 of Delaware corporate law do not
apply if:

- prior to the time the stockholder became an interested stockholder, the
board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;

- upon consummation of the transaction, which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or

- at or subsequent to the time the stockholder became an interested
stockholder, the business combination is approved by the board of
directors and authorized by the affirmative vote of at least 66 2/3% of
the outstanding voting stock that is not owned by the interested
stockholder.

Under Section 203 of Delaware corporate law, a "business combination"
includes:

- any merger or consolidation of the corporation with the interested
stockholder;

- any sale, lease, exchange or other disposition, except proportionately as
a stockholder of such corporation, to or with the interested stockholder
of assets of the corporation having an aggregate market value equal to 10%
or more of either the aggregate market value of all the assets of the
corporation or the aggregate market value of all the outstanding stock of
the corporation;

- transactions resulting in the issuance or transfer by the corporation of
stock of the corporation to the interested stockholder;

- transactions involving the corporation, which have the effect of
increasing the proportionate share of the corporation's stock of any class
or series that is owned by the interested stockholder; or

- transactions in which the interested stockholder receives financial
benefits provided by the corporation.

Under Section 203 of Delaware corporate law, an "interested stockholder"
generally is

- any person that owns 15% or more of the outstanding voting stock of the
corporation;

- any person that is an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether or not such person
is an interested stockholder; and

- the affiliates or associates of either of the above-stated categories
person.

Because Viacom owned more than 15% of our voting stock before we became a
public company in this offering, Section 203 of Delaware corporate law by its
terms is currently not applicable to business combinations with Viacom even
though Viacom owns 15% or more of our outstanding stock. If any other person
acquires 15% or more of our outstanding stock, such person will be subject to
the provisions of Section 203 of the Delaware corporate law.

Under some circumstances, Section 203 of Delaware corporate law makes it
more difficult for an "interested stockholder" to effect various business
combinations with us for a three-year period, although our stockholders may
elect to exclude us from the restrictions imposed thereunder. By virtue of its
beneficial ownership of our class B common stock, Viacom is in a position to
elect to exclude us from the restrictions under Section 203. Currently, Viacom
has indicated to us that it has no intention to do so.

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TRANSACTIONS WITH INTERESTED PARTIES

Our certificate of incorporation includes provisions addressing potential
conflicts of interest between us and Viacom and its non-Blockbuster-related
subsidiaries and other similar entities. In addition, our certificate of
incorporation includes provisions regulating and defining our conduct as it may
involve us and Viacom and our and its subsidiaries, directors and officers. Our
certificate of incorporation provides that no contract or transaction:

- between us and Viacom or any of its non-Blockbuster-related subsidiaries
and other similar entities; or

- between us and any entity in which one or more of our directors or
officers has a financial interest, which we refer to as a "related
entity"; or

- between us and any director or officer of our company, Viacom, any
subsidiary of Viacom or any related entity;

shall be void or voidable solely because:

- Viacom, any non-Blockbuster-related subsidiary or other similar entity of
Viacom or any related entity, or any of their or our directors or officers
are parties to the contract or transaction; or

- any of those directors or officers is present at or participates in the
meeting of the board of directors or committee thereof that authorizes the
contract or transaction.

CORPORATE OPPORTUNITIES

Our certificate of incorporation provides that, except as Viacom may
otherwise agree in writing, neither Viacom nor any non-Blockbuster-related
subsidiary or other similar entity of Viacom shall have a duty to refrain from
engaging directly or indirectly in the same or similar business activities or
lines of business as ours.

The foregoing provisions of our certificate of incorporation as they relate
to Viacom shall expire on the date that Viacom and its subsidiaries no longer
own at least 20% of the combined voting power of our outstanding common stock
and no person who is a director or officer of our company is also a director or
officer of Viacom or its subsidiaries.

TRANSFER AGENT AND REGISTRAR

First Chicago Trust Company of New York, a division of EquiServe, L.P., will
serve as the transfer agent and registrar for our common stock.

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DESCRIPTION OF CREDIT AGREEMENT

THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE CREDIT
AGREEMENT. A COPY OF THE CREDIT AGREEMENT IS FILED AS AN EXHIBIT HERETO.

On June 21, 1999, we entered into a $1.9 billion credit agreement with a
syndicate of lenders. The credit agreement is comprised of three tranches.
Tranche A is a $700 million revolving loan maturing on July 1, 2004. Tranche B
is a $600 million term loan also maturing on July 1, 2004. Tranche C is a $600
million revolving loan which matures on June 19, 2000. On June 23, 1999, we
borrowed $1.6 billion under this credit agreement.

We have used or will use the borrowings under the credit agreement:

- to pay about $65 million which is a portion of the purchase price to
affiliates of Viacom to acquire the non-U.S. operations of our business
that we did not already own;

- to repay a promissory note issued by us to Viacom International Inc. as a
dividend in the principal amount of $1.4 billion plus accrued and unpaid
interest;

- to repay promissory notes issued by us to Viacom International Inc. in the
aggregate principal amount of about $77 million plus accrued and unpaid
interest for an acquisition of video stores;

- to pay the fees and expenses of about $15 million related to the
origination of the credit agreement to the syndicate of lenders; and

- for working capital and general corporate purposes.

The credit agreement contains provisions for the mandatory prepayment of
loans as follows:

- If we issue equity securities, unless we are Investment Grade, as defined
in the credit agreement, we will be required to use 25% of the net cash
proceeds to repay the Tranche A loan and Tranche B loan, on a pro rata
basis, until $400 million of these loans have been repaid;

- If we incur indebtedness in a capital market transaction, unless we are
Investment Grade, we are required to use 75% of the net cash proceeds to
repay the Tranche A and Tranche B loans, on a pro rata basis, until $400
million, including amounts repaid from an issuance of equity as stated
above, have been repaid; and

- If we sell assets, other than to franchisees, we will be required to use
50% of the net cash proceeds from such sales over $100 million, to repay
the Tranche A and Tranche B loans, on a pro rata basis, until $500 million
of the loans have been repaid.

Borrowings under the credit agreement accrue interest at a rate equal to the
interest rates prevailing on the date of determination in the London interbank
market for the interest period selected by us, plus a margin over this rate. The
margin and the commitment fees on the undrawn portion of the facility vary based
on specified leverage ratios.

The credit agreement contains customary covenants for us not to, among other
things:

- grant liens;

- merge;

- sell substantially all of our assets;

- enter into speculative interest rate or currency hedges;

- incur debt above $175 million at the subsidiary level;

- pay dividends on or repurchase our common stock or make other
distributions, in each case other than dividends of $90 million, $115
million, $130 million, $145 million and $160 million in the first five
years following the completion of this offering, respectively;

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- transfer assets to subsidiaries; and

- invest in or make loans to any business, other than investments or loans
that are reasonably related to the operation or growth of our core rental
business.

We will also be required to comply with financial covenants with respect to:
(1) maximum leverage ratio and (2) a minimum fixed charge coverage ratio. The
credit agreement also contains some customary affirmative covenants.

Events of default under the credit agreement include, among others: failure
to pay principal and interest when due, breach of some of the representations
and warranties, failure to perform or observe some of the covenants, bankruptcy,
and a change of control. Under the credit agreement, a change of control
includes:

- control of 50% or more of our outstanding common stock by persons other
than Viacom or National Amusements, Inc.;

- our board of directors ceases to be controlled by our continuing
directors; or

- we enter into a merger or purchase agreement which cedes power to control
our management or policies prior to consummation of the merger or
purchase, as applicable.

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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

The 31,000,000 shares of our class A common stock sold in this offering, or
35,650,000 shares if the underwriters exercise their over-allotment options in
full, will be freely tradable without restriction under the Securities Act of
1933, as amended, except for any such shares which may be acquired by an
"affiliate" of ours, as that term is defined in Rule 144 promulgated under the
Securities Act, which shares will remain subject to the resale limitations of
Rule 144.

The 144,000,000 shares of our class B common stock that will be held by
Viacom after this offering constitute "restricted securities" within the meaning
of Rule 144, and will be eligible for sale by Viacom in the open market after
this offering, subject to some contractual lockup provisions and the applicable
requirements of Rule 144, both of which are described below. We have granted
some registration rights to Viacom. We refer you to "Related Party Transactions
- -- Agreements Between Viacom and Us -- Registration Rights Agreement."

Generally, Rule 144 provides that a person who has beneficially owned
"restricted securities" for at least one year is entitled to sell on the open
market in brokers' transactions within any three-month period a number of shares
that does not exceed the greater of:

- 1% of the then outstanding shares of the common stock; and

- the average weekly trading volume in the common stock on the open market
during the four calendar weeks preceding such sale.

Sales under Rule 144 are also subject to some post-sale notice requirements and
the availability of current public information concerning us.

In the event that any person is deemed to be our affiliate, and such
affiliate purchases shares of our class A common stock pursuant to this offering
or acquires shares of our class A common stock pursuant to our employee benefit
plan, the shares held by such person are required under Rule 144 to be sold in
brokers' transactions, subject to the volume limitations described above. Shares
properly sold in reliance upon Rule 144 to persons who are not affiliates are
thereafter freely tradable without restriction.

Sales of substantial amounts of our common stock in the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. Viacom has advised us that it intends to offer its common stock in
a tax-free split-off expected to be completed within 12 months from the date a
favorable tax ruling is received from the Internal Revenue Service. We refer you
to "Summary -- Separation from Viacom," "Separation from Viacom" and "Risk
Factors -- Risk Factors Relating to the Securities Market and Ownership of Our
Stock -- We Cannot Predict the Effect that the Split-off Will Have on the Price
of Our Common Stock; The Price of Our Common Stock Could Be Adversely Affected
by Sales of Substantial Amounts of Our Common Stock in the Public Market." Any
shares distributed by Viacom will be eligible for immediate resale to the public
market without restrictions by persons other our affiliates. Our affiliates
would be subject to the restrictions of Rule 144 described above other than the
one-year holding period requirement.

Subject to limited exceptions, we and our executive officers and directors
and Viacom have agreed not to, and Viacom has agreed to cause its
non-Blockbuster subsidiaries not to, for a period of 180 days from the date of
this prospectus, without the prior written consent of Salomon Smith Barney Inc.
and Salomon Brothers International Limited, dispose of or hedge any shares of
our class A common stock or any securities convertible into or exchangeable for
shares of our class A common stock. Salomon Smith Barney Inc. and Salomon
Brothers International Limited in their sole discretion may release any of the
securities subject to these lock-up agreements at any time without notice. This
offering is specifically exempted from this agreement. We refer you to
"Underwriting."

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<PAGE>
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS

The following is a discussion of the material United States federal income
and estate tax consequences of the ownership and disposition of the class A
common stock applicable to Non-United States Holders of such class A common
stock. For the purpose of this discussion, a "Non-United States Holder" is any
holder that for United States federal income tax purposes is not a "United
States person," as defined below. This discussion does not address all aspects
of United States federal income and estate taxation that may be relevant in
light of such Non-United States Holder's particular facts and circumstances,
such as being a U.S. expatriate, and does not address any tax consequences
arising under the laws of any state, local or non-United States taxing
jurisdiction. Furthermore, the following discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended, and administrative
and judicial interpretations thereof, all as in effect on the date hereof, and
all of which are subject to change, possibly with retroactive effect. We have
not and will not seek a ruling from the Internal Revenue Service with respect to
the United States federal income and estate tax consequences described below,
and as a result, there can be no assurance that the Internal Revenue Service
will not disagree with or challenge any of the conclusions set forth in this
discussion. For purposes of this discussion, the term "United States person"
means:

- a citizen or resident of the United States;

- a corporation, partnership, or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof;

- an estate whose income is included in gross income for United States
federal income tax purposes regardless of its source; or

- a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust.

DIVIDENDS

If we pay a dividend, any dividend paid to a Non-United States Holder of
class A common stock generally will be subject to United States withholding tax
either at a rate of 30% of the gross amount of the dividend or such lower rate
as may be specified by an applicable tax treaty. Dividends received by a
Non-United States Holder which are effectively connected with a United States
trade or business conducted by such Non-United States Holder are exempt from
such withholding tax. However, such effectively connected dividends, net of some
types of deductions and credits, are taxed at the same graduated rates
applicable to United States persons.

In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business of the corporate Non-United States Holder may also be
subject to a branch profits tax at a rate of 30% or such lower rate as may be
specified by an applicable tax treaty.

A Non-United States Holder of class A common stock that is eligible for a
reduced rate of withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the Internal Revenue Service.

GAIN ON DISPOSITION OF COMMON STOCK

A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his shares of class A common stock unless:

- such gain is effectively connected with a United States trade or business
of such Non-United States Holder, which gain, in the case of a corporate
Non-United States Holder, must also be taken into account for branch
profits tax purposes;

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<PAGE>
- the Non-United States Holder is an individual who holds such shares of
class A common stock as a capital asset within the meaning of section 1221
of the Internal Revenue Code of 1986, as amended, and who is present in
the United States for a period or periods aggregating 183 days or more
during the calendar year in which such sale or disposition occurs and some
other conditions are met; or

- we are or have been a "United States real property holding corporation"
for federal income tax purposes at any time within the shorter of the
five-year period preceding such disposition or such holder's holding
period.

We have determined that we are not and do not believe that we will become a
"United States real property holding corporation" for United States federal
income tax purposes.

BACKUP WITHHOLDING AND INFORMATION REPORTING

Generally, we must report annually to the Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or other agreements, the Internal Revenue Service may make its reports
available to tax authorities in the recipient's country of residence.

Dividends paid to a Non-United States Holder at an address within the United
States may be subject to backup withholding at a rate of 31% if the Non-United
States Holder fails to establish that it is entitled to an exemption or to
provide a correct taxpayer identification number and other information to the
payer. Backup withholding will generally not apply to dividends paid to
Non-United States Holders at an address outside the United States on or prior to
December 31, 2000 unless the payer has knowledge that the payee is a United
States person. Under recently finalized Treasury Regulations regarding
withholding and information reporting (we refer to these regulations as the "New
Regulations"), payment of dividends to Non-United States Holders at an address
outside the United States after December 31, 2000 may be subject to backup
withholding at a rate of 31% unless such non-United States Holder satisfies
certification requirements.

The payment of the proceeds of the disposition of shares of class A common
stock to or through the United States office of a broker is subject to
information reporting and backup withholding at a rate of 31% unless the holder
certifies its non-United States status under penalties of perjury or otherwise
establishes an exemption. Generally, the payment of the proceeds of the
disposition by a Non-United States Holder of class A common stock outside the
United States to or through a foreign office of a broker will not be subject to
backup withholding but will be subject to information reporting requirements if
the broker is:

- a United States person;

- a "controlled foreign corporation" for United States tax purposes; or

- a foreign person 50% or more of whose gross income for specified periods
is from the conduct of a United States trade or business unless such
broker has documentary evidence in its files of the holder's non-United
States status and some conditions are met or the holder otherwise
establishes an exemption.

Under the New Regulations backup withholding may apply to any payment made after
December 31, 2000 which the broker is required to report if such broker has
actual knowledge that the payee is a United States person.

In general, the New Regulations do not significantly alter the substantive
withholding and information reporting requirements but would alter the
procedures for claiming benefits of an income tax treaty and change the
certification procedures relating to the receipt by intermediaries of payments
on behalf of the beneficial owner of shares of class A common stock. Non-United
States Holders should consult their tax advisors regarding the effect, if any,
of the New Regulations on an investment

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<PAGE>
in the class A common stock. The New Regulations are generally effective for
payments made after December 31, 2000.

Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.

ESTATE TAX

An individual Non-United States Holder who owns class A common stock at the
time of his death or had made some types of lifetime transfers of an interest in
class A common stock will be required to include the value of such shares of
class A common stock in such holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.

THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF CLASS A
COMMON STOCK BY NON-UNITED STATES HOLDERS. ACCORDINGLY, INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE INCOME TAX CONSEQUENCES OF
THE OWNERSHIP AND DISPOSITION OF SHARES OF CLASS A COMMON STOCK, INCLUDING THE
APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING
JURISDICTION.

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UNDERWRITING

We intend to offer our class A common stock in the United States and Canada
through a number of U.S. underwriters as well as outside the United States and
Canada through a number of international managers. However, we are offering to
sell, and seeking offers to buy, shares of class A common stock only in
jurisdictions where such offers and sales are permitted. Salomon Smith Barney
Inc. and Bear, Stearns & Co. Inc. are acting as U.S. representatives of each of
the U.S. underwriters named below. Salomon Brothers International Limited and
Bear, Stearns International Limited are acting as International Representatives
of each of the international managers named below. Subject to the terms and
conditions stated in a U.S. underwriting agreement dated the date hereof between
us and each of the U.S. underwriters, and an international underwriting
agreement dated the date hereof between us and each of the international
managers, each U.S. underwriter and each international manager named below has
severally agreed to purchase, and we have agreed to sell to such U.S.
underwriter and such international manager, the number of shares of our class A
common stock set forth opposite the name of such U.S. underwriter and such
international manager.

<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
- -------------------------------------------------------------------------------- ------------
<S> <C>
Salomon Smith Barney Inc........................................................
Bear, Stearns & Co. Inc.........................................................
Credit Suisse First Boston Corporation..........................................
Goldman, Sachs & Co.............................................................
J.P. Morgan Securities Inc......................................................
Banc of America Securities LLC..................................................
ING Barings LLC.................................................................
PaineWebber Incorporated........................................................
Schroder & Co. Inc..............................................................
SG Cowen Securities Corporation.................................................
Wit Capital Corporation.........................................................
------------
Subtotal.................................................................... 24,800,000
------------
------------
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGER SHARES
- -------------------------------------------------------------------------------- ------------
<S> <C>
Salomon Brothers International Limited..........................................
Bear, Stearns International Limited.............................................
Credit Suisse First Boston (Europe) Limited.....................................
Goldman Sachs International.....................................................
J.P. Morgan Securities Ltd......................................................
Bank of America International Limited...........................................
ING Barings Limited, as agent for ING Bank N.V.,
London Branch.................................................................
PaineWebber International (U.K.) Ltd............................................
J. Henry Schroder & Co. Limited.................................................
Societe Generale................................................................
------------
Subtotal.................................................................... 6,200,000
------------
Total....................................................................... 31,000,000
------------
------------
</TABLE>

The U.S. underwriters and the international managers are collectively
referred to as the underwriters. Representatives refers to the U.S.
representatives and the international representatives collectively. The initial
public offering price per share and the total underwriting discounts and
commissions per share of class A common stock are identical under the U.S.
underwriting agreement and the international underwriting agreement.

The U.S. underwriting agreement and the international underwriting agreement
each provide that the obligations of the several underwriters to purchase the
shares of our class A common stock

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<PAGE>
included in this offering are subject to approval of some legal matters by
counsel and to some other conditions set forth in those agreements. The several
underwriters are obligated to purchase all of the shares, other than those
covered by the over-allotment options described below, if they purchase any of
the shares. Under some circumstances, under the U.S. underwriting agreement and
the international underwriting agreement, the commitments of non-defaulting
underwriters may be increased. The closings with respect to the sales of shares
of class A common stock to be purchased by the U.S. underwriters and the
international managers are conditioned upon one another. The underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part.

The underwriters propose to offer some of the shares of our class A common
stock directly to the public at the initial public offering price set forth on
the cover page of this prospectus and some of the shares to some dealers at the
initial public offering price less a concession not in excess of $ per
share. The underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share on sales to some other dealers. If all of
the shares of our class A common stock are not sold at the initial offering
price, the representatives may change the public offering price and the other
selling terms. The representatives have advised us that the underwriters do not
intend to confirm any sales to any accounts over which they exercise
discretionary authority.

We have granted to the U.S. underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to 3,720,000 additional shares
of our class A common stock at the public offering price less the underwriting
discounts and commissions. The U.S. underwriters may exercise such option solely
for the purpose of covering over-allotments, if any, in connection with this
offering. To the extent that such option is exercised, each U.S. underwriter
will be obligated, subject to some conditions, to purchase a number of
additional shares about proportionate to such U.S. underwriter's initial
purchase commitment.

We also have granted to the international managers an option, exercisable
for 30 days from the date of this prospectus, to purchase up to 930,000
additional shares of our class A common stock to cover over-allotments, if any,
on terms similar to those granted to the U.S. underwriters.

At our request, Salomon Smith Barney Inc. has reserved up to 5% of the
shares of our class A common stock for sale at the initial public offering price
to persons who are our directors, officers or employees, or who are otherwise
associated with us and our affiliates, and who have advised us of their desire
to purchase these shares through a directed share program. The number of shares
of our class A common stock available for sale to the general public will be
reduced to the extent of sales of shares under the directed share program to any
of the persons for whom they have been reserved. Any shares not so purchased
will be offered by Salomon Smith Barney Inc. on the same basis as all other
shares of our class A common stock offered in the offering. We have agreed to
indemnify Salomon Smith Barney Inc. against some liabilities and expenses,
including liabilities under the Securities Act in connection with the sales of
shares under the directed share program.

We and our executive officers and directors and Viacom have agreed not to,
and Viacom has agreed to cause its non-Blockbuster subsidiaries not to, for a
period of 180 days from the date of this prospectus, without the prior written
consent of Salomon Smith Barney Inc. and Salomon Brothers International Limited,
dispose of or hedge any shares of our class A common stock or any securities
convertible into or exchangeable for shares of our class A common stock. We and,
in the case of clause (3) below, Viacom and its non-Blockbuster subsidiaries are
not required to obtain this consent for some transactions, including issuances
and sales of our common stock (1) under the employee benefit plans described in
this prospectus, (2) in satisfaction of our obligations under the Initial Public
Offering and Split-off Agreement and (3) in connection with some merger or
acquisition transactions so long as this obligation to obtain consent is assumed
by the recipient of our common stock. Salomon Smith Barney Inc. and Salomon
Brothers International Limited in their sole discretion may release any of the
securities subject to these lock-up agreements at any time without notice.

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Prior to this offering, there has been no public market for our class A
common stock. Consequently, the initial public offering price for the shares was
determined by negotiations between us and Viacom, on the one hand, and the U.S.
representatives and the international representatives, on the other. Among the
factors considered in determining the initial public offering price were our
results of operations, our current financial condition, our future prospects,
our markets, the economic conditions in and future prospects for the industry in
which we compete, our management, and currently prevailing general conditions in
the equity securities markets, including current market valuations of publicly
traded companies considered comparable to Blockbuster. We cannot assure you,
however, that the prices at which the shares of our class A common stock will
sell in the public market after this offering will not be lower than the price
at which they are sold by the underwriters or that an active trading market in
the class A common stock will develop and continue after this offering.

The following table shows the underwriting discounts and commissions to be
paid to the U.S. underwriters and the international managers by us in connection
with this offering. These amounts are shown assuming both no exercise and full
exercise of the underwriters' options to purchase additional shares of our class
A common stock.

<TABLE>
<CAPTION>
PAID BY BLOCKBUSTER
--------------------------
<S> <C> <C>
NO EXERCISE FULL EXERCISE
----------- -------------
Per share......................................................... $ $
Total............................................................. $ $
----------- -------------
----------- -------------
</TABLE>

The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the terms of the intersyndicate agreement, the U.S. underwriters and the
international managers are permitted to sell shares of our class A common stock
to each other for purposes of resale at the initial public offering price, less
an amount not greater than the selling concession. Under the terms of the
intersyndicate agreement, the U.S. underwriters and any dealer to whom they sell
shares of our class A common stock will not offer to sell or sell shares of our
class A common stock to persons who are non-U.S. or non-Canadian persons, and
the international managers and any dealer to whom they sell shares of our class
A common stock will not offer to sell or sell shares of our class A common stock
to U.S. persons or to Canadian persons or to persons that they believe intend to
resell to U.S. or Canadian persons, except in the case of transactions under the
terms of the intersyndicate agreement.

For investors outside the United States: neither we nor any underwriter has
taken or will take any action in any jurisdiction that would permit a public
offering of the class A common stock or possession or distribution of this
prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Both we and the underwriters require that persons who
come into possession of this prospectus must inform themselves about and observe
any restrictions as to the offering of the class A common stock and the
distribution of this prospectus.

Each underwriter has agreed that:

- it has not offered or sold and will not offer or sell any shares of our
class A common stock to persons in the United Kingdom, except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments, as principal or agent, for the purposes of their
businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995 or the
Financial Services Act 1986;

- it has complied, and will comply, with all applicable provisions of the
Financial Services Act 1986 of Great Britain with respect to anything done
by it in relation to the shares of our class A common stock in, from or
otherwise involving the United Kingdom; and

- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance
of the shares of our class A common

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stock, other than any document required or permitted to be published by
listing rules under Part IV of the Financial Services Act 1986, to a
person who is of a kind described in Article 11(3) of the Financial
Services Act of 1986 (Investment Advertisements) (Exemptions) Order 1996
of Great Britain or is a person to whom the document may otherwise
lawfully be issued or passed on.

The shares of our class A common stock have not been and will not be
qualified for sale in Canada or any of its provinces or territories and may not
be offered or sold directly or indirectly in any province or territory of
Canada, except pursuant to an exemption from the applicable prospectus filing
requirements, and otherwise in compliance with the applicable securities laws
and regulations of the relevant province or territory. The underwriters intend
to rely on these exemptions for offers and sales of shares of class A common
stock in Canada.

In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of class A common stock in excess of the number of shares to be purchased
by the underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the class A common stock in
the open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of bids or purchases
of class A common stock made for the purpose of preventing or retarding a
decline in the market price of the class A common stock while the offering is in
progress. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when Salomon Smith Barney Inc., in covering syndicate
short positions or making stabilizing purchases, repurchases shares originally
sold by that syndicate member. These activities may cause the price of shares of
our class A common stock to be higher than the price that otherwise would exist
in the open market in the absence of such transactions. These transactions may
be effected on the New York Stock Exchange or in the over-the-counter market, or
otherwise and, if commenced, may be discontinued at any time.

We estimate that the expenses of this offering, exclusive of the
underwriting discounts and commissions, will be about $5.7 million.

The U.S. representatives and some of the underwriters or their affiliates
have performed some investment banking and advisory services for us, Viacom and
each of our affiliates from time to time for which they have received customary
fees and expenses. The U.S. representatives and underwriters may, from time to
time, engage in transactions with and perform services for us, Viacom and each
of our affiliates in the ordinary course of their business. In particular,
Citibank N.A., an affiliate of each of Salomon Smith Barney Inc. and Salomon
Brothers International Limited, is the lead arranger on our new credit agreement
and will receive in excess of 10% of the net proceeds of this offering.
Accordingly, this offering will be conducted in accordance with Rule 2710(c)(8)
of the National Association of Securities Dealers, Inc. which requires that the
public offering price of an equity security be no higher than the price
recommended by a "qualified independent underwriter" which has participated in
the preparation of the registration statement and performed its usual standard
of due diligence. Bear, Stearns & Co. Inc. has agreed to act as "qualified
independent underwriter" for this offering and the public offering price of
shares of our class A common stock will be no higher than the price recommended
by Bear, Stearns & Co. Inc. We refer you to "Description of Credit Agreement"
and "Use of Proceeds."

We have agreed to indemnify the U.S. underwriters and the international
managers against some types of liabilities, including liabilities under the
Securities Act, or to contribute to payments the U.S. underwriters or the
international managers may be required to make in respect of any of those
liabilities.

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LEGAL MATTERS

Some legal matters with respect to the validity of the shares of common
stock offered hereby will be passed upon for us by Shearman & Sterling, and for
the underwriters by Hughes Hubbard & Reed LLP. Hughes Hubbard & Reed LLP has
provided legal services to us, Viacom and our respective affiliates, from time
to time, for which they have received customary fees and expenses.

EXPERTS

Our consolidated financial statements as of December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998 included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given upon their authority
as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement, as amended, on Form S-1
under the Securities Act with respect to the shares of our class A common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules thereto. Some
items are omitted in accordance with the rules and regulations of the SEC. For
further information about us and our class A common stock, reference is made to
the registration statement and the exhibits and any schedules filed therewith.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance, if
such contract or document is filed as an exhibit, reference is made to the copy
of such contract or other documents filed as an exhibit to the registration
statement, each statement being qualified in all respects by such reference. A
copy of the registration statement, including the exhibits and schedules
thereto, may be read and copied at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices at Seven
World Trade Center, New York, New York 10048 and 500 West Madison Street,
Chicago, Illinois 60661. Information on the operation of the Public Reference
Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site at http://www.sec.gov, from which interested persons
can electronically access the registration statement, including the exhibits and
any schedules thereto.

Subject to the foregoing, you should rely only on the information contained
in this prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. The information
contained in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of class A
common stock.

As a result of this offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. We also maintain our U.S.
Internet site at http://WWW.BLOCKBUSTER.COM. Our U.S. Internet site and the
information contained therein or connected thereto shall not be deemed to be
incorporated into this prospectus or the registration statement of which it
forms a part.

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BLOCKBUSTER INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:

Report of Independent Accountants............................................... F-2

Consolidated Statements of Operations--Years Ended December 31, 1996, 1997 and
1998.......................................................................... F-3

Consolidated Balance Sheets--at December 31, 1997 and 1998...................... F-4

Consolidated Statements of Changes in Stockholder's Equity--Years Ended December
31, 1996, 1997 and 1998....................................................... F-5

Consolidated Statements of Cash Flows--Years Ended December 31, 1996, 1997 and
1998.......................................................................... F-6

Notes to Consolidated Financial Statements...................................... F-7

INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):

Interim Consolidated Statements of Operations (Unaudited) for the Three Months
Ended March 31, 1998 and 1999................................................. F-27

Interim Consolidated Balance Sheets--at December 31, 1998 and March 31, 1999
(Unaudited)................................................................... F-28

Interim Consolidated Statements of Cash Flows (Unaudited)--for the Three Months
Ended March 31, 1998 and 1999................................................. F-29

Notes to Interim Consolidated Financial Statements (Unaudited).................. F-30
</TABLE>

Some 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.

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of Viacom Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholder's equity, and
of cash flows present fairly, in all material respects, the financial position
of Blockbuster Inc. at December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP

Dallas, Texas
May 4, 1999, except as to the fourth
paragraph of Note 1 which is as of
August 3, 1999

F-2
<PAGE>
BLOCKBUSTER INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
REVENUES:
Rental revenues.............................................................. $ 2,386.9 $ 2,664.0 $ 3,219.6
Merchandise sales............................................................ 491.3 594.0 618.0
Other revenues............................................................... 63.9 55.6 55.8
--------- --------- ---------
2,942.1 3,313.6 3,893.4
--------- --------- ---------
COST OF SALES:
Cost of rental revenues...................................................... 617.2 810.6 1,460.9
Cost of merchandise sold..................................................... 396.5 549.9 495.5
--------- --------- ---------
1,013.7 1,360.5 1,956.4
--------- --------- ---------
Gross profit................................................................. 1,928.4 1,953.1 1,937.0

OPERATING EXPENSES:
General and administrative................................................... 1,163.6 1,605.7 1,732.3
Advertising.................................................................. 115.3 139.5 181.0
Depreciation................................................................. 165.5 253.8 212.7
Amortization of intangibles.................................................. 166.2 168.7 170.2
Restructuring charge......................................................... 50.2 -- --
--------- --------- ---------
1,660.8 2,167.7 2,296.2
--------- --------- ---------
Operating income (loss)........................................................ 267.6 (214.6) (359.2)

Interest expense............................................................. (22.0) (30.8) (27.7)
Interest income.............................................................. 3.6 3.7 4.0
Other items, net............................................................. -- (27.6) (11.8)
--------- --------- ---------
Income (loss) before income taxes.............................................. 249.2 (269.3) (394.7)
Benefit (provision) for income taxes......................................... (167.4) (30.0) 59.4
Equity in loss of affiliated companies, net of tax........................... (4.0) (18.9) (1.3)
--------- --------- ---------
NET INCOME (LOSS).............................................................. $ 77.8 $ (318.2) $ (336.6)
--------- --------- ---------
--------- --------- ---------

NET INCOME (LOSS) PER SHARE:
Basic and diluted............................................................ $ 0.54 $ (2.21) $ (2.34)
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted............................................................ 144 144 144
--------- --------- ---------
--------- --------- ---------
UNAUDITED PRO FORMA NET INCOME (LOSS) PER SHARE:
Basic and diluted............................................................ $ (2.19)
---------
---------
UNAUDITED PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted............................................................ 175
---------
---------
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE>
BLOCKBUSTER INC.

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 129.6 $ 99.0
Receivables, less allowances of $22.3 (1997) and $22.7 (1998)............................ 114.8 124.8
Merchandise inventories.................................................................. 281.3 277.4
Deferred income taxes.................................................................... 6.7 --
Prepaid assets........................................................................... 95.5 130.5
--------- ---------
Total current assets................................................................... 627.9 631.7

Rental library, net........................................................................ 734.5 441.2
Deferred income taxes...................................................................... 31.3 92.5
Property and equipment, net................................................................ 1,085.2 995.3
Intangibles, net........................................................................... 6,192.7 6,055.6
Other assets............................................................................... 59.4 58.5
--------- ---------
$ 8,731.0 $ 8,274.8
--------- ---------
--------- ---------

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable......................................................................... $ 362.4 $ 448.6
Accrued expenses......................................................................... 267.0 361.8
Current portion of capital lease obligations............................................. 36.7 22.2
Deferred income taxes.................................................................... -- 13.6
Short-term borrowings.................................................................... 47.0 --
--------- ---------
Total current liabilities.............................................................. 713.1 846.2

Notes payable to Viacom.................................................................... 175.8 1,576.4
Capital lease obligations, less current portion............................................ 155.5 138.8
Other liabilities.......................................................................... 69.0 75.5
--------- ---------
1,113.4 2,636.9
--------- ---------

Commitments and contingencies (Note 12)

Stockholder's equity:
Viacom's net equity investment........................................................... 7,666.5 5,695.8
Accumulated other comprehensive loss--foreign currency
translation adjustment................................................................. (48.9) (57.9)
--------- ---------
Total stockholder's equity............................................................. 7,617.6 5,637.9
--------- ---------
$ 8,731.0 $ 8,274.8
--------- ---------
--------- ---------
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE>
BLOCKBUSTER INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY

(IN MILLIONS)

<TABLE>
<CAPTION>
ACCUMULATED
VIACOM'S OTHER TOTAL
NET EQUITY COMPREHENSIVE COMPREHENSIVE STOCKHOLDER'S
INVESTMENT INCOME (LOSS) INCOME (LOSS) EQUITY
---------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996.................................. $ 7,754.1 $ (16.9) $ 7,737.2
Net income.................................................. 77.8 $ 77.8 77.8
Other comprehensive income (loss):
Cumulative translation adjustment....................... 9.8 9.8 9.8
-------
Total comprehensive income............................ $ 87.6
-------
-------
Net contribution to Viacom.................................. (40.4) (40.4)
---------- ------- -------------
BALANCE AT DECEMBER 31, 1996................................ 7,791.5 (7.1) 7,784.4
Net loss.................................................... (318.2) $ (318.2) (318.2)
Other comprehensive income (loss):
Cumulative translation adjustment....................... (38.6) (38.6) (38.6)
Reclassification of foreign currency translation gain
realized.............................................. (3.2) (3.2) (3.2)
-------
Total comprehensive loss.............................. $ (360.0)
-------
-------
Net receipt from Viacom..................................... 193.2 193.2
---------- ------- -------------
BALANCE AT DECEMBER 31, 1997................................ 7,666.5 (48.9) 7,617.6
Net loss.................................................... (336.6) $ (336.6) (336.6)
Other comprehensive income (loss):
Cumulative translation adjustment....................... (9.0) (9.0) (9.0)
-------
Total comprehensive loss.............................. $ (345.6)
-------
-------
Dividend payable to Viacom.................................. (1,400.0) (1,400.0)
Net contribution to Viacom.................................. (234.1) (234.1)
---------- ------- -------------
BALANCE AT DECEMBER 31, 1998................................ $ 5,695.8 $ (57.9) $ 5,637.9
---------- ------- -------------
---------- ------- -------------
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE>
BLOCKBUSTER INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................. $ 77.8 $ (318.2) $ (336.6)
Adjustments to reconcile net income (loss) to net cash flow provided by
operating activities:
Depreciation and amortization............................................... 948.9 1,222.4 1,518.8
Deferred income taxes....................................................... 26.7 121.5 (8.1)
Write-down of investments................................................... -- 27.1 10.5
Restructuring charge........................................................ 50.2 -- --
Equity in loss of affiliated companies, net of tax.......................... 4.0 18.9 1.3
Other....................................................................... -- (0.3) --
Change in operating assets and liabilities:
Increase in receivables..................................................... (39.5) (7.8) (10.9)
Increase in merchandise inventories......................................... (73.1) (51.4) (0.4)
Increase in prepaid and other assets........................................ (20.3) (15.6) (40.0)
Increase (decrease) in accounts payable..................................... 49.0 (41.4) 67.9
Increase (decrease) in accrued expenses and other liabilities............... (38.7) 36.1 32.0
--------- --------- ---------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES................................. 985.0 991.3 1,234.5
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Rental library purchases...................................................... (751.5) (860.2) (818.1)
Capital expenditures.......................................................... (323.7) (262.2) (175.0)
Cash used for acquisitions.................................................... (154.4) (79.0) (34.2)
Proceeds from sale of property and equipment.................................. -- 19.1 0.3
Investments in affiliated companies........................................... (5.5) (5.8) 4.8
--------- --------- ---------
NET CASH FLOW USED IN INVESTING ACTIVITIES...................................... (1,235.1) (1,188.1) (1,022.2)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on (repayments of) credit facility............................. 25.8 22.3 (46.6)
Proceeds from term loan....................................................... -- -- 46.6
Net borrowings from notes due to Viacom....................................... 69.7 106.1 0.6
Capital lease payments........................................................ (24.9) (33.2) (34.8)
Advances from (repayments to) Viacom, net..................................... 138.2 174.1 (206.9)
--------- --------- ---------
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES........................ 208.8 269.3 (241.1)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH......................................... (0.4) (1.5) (1.8)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................ (41.7) 71.0 (30.6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................. 100.3 58.6 129.6
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................................ $ 58.6 $ 129.6 $ 99.0
--------- --------- ---------
--------- --------- ---------
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

The business and operations of Blockbuster Inc. (collectively, the "Company"
or "Blockbuster") consists of various wholly owned entities owned directly or
indirectly by Viacom International Inc. which is a wholly owned subsidiary of
Viacom Inc. ("Viacom"). During 1998, Viacom announced its intention that
Blockbuster would offer in an initial public offering a portion of its common
stock. This initial public offering is Viacom's first step in the planned
divestiture of Blockbuster Inc. The Company owns, operates and franchises
videocassette rental and sales stores in the United States and a number of
foreign countries. The Company offers pre-recorded videocassettes primarily for
rental and also offers titles for purchase on a "sell-through" (retail) basis.
In addition, the Company offers video games for rental and sale and sells
certain other entertainment-related merchandise.

The Company's business and operations were originally conducted by
Blockbuster Entertainment Corporation which was incorporated in Delaware in 1982
and entered the movie rental business in 1985. On September 29, 1994,
Blockbuster Entertainment Corporation was merged with and into Viacom. Since the
merger and during the period covered by the accompanying consolidated financial
statements, operations of the Company were conducted by various subsidiaries of
Viacom. Viacom's acquisition of the Company in 1994 was accounted for as a
purchase, and accordingly, its basis in the acquired assets and liabilities has
been pushed down to Blockbuster. Viacom's initial investment and all subsequent
cash advances, with the exception of cash advanced to fund the Company's
international operations, have been classified as contributed capital and no
interest expense or income has been allocated to the Company in the accompanying
consolidated financial statements.

As a part of the Reorganization Transactions (see discussion below), the
Company purchased stock and/or assets from affiliates of Viacom with cash funded
by the bank credit agreement or contributed by Viacom in order to acquire
certain international operations of the Company. Advances from Viacom to
Blockbuster to fund these operations have been treated as intercompany notes in
the accompanying consolidated financial statements. Any difference between the
recorded intercompany notes payable to Viacom and the ultimate amount of the
purchase price for the stock or assets of these operations will be recognized as
an adjustment to stockholder's equity.

Prior to the Company's initial public offering (the "Offering") the
following transactions were completed: (1) in late 1998 numerous U.S.
subsidiaries of Viacom International Inc., a wholly owned subsidiary of Viacom,
each of which were directly or indirectly involved in the Company's operations,
were merged with and into the Company, (2) on December 31, 1998 the Company
declared a $1.4 billion dividend payable to Viacom International Inc. which has
been reflected as an interest-bearing note in the accompanying consolidated
balance sheet, (3) effective on or about June 23, 1999, the Company purchased
certain international operations of the Company from affiliates of Viacom, (4)
effective June 21, 1999, the Company entered into a term and revolving credit
agreement with a syndicate of lenders which was used to fund debt owed to Viacom
and to pay a portion of the purchase price to acquire certain international
operations from affiliates of Viacom, and (5) effective August 3, 1999, the
Company was recapitalized with Class A common stock and Class B common stock of
which 144,000,000 shares of Class B common stock were simultaneously issued to
Viacom International Inc. in exchange for 100 shares of common stock of the
Company. These transactions are collectively referred to as the Reorganization
Transactions.

The Company expects to offer Class A common stock in the Offering.
Immediately following the Offering, Viacom will own none of the outstanding
shares of the Class A common stock and 100% of the outstanding shares of the
Class B common stock, which will represent no less than 80% of the

F-7
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
combined voting interest of the Company's then outstanding common stock. Viacom
has expressed its current intention to achieve a complete separation between the
Company and itself through a subsequent stock split-off or other back-up
distribution. Viacom has the sole discretion to determine the timing and all
terms of the split-off or other backup distribution, and is under no obligation
to effect such separation. There can be no assurance as to whether or when such
a separation will occur, or as to the terms of such separation.

The accompanying consolidated financial statements are presented on a
carve-out basis and reflect the historical results of operations, financial
position and cash flows of the Company including entities owned by Blockbuster
or purchased from affiliates of Viacom in the case of certain of its
international operations. In this context, no historical direct ownership
relationship existed among all the various entities comprising Blockbuster;
accordingly, Viacom and its subsidiaries' net investment in Blockbuster is
included in stockholder's equity in the consolidated financial statements.

For all periods presented, certain expenses reflected in the consolidated
financial statements include allocation of corporate expenses from Viacom (see
Note 10). All such costs and expenses have been deemed to have been paid by the
Company to Viacom in the period in which the costs were recorded. Allocations of
current income taxes receivable or payable are deemed to have been remitted, in
cash, by or to Viacom in the period the related income taxes were recorded.
Management believes that the foregoing allocations were made on a reasonable
basis; however, the allocations of costs and expenses do not necessarily
indicate the costs that would have been or will be incurred by the Company on a
stand-alone basis. Also, the consolidated financial statements may not
necessarily reflect the financial position, results of operations and cash flows
of the Company in the future or what the financial position, results of
operations or cash flows would have been if the Company had been a separate,
stand-alone company during the periods presented.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could subsequently differ from those estimates.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and investments of more than 50% in subsidiaries and other entities. Investments
in affiliated companies over which the Company has a significant influence or
ownership of more than 20% but less than or equal to 50% are accounted for under
the equity method. Investments of 20% or less are accounted for under the cost
method. All significant intercompany transactions have been eliminated.

CASH AND CASH EQUIVALENTS

Cash equivalents are defined as short-term (original maturities of three
months or less) highly liquid investments.

F-8
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MERCHANDISE INVENTORIES

Merchandise inventories consist primarily of prerecorded videocassette
retail inventory, video games and confectionery items and is stated at the lower
of cost or market. Merchandise inventory costs are determined using the weighted
average method, the use of which approximates the first-in, first-out basis.

RENTAL LIBRARY, NET

Effective April 1, 1998, Blockbuster adopted an accelerated method of
amortizing the videocassette and game rental library in order to more closely
match expenses in proportion with anticipated revenues from revenue sharing
agreements (see Note 3).

Rental library and related accumulated amortization at December 31 are as
follows:

<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Rental library......................................................... $ 1,742.8 $ 2,011.5
Less: accumulated amortization......................................... 1,008.3 1,570.3
--------- ---------
Rental library, net.................................................... $ 734.5 $ 441.2
--------- ---------
--------- ---------
</TABLE>

Rental amortization expense, excluding the charge (see Note 3), approximated
$617.2 million (1996), $799.9 million (1997) and $711.6 million (1998).

PROPERTY AND EQUIPMENT

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

<TABLE>
<S> <C>
Building.................................... 25 to 31.5 years
Building improvements....................... 10 years
Leasehold improvements...................... 4 to 10 years
Equipment and other......................... 3 to 10 years
Furniture and fixtures...................... 3 to 10 years
</TABLE>

Balances of major classes of assets and accumulated depreciation at December
31 are as follows:

<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Land, building and building improvements............................... $ 64.6 $ 56.3
Leasehold improvements................................................. 563.2 637.7
Equipment and other.................................................... 347.6 386.2
Furniture and fixtures................................................. 308.7 294.0
Capital leases......................................................... 244.4 248.3
--------- ---------
Total................................................................ 1,528.5 1,622.5
Less: accumulated depreciation......................................... 443.3 627.2
--------- ---------
Property and equipment, net............................................ $ 1,085.2 $ 995.3
--------- ---------
--------- ---------
</TABLE>

Maintenance and repair costs are charged to expense as incurred.
Improvements that extend the useful life of the assets are capitalized.
Depreciation expense, including capital lease amortization, was

F-9
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$165.5 million (1996), $253.8 million (1997) and $212.7 million (1998).
Depreciation expense related to capital leases was $31.7 million (1996), $30.6
million (1997) and $29.7 million (1998).

INTANGIBLES

Intangible assets at December 31 consist of the following:

<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Goodwill............................................................... $ 6,721.5 $ 6,752.7
Trademarks............................................................. 11.7 11.8
--------- ---------
Total................................................................ 6,733.2 6,764.5
Less: accumulated amortization......................................... 540.5 708.9
--------- ---------
Intangibles, net....................................................... $ 6,192.7 $ 6,055.6
--------- ---------
--------- ---------
</TABLE>

The cost of acquired businesses in excess of the fair value of tangible
assets and liabilities acquired ("goodwill"), which principally relates to
Viacom's acquisition of the Company and the resulting pushdown of goodwill
associated with the transaction, is amortized using the straight-line method
over estimated useful lives not exceeding 40 years. Amortization expense related
to intangible assets was $166.2 million (1996), $168.7 million (1997) and $170.2
million (1998).

Trademarks are amortized on a straight-line basis over the estimated
remaining economic lives, not exceeding 40 years.

FAIR VALUE OF FINANCIAL INSTRUMENTS

At December 31, 1997 and 1998, the Company's carrying value of financial
instruments approximates fair value due to the short-term maturities of these
instruments or variable rates of interest. During 1996, 1997 and 1998, no
financial instruments were held or issued for trading purposes.

IMPAIRMENT OF LONG-LIVED ASSETS

In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of." SFAS 121 requires that the Company
assess long-lived assets (primarily property, plant and equipment and goodwill)
for impairment whenever there is an indication that the carrying amount of the
assets may not be recoverable. Recoverability is determined by comparing the
forecasted undiscounted cash flows generated by these assets to the assets' net
carrying value. The amount of impairment loss, if any, will generally be
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 the
Company's stores is performed on a market-by-market basis.

ADVERTISING EXPENSES

Advertising costs are expensed the first time the advertising takes place.

GIFT CARD LIABILITY

Gift card liabilities are recorded at the time of sale with the costs of
designing, printing and distributing the cards recorded as expense as incurred.
The liability is relieved and revenue recognized upon redemption of the gift
cards at any Blockbuster video store.

F-10
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION

Revenues are generally recognized at the time of sale or rental. Rental
revenue includes sales of previously viewed videocassettes and previously played
video games.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

The financial statements of the Company's 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 1996, 1997 and 1998. Net foreign currency transaction
gains and losses were not significant for any of the years presented, except for
1997, in which the Company recognized a gain of approximately $8.0 million,
which is included in general and administrative expenses in the Consolidated
Statements of Operations.

HEDGING ACTIVITY

The Company has historically been considered in Viacom's overall risk
management strategy. As a part of this strategy, Viacom uses certain financial
instruments to reduce its exposure to adverse movements in foreign-exchange
rates. Viacom allocates to the Company the income and expense associated with
certain of these financial instruments used to hedge foreign currency movements.
Allocated net expense and the related notional amounts for these financial
instruments were immaterial in all years presented.

The Company is exposed to credit loss in the event of nonperformance by
counterparties to the financial instrument contracts. However, the Company does
not anticipate nonperformance by the other parties and no material loss would be
expected from their nonperformance.

CAPITALIZED SOFTWARE COSTS

The Company capitalizes qualifying costs related to developing or obtaining
internal-use software. Capitalization of costs begins after the conceptual
formulation stage has been completed. Capitalized costs are depreciated over the
estimated useful life of the software which ranges between three and five years.
Capitalized costs at December 31, 1997 and 1998 totaled $10.6 million and $11.1
million, net of accumulated depreciation of $7.0 million and $10.5 million,
respectively. In January 1998, the American Institute of Certified Public
Accountants (the "AICPA") issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
SOP 98-1 becomes effective for all fiscal years beginning after December 15,
1998. The Company's policy falls within the guidelines of SOP 98-1.

START-UP COSTS

In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 becomes effective for
all fiscal years beginning after December 15, 1998. The Company's policy falls
within the guidelines of SOP 98-5.

F-11
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES

Income taxes are provided based on the liability method of accounting
pursuant to SFAS 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred
income taxes are recorded to reflect the tax benefit and consequences of future
years' differences between the tax bases of assets and liabilities and their
financial reporting basis. The Company records 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.

NET INCOME (LOSS) PER SHARE

As described in Note 1, the Company was recapitalized to provide for Class A
common stock and Class B common stock. In accordance with SEC Staff Accounting
Bulletin No. 98, the capitalization of Class B common stock has been
retroactively reflected for the purposes of presenting historical net income
(loss) per share for periods prior to the Offering.

Unaudited pro forma basic and diluted net income (loss) per share includes
the shares of both Class A and Class B common stock assumed to be outstanding as
of the date of the Offering. Unaudited pro forma basic and diluted net income
(loss) per share are the same since there are currently no Company options
outstanding. Pro forma basic and diluted net income (loss) per share have been
presented for the most recent annual period.

COMPREHENSIVE INCOME (LOSS)

Effective January 1, 1998 the Company adopted SFAS 130, "Reporting
Comprehensive Income" ("SFAS 130"), effective for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting and display of
comprehensive income (loss) and its components in financial statements.
Comprehensive income 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 income (loss) and other
gains and losses affecting stockholder's equity that, under generally accepted
accounting principles, are excluded from net income, such as unrealized gains
and losses on investments available for sale, foreign currency translation gains
and losses and minimum pension liability. Currency translation is the only item
of other comprehensive income impacting the Company. There is no tax effect
associated with comprehensive income (loss) as the foreign currency translation
adjustments are associated with operations located in foreign jurisdictions with
operating losses.

SEGMENT INFORMATION AND PENSION DISCLOSURES

In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), effective for fiscal years
beginning after December 15, 1997. SFAS 131 establishes revised standards for
public companies relating to the reporting of financial and descriptive
information about their operating segments in financial statements. In February
1998, the FASB issued SFAS 132, "Employer's Disclosures about Pensions and Other
Post Retirement Benefits" ("SFAS 132"), which is effective for fiscal years
beginning after December 15, 1997. SFAS 132 standardizes the disclosure
requirements for pension and other post-retirement benefits and requires
additional information on benefit obligations and the fair value of plan assets.
Implementation of

F-12
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SFAS 131 and SFAS 132 have not had a material effect on the consolidated
financial statements as currently presented.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This new accounting standard
will require that derivative instruments be measured at fair value and
recognized in the balance sheet as either assets or liabilities, as the case may
be. The treatment of changes in the fair value of a derivative (i.e., gains and
losses) will depend on its intended use and designation. Gains and losses on
derivatives designated as hedges against the cash flow effect of a forecasted
transaction will initially be reported as a component of comprehensive income
and, subsequently, reclassified into income when the forecasted transaction
affects income. Gains and losses on all other forms or derivatives will be
recognized in income in the period of change. The Company will adopt SFAS 133
effective January 1, 2001 and anticipates that its adoption will not have a
material effect on its consolidated financial statements.

NOTE 3--CHANGE IN ACCOUNTING METHOD FOR RENTAL LIBRARY

Effective April 1, 1998, Blockbuster adopted an accelerated method of
amortizing videocassette and game rental library. Blockbuster has adopted this
new method of amortization because it has implemented a new business model,
including revenue sharing agreements with Hollywood studios, which has
dramatically increased the number of videocassettes in the stores and is
satisfying consumer demand over a shorter period of time. Revenue sharing allows
Blockbuster to purchase videocassettes at a lower product cost than the
traditional buying arrangements, with a percentage of the net rental revenues
shared with the studios over a contractually determined period of time. As the
new business model results in a greater proportion of rental revenue over a
shorter period of time, Blockbuster has changed its method of amortizing rental
library in order to more closely match expenses in proportion with the
anticipated revenues to be generated therefrom.

Pursuant to the new accounting method, the Company records base stock
videocassettes (generally less than five copies per title for each store) at
cost and amortizes a portion of these costs on an accelerated basis over three
months, generally to $8 per unit, with the remaining base stock videocassette
cost amortized on a straight-line basis over 33 months to an estimated $4
salvage value. The cost of non-base stock videocassettes (generally greater than
four copies per title for each store) are amortized on an accelerated basis over
three months to an estimated $4 salvage value. Video games are amortized on an
accelerated basis over a 12-month period to an estimated $10 salvage value.
Revenue sharing payments are expensed when revenues are earned pursuant to the
applicable contractual arrangements.

The new method of accounting has been applied to the rental library that was
held at April 1, 1998. The adoption of the new method of amortization has been
accounted for as a change in accounting estimate effected by a change in
accounting principle and, accordingly, the Company recorded a non-cash pre-tax
charge of $424.3 million to cost of rental revenues. The charge represents an
adjustment to the carrying value of the rental tapes due to the new method of
accounting.

F-13
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

The Company believes that the new amortization method developed for
Blockbuster's new business model will result in a better matching of revenue and
expense recognition. Under the new model, cost of sales attributable to
videocassettes is comprised of revenue sharing payments, which are expensed when
the related revenue is recognized, amortization of product costs and residual
values of previously viewed tapes and games upon sale.

Prior to April 1, 1998 videocassette rental library was recorded at cost and
amortized over its estimated economic life. Base stock videocassettes (generally
1 to 4 copies per title for each store) were amortized over 36 months on a
straight-line basis. Non-base stock videocassettes (generally the fifth and
succeeding copies per title for each store) were amortized over six months on a
straight-line basis. Video game library was amortized on a straight-line basis
over a period of 12 to 24 months.

NOTE 4--SPECIAL ITEM CHARGES AND RESTRUCTURING

During the second quarter of 1997, the Company shifted its strategic
emphasis from retailing a broad assortment of merchandise to focusing on its
core rental business. Rationalization of the retail product lines such as sell
through video, confectionery items, literature, music and fashion merchandise
allowed the Company to devote more management time and attention, as well as
retail floor selling space, to its rental video and game business. In addition,
as part of its efforts to improve the performance of its operations, the Company
adopted a plan to close consistently underperforming stores primarily located in
the United States, United Kingdom and Australia and to exit the German market.
The Company also recognized a charge associated with its joint venture
operations in Japan.

As a result, the Company recorded a pre-tax charge of approximately $250
million (the "Charge"). The Charge consisted principally of $100.8 million
recognized as cost of merchandise sold for a reduction in the carrying value of
excess merchandise inventories, $69.6 million for the reorganizing of operations
and closing of underperforming stores and $39.3 million recognized as general
and administrative expenses, primarily related to additional relocation costs
incurred in connection with the move of the Company's employees, corporate
offices and data center from Fort Lauderdale, Florida to Dallas, Texas. In
addition, the Charge consisted of $29.4 million, recognized as part of the
equity in loss of affiliated companies, associated with the Company's debt
guarantee of joint venture operations in Japan. Through December 31, 1998, the
Company has fully satisfied its obligations related to the debt guarantee.

The $69.6 million charge is comprised of a $41.8 million non-cash impairment
charge associated with long-lived assets and a $27.8 million charge for lease
exit obligations. These amounts have been recognized as depreciation expense and
general and administrative expense, respectively. Through December 31, 1998, the
Company has paid and charged approximately $12.8 million against the lease exit
obligations.

Also in the second quarter of 1997, as part of the Company's strategic
initiatives, management made the decision to dispose of certain investments that
did not relate to the Company's core business. The Company recognized a non-cash
charge of $27.1 million to write down these non-strategic investments to their
net realizable value. This charge is reflected in "Other items, net" in the
Consolidated Statements of Operations.

During 1998, the Company revised its estimate of net realizable value
associated with certain investments referred to above. An additional provision
of approximately $10.5 million was recognized in the fourth quarter to reflect
this change in estimate and was included in "Other items, net."

F-14
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 4--SPECIAL ITEM CHARGES AND RESTRUCTURING (CONTINUED)
During the fourth quarter of 1996, the Company adopted a plan to relocate
its corporate headquarters from Fort Lauderdale to Dallas and eliminate third
party distributors. As a result of such plan, the Company recognized a
restructuring charge of approximately $50.2 million. The restructuring charge
reflects a $25.0 million reserve for estimated severance benefits payable to
approximately 650 employees who did not relocate to Dallas. The Company, through
the restructuring charge, also recognized $11.6 million of other costs of
exiting Fort Lauderdale (primarily related to the disposition of its corporate
headquarters) and $13.6 million for eliminating third party distributors. The
Company's relocation to Dallas was completed during the second quarter of 1997
at which time the Company recorded additional period costs associated with the
move, as discussed above. Through December 31, 1998, the Company paid and
charged approximately $25.0 million against the severance liability and
approximately $11.4 million against the Fort Lauderdale exit costs.

NOTE 5--STOCK OPTION PLANS

Certain of the Company's employees have been granted Viacom stock options
under Viacom's Long-term Incentive Plans (the "Plans"). The purpose of the Plans
is to benefit and advance the interests of Viacom by rewarding certain key
employees for their contributions to the financial success of Viacom and thereby
motivating them to continue to make such contributions in the future. The 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 vest over a four to six year period from the date of grant and expire
10 years after the date of grant.

The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation". In accordance with the provisions of
SFAS 123, the Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for the Plans and accordingly, does not recognize compensation
expense for its stock option plans because Viacom typically does not issue
options at exercise prices below the market value at date of grant. Had
compensation expense for Viacom's stock option plans applicable to the Company's
employees been determined based upon the fair value at the grant date for awards
consistent with the methodology prescribed by SFAS 123, the Company's
consolidated pretax income would have decreased by $1.6 million ($1.0 million
after tax or $0.01 per basic and diluted share), $2.2 million ($1.4 million
after tax or $0.01 per basic and diluted share) and $4.1 million ($2.6 million
after tax or $0.02 per basic and diluted share) in 1996, 1997 and 1998,
respectively. These pro forma effects may not be representative of expense in
future periods since the estimated fair value of stock options on the date of
grant is amortized to expense over the vesting period. Additional options may be
granted in future years. Options issued prior to January 1, 1995 were excluded
from the computation.

F-15
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 5--STOCK OPTION PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:

<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield (a)................................. -- -- --
Expected stock price volatility............................. 32.65% 31.75% 32.72%
Risk-free interest rate..................................... 6.43% 6.04% 5.46%
Expected life of options (years)............................ 6.0 6.0 6.0
</TABLE>

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

(a) Viacom has not declared any cash dividends on its common stock for any of
the periods presented and has no present intention of so doing.

On February 25, 1999, the Board of Directors of Viacom declared a 2-for-1
common stock split, effected in the form of a dividend. The additional shares
were issued on March 31, 1999 to shareholders of record on March 15, 1999. All
stock options and per share amounts have been adjusted to reflect the stock
split for all periods presented.

The weighted-average fair value of each option as of the grant date was
$8.13, $6.59 and $12.89 in 1996, 1997 and 1998, respectively.

The following table summarizes stock option activity under the various plans
as it relates to Blockbuster's employees:

<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
------------ -----------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995.................................. 20,398,918 $ 15.49
Granted..................................................... 1,155,600 18.23
Exercised................................................... 7,039,854 15.15
Canceled.................................................... 1,333,634 16.90
------------
BALANCE AT DECEMBER 31, 1996.................................. 13,181,030 15.77
Granted..................................................... 2,596,000 15.32
Exercised................................................... 2,778,348 14.58
Canceled.................................................... 2,766,482 15.76
------------
BALANCE AT DECEMBER 31, 1997.................................. 10,232,200 15.98
Granted..................................................... 506,320 30.31
Exercised................................................... 7,102,920 14.39
Canceled.................................................... 414,356 16.00
------------
BALANCE AT DECEMBER 31, 1998.................................. 3,221,244 $ 21.75
------------
------------
</TABLE>

F-16
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 5--STOCK OPTION PLANS (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable Viacom stock options issued to Blockbuster employees at December
31, 1998:

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------ ------------------------
WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES OPTIONS LIFE (YEARS) PRICE OPTIONS PRICE
- -------------- ---------- --------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
$ 10 to $15 20,000 8.62 $ 14.94 -- --
15 to 20 2,340,540 8.47 15.46 23,398 $ 17.50
20 to 25 14,000 9.01 21.47 -- --
25 to 30 -- -- -- -- --
30 to 35 487,320 9.61 30.57 -- --
3 to 25 (a) 359,384(a) 4.16 14.29 359,384 14.29
---------- ---------
3,221,244 382,782
---------- ---------
---------- ---------
</TABLE>

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

(a) Represents information for options assumed with the Viacom acquisition of
Blockbuster.

NOTE 6--ACCRUED EXPENSES

The Company's accrued expenses consist of the following:

<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Accrued compensation................................................. $ 42.7 $ 55.9
Accrued gift card liability.......................................... 46.7 65.9
Accrued sales tax.................................................... 27.8 24.5
Accrued property tax................................................. 27.0 38.9
Accrued revenue sharing.............................................. -- 38.0
Restructuring reserve................................................ 23.4 14.2
Store closure reserves............................................... 25.3 15.0
Assigned music liabilities (see Note 10)............................. -- 43.7
Other................................................................ 74.1 65.7
--------- ---------
$ 267.0 $ 361.8
--------- ---------
--------- ---------
</TABLE>

NOTE 7--DEBT

Effective February 1996, the Company, along with three other Viacom
affiliates, entered into a Cdn $75 million credit facility, secured by Viacom.
The Company had outstanding approximately Cdn $65.8 million of bankers
acceptances as of December 31, 1997 ($47.0 million at December 31, 1997 exchange
rates). Interest on outstanding borrowings is equal to the Canadian bankers
acceptance rate plus 40 basis points, 3.5% and 5.1% at December 31, 1996 and
1997, respectively. Interest expense related to the Canadian facility was $.3
million and $2.0 million for the years ended December 31, 1996 and 1997,
respectively.

F-17
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 7--DEBT (CONTINUED)
In March 1998, the Company entered into a ten-year term loan for Cdn $65.8
million to repay the existing credit facility. In June 1998, the note was sold
to a Viacom affiliate and, accordingly, is reflected as part of notes payable to
Viacom.

Funds advanced by Viacom to the Company to fund certain international
operations have been recognized as intercompany loans. These intercompany loans
will be purchased and retired by the Company with borrowings from the Company's
credit agreement as part of its Reorganization Transactions as described in Note
1. Interest expense charged by Viacom approximated $4.1 million, $10.1 million
and $8.4 million for the years 1996, 1997 and 1998, respectively, and reflects
market-based rates.

Interest expense related to capital leases was $17.6 million, $18.7 million
and $18.5 million for the years ended December 31, 1996, 1997 and 1998,
respectively. See Note 12 for further information regarding capital lease
obligations.

On December 31, 1998, the Company declared a dividend in the form of an
interest-bearing (London Interbank Offered Rate "LIBOR" plus 1%, 6.12% at
December 31, 1998) promissory note to Viacom International Inc. in the principal
amount of $1.4 billion.

NOTE 8--VIACOM'S NET EQUITY INVESTMENT

Viacom funds the working capital requirements of the Company based upon a
centralized cash management system. The Viacom's net equity investment includes
accumulated equity as well as any non-interest-bearing payable and receivable
due to/from Viacom resulting from cash transfers and other intercompany
activity. Viacom generally does not charge the Company interest on intercompany
balances except for intercompany debt associated with certain foreign operations
(see Note 7).

NOTE 9--OTHER ITEMS, NET

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Write-down of investments (Note 4)................................... $ -- $ 27.1 $ 10.5
Other................................................................ -- .5 1.3
--------- --------- ---------
TOTAL OTHER ITEMS, NET............................................... $ -- $ 27.6 $ 11.8
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-18
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 10--RELATED PARTY TRANSACTIONS

Viacom provides the Company with certain general and administrative
services, including insurance, legal, treasury, financial and other corporate
functions. The allocation of expenses was generally based on actual costs
incurred and such costs were apportioned to the Company based upon the average
of certain specified ratios of revenues and net assets. The charges for such
services were $9.8 million (1996), $9.2 million (1997) and $12.5 million (1998).
Management believes that the methodologies used to allocate these charges are
reasonable, however, these allocations of costs and expenses do not necessarily
indicate the cash and expenses that would have been or will be incurred by the
Company on a stand-alone basis. Viacom also pays insurance premiums on behalf of
the Company for certain worker's compensation, property, general liability and
group insurance policies. Insurance expense related to these policies was $13.2
million (1996), $13.3 million (1997) and $16.0 million (1998) and is reflected
as a component of general and administrative expenses in the Consolidated
Statements of Operations. See Note 13 for pension plan and additional employee
benefit costs charged by Viacom to the Company. These services between Viacom
and the Company will continue after the Offering pursuant to the transition
services described below.

Blockbuster and Viacom will enter into a transition services agreement
whereby Viacom will provide the Company cash management, accounting, management
information systems, legal, financial and tax services as well as employee
benefit plan and insurance administration. These services may change upon
agreement between Viacom and the Company. The fee for these services will
approximate Viacom's cost and could be subject to adjustment. The Company has
agreed to pay or reimburse Viacom for any out-of-pocket payments, costs and
expenses associated with these services. The services agreement expires upon the
closing of a split-off or backup distribution.

The Company, through the normal course of business, is involved in
transactions with companies owned by or affiliated with Viacom or certain of its
board members. The Company purchases certain videocassettes for rental and sale
directly from Paramount Pictures Corporation. Total purchases were $7.6 million,
$77.5 million and $110.1 million for the years ended December 31, 1996, 1997 and
1998, respectively. The Company purchases certain home video games from Midway
Games Inc. Total amounts paid for purchases were $8.4 million, $12.5 million and
$19.1 million for the years ended December 31, 1996, 1997 and 1998,
respectively.

In conjunction with the sale by a related party of Blockbuster Music
("Music") to Wherehouse Entertainment, Inc. ("Wherehouse"), the Company assumed
certain liabilities as a result of the disposition of Blockbuster Music with a
corresponding reduction to Viacom's net equity investment. The nature of these
liabilities was predominantly for obligations related to closed Music stores
excluded from the sale and to a lesser extent certain transaction costs and
various costs to complete the transition of operations from Music to Wherehouse.
These liabilities at the date of assignment aggregated approximately $67 million
of which $43.7 million remains in current liabilities at December 31, 1998.

All other transactions with companies owned by or affiliated with Viacom did
not have a material impact on the financial position or results of operations
presented herein. See Note 7 regarding intercompany loans related to the
Company's international operations.

F-19
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 11--INCOME TAXES

The Company has been included in consolidated federal, state and local
income tax returns filed by Viacom. However, the tax benefit (expense) reflected
in the Consolidated Statements of Operations and deferred tax assets and
liabilities reflected in the Consolidated Balance Sheets have been prepared as
if such benefits were computed on a separate return basis. The current income
tax liabilities for the periods presented have been satisfied by Viacom. Any tax
losses generated by the Company have been utilized by Viacom to reduce its
consolidated taxable income. These amounts have been reflected in Viacom's net
equity investment in the Consolidated Balance Sheets.

The Company and Viacom will enter into a tax matters agreement which
provides that subsequent to the Offering the Company will continue to be
included in the Viacom U.S. federal consolidated income tax return and certain
consolidated, combined and unitary state tax returns. The tax matters agreement
requires the Company and Viacom to make payments to each other equal to the
amount of income taxes which would be paid by the Company, subject to certain
adjustments, if the Company had filed a stand-alone return for any taxable year
or portion thereof beginning after the date of this offering in which the
Company is included in the Viacom group. With respect to certain tax attributes
such as net operating losses, tax credits and capital losses, the Company will
have the right of reimbursement or offset, which will be determined based on the
extent such tax attributes could be utilized by the Company if it had not been
included in the Viacom group. The right to reimbursement or offset will arise
regardless of whether the Company is a member of the Viacom group at the time
the attributes could have been used.

The tax matters agreement also requires the Company, if so requested by
Viacom, to surrender certain tax losses of our subsidiaries that are resident in
the United Kingdom for 1998 and earlier years to Viacom's United Kingdom
Operations without any rights to compensation.

The tax matters agreement specifies that Viacom will indemnify the Company
against any and all tax adjustments to Viacom's consolidated federal and
consolidated, combined and unitary state tax returns from September 29, 1994
through the date of the Offering.

The net operating loss carryforwards at December 31, 1998 are primarily
attributable to domestic ($8.2 million) and foreign ($42.5 million) subsidiaries
of the Company. These losses are subject to certain restrictions and limitations
in accordance with domestic and foreign tax laws. A valuation allowance has been
provided primarily related to foreign loss carryforwards and certain foreign
restructuring reserves as the Company believes that it is more likely than not
that these tax benefits will not be realized. Of the total amount, $27.5 million
has no expiration date, $0.7 million expires in 1998, $1.1 million expires in
1999 and $21.4 million expires thereafter.

Losses accounted for under the equity method of accounting are shown net of
tax in the Consolidated Statements of Operations. Included in equity in loss of
affiliated companies, net of tax of $4.0 million (1996), $18.9 million (1997)
and $1.3 million (1998) are tax benefits of $0.5 million and $12.7 million for
1996 and 1997, respectively, and a tax provision of $0.2 million for 1998.

F-20
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 11--INCOME TAXES (CONTINUED)
Income (loss) before income taxes are attributable to the following
jurisdictions:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
United States.................................................. $ 283.3 $ (167.3) $ (313.6)
Foreign........................................................ (34.1) (102.0) (81.1)
--------- --------- ---------
$ 249.2 $ (269.3) $ (394.7)
--------- --------- ---------
--------- --------- ---------
</TABLE>

Components of the income tax benefit (expense) are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Current:
Federal........................................................ $ (119.1) $ 89.7 $ 51.2
State and local................................................ (19.4) 3.4 3.0
Foreign........................................................ (3.5) (1.6) (2.9)
--------- --------- ---------
(142.0) 91.5 51.3
Deferred......................................................... (25.4) (121.5) 8.1
--------- --------- ---------
$ (167.4) $ (30.0) $ 59.4
--------- --------- ---------
--------- --------- ---------
</TABLE>

A reconciliation of the U.S. federal statutory tax rate to the Company's
effective tax rate on income (loss) before income taxes is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Statutory U.S. tax provision (benefit) rate..................... 35.0% (35.0)% (35.0)%
Amortization of non-deductible goodwill......................... 24.1 23.5 15.6
State and local taxes, net of federal tax benefit............... 1.7 (1.6) (4.1)
Effect of foreign operations.................................... 7.1 23.9 8.6
Other, net...................................................... (.7) .3 (.1)
--- --------- ---------
Effective tax provision (benefit) rate.......................... 67.2% 11.1% (15.0)%
--- --------- ---------
--- --------- ---------
</TABLE>

F-21
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 11--INCOME TAXES (CONTINUED)
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Deferred tax assets:
Reserves and accrued liabilities........................................... $ 39.8 $ 38.6
Book-tax basis differences in rental library and other assets.............. -- 60.1
Book-tax basis differences in investments.................................. 17.9 10.7
Net operating loss carryforwards........................................... 50.2 50.7
--------- ---------
Total deferred tax assets.................................................... 107.9 160.1
Less: Valuation allowance.................................................... (67.1) (67.6)
--------- ---------
Net deferred tax assets...................................................... 40.8 92.5
--------- ---------
Deferred tax liabilities:
Deferred expenses.......................................................... -- (13.6)
Book-tax basis differences in rental library and other assets.............. (2.8) --
--------- ---------
Total deferred tax liabilities............................................... (2.8) (13.6)
--------- ---------
Total net deferred tax assets.............................................. $ 38.0 $ 78.9
--------- ---------
--------- ---------
</TABLE>

NOTE 12--COMMITMENTS AND CONTINGENCIES

The Company has long-term noncancelable lease commitments for various real
and personal property and office space which expire at various dates. Certain
leases contain renewal and escalation clauses. Generally, leases are five to ten
years with extended renewal options.

At December 31, 1998, minimum rental payments under noncancelable leases are
as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
----------- ---------
<S> <C> <C>
1999..................................................................... $ 369.9 $ 47.6
2000..................................................................... 319.3 39.3
2001..................................................................... 262.6 32.0
2002..................................................................... 210.8 28.0
2003..................................................................... 183.2 27.0
2004 and thereafter...................................................... 601.5 43.8
----------- ---------
Total minimum lease payments............................................. $ 1,947.3 217.7
-----------
-----------
Less amount representing interest........................................ (56.7)
---------
Present value of net minimum payments.................................... $ 161.0
---------
---------
</TABLE>

Rent expense was $269.8 million (1996), $355.3 million (1997) and $409.8
million (1998). Subtenant rental income was $5.0 million (1996), $4.8 million
(1997) and $5.6 million (1998). Future minimum lease payments have not been
reduced by future minimum subtenant rental income of $30.6 million. No
contingent rentals were paid during the three years ended December 31, 1998.

F-22
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 12--COMMITMENTS AND CONTINGENCIES (CONTINUED)

In October 1998, Music stores were sold to Wherehouse. Certain of the leases
transferred in connection with this sale had previously been guaranteed either
by Viacom or its affiliates. The remaining lease terms expire through various
dates through 2007. Blockbuster has agreed to indemnify Viacom with respect to
any amount paid under these guarantees. At the time of sale, the contingent
liability for base rent approximated $84 million, on an undiscounted basis, with
respect to these guarantees. The Company has not recognized any reserves related
to this contingent liability in the accompanying consolidated financial
statements. If Wherehouse defaults, related losses could materially affect
future operating income.

Pursuant to the tax matters agreement, the Company will generally be
responsible for, among other things, any taxes imposed on Viacom or its
Subsidiaries as a result of the split-off failing to qualify as a tax-free
transaction on account of any breach of the Company's representations or
agreements or any action or failure to act by the Company or any transaction
involving the Company's assets, stock or business (regardless of whether such
transaction is within its control) following the split-off.

The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of these known contingencies would not have a material adverse impact
on the Company's financial statements or liquidity. However, there can be no
assurances that future costs would not be material to results of operations or
liquidity of the Company for a particular future period. In addition, the
Company's estimates of future costs are subject to change as circumstances
change and additional information becomes available during the course of
litigation.

NOTE 13--PENSION PLANS AND OTHER EMPLOYEE BENEFITS

Viacom has a noncontributory defined benefit pension plan covering
substantially all of its employees, including the employees of the Company
during 1996, 1997 and 1998. Retirement benefits are based principally on years
of service and salary. Viacom also offers participation in a 401(k) savings plan
to the employees of the Company and has charged the Company for pension and
401(k) savings plan expenses of $4.6 million (1996), $4.6 million (1997) and
$5.3 million (1998).

Viacom also provides other employee benefits to the Company's employees,
including certain postemployment benefits, medical, dental, life and disability
insurance costs.

Management believes that the methodologies used to allocate pension and
other employee benefit charges to the Company are reasonable.

Viacom intends to spin off a Blockbuster Entertainment Investment Plan from
the Viacom Investment Plan, the provisions of which will mirror those of the
Viacom Investment Plan. The Company will continue to invest matching
contributions in Viacom's Class B common stock.

NOTE 14--ACQUISITIONS

During 1996, 1997 and 1998, the Company acquired or invested in several
businesses that own and operate videocassette rental stores. The aggregate
purchase price, consisting of cash consideration, for

F-23
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 14--ACQUISITIONS (CONTINUED)
these businesses approximated $154.4 million (1996), $79.0 million (1997) and
$34.2 million (1998) and was primarily allocated to video rental library,
property and equipment, and intangible assets.

All acquisitions were accounted for under the purchase method and,
accordingly, the operating results of the acquired businesses are included in
the consolidated results of operations of the Company since their respective
date of acquisition. Pro forma results of operations have not been presented due
to the immateriality of the acquisitions.

NOTE 15--EQUITY INVESTMENTS

The Company has a 50% interest in a joint venture located in Japan which
owns and operates videocassette rental stores. As discussed in Note 4, during
1997 the Company recognized a charge of $29.4 million (approximately $17.6
million net of tax) related to debt guarantees in recognition of the joint
venture's financial condition. The Company has also recognized its proportionate
share of this joint venture's net operating loss to the extent of its investment
which were as follows: $11.9 million (1996) and $12.1 million (1997). Through
December 31, 1998, the Company had fully satisfied its obligations related to
its Japan debt guarantees. As of December 31, 1997 and 1998, the Company had no
remaining net investment in its Japan joint venture and intends to dispose of
its interest in this joint venture in 1999.

NOTE 16--SUPPLEMENTAL CASH FLOW INFORMATION

Cash flows from operating activities included cash payments as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash payments for interest............................................................... $ 17.9 $ 20.4 $ 27.2

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:

Retail stores acquired under capitalized leases........................................ $ 40.6 $ 14.4 $ 3.8
</TABLE>

On December 31, 1998, the Company declared a cash dividend in the amount of
$1.4 billion payable to Viacom in the form of an interest-bearing promissory
note to Viacom International Inc.

All income tax obligations have been satisfied by Viacom as the Company has
been included in Viacom's consolidated tax return.

NOTE 17--OPERATIONS BY GEOGRAPHIC AREA

The Company operates in one industry segment: rental and retail sales of
videocassettes, video games and other entertainment related merchandise. The
principal geographic areas of the Company's operations are the United States and
Europe. Operations in Latin America, Australia, Canada and Asia are classified
in "International--all other".

F-24
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 17--OPERATIONS BY GEOGRAPHIC AREA (CONTINUED)
The following table shows revenues and long-lived assets by geographic area.
Transfers between geographic areas were not significant.

<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
United States................................................................ $ 2,427.9 $ 2,611.5 $ 3,090.1
Europe....................................................................... 259.1 355.9 427.9
International--all other..................................................... 255.1 346.2 375.4
--------- --------- ---------
Total revenues........................................................... $ 2,942.1 $ 3,313.6 $ 3,893.4
--------- --------- ---------
--------- --------- ---------
LONG-LIVED ASSETS(1):
United States(2)............................................................. $ 7,484.6 $ 7,395.5 $ 6,942.2
Europe....................................................................... 371.2 380.9 362.8
International--all other..................................................... 306.4 295.4 245.6
--------- --------- ---------
Total long-lived assets.................................................. $ 8,162.2 $ 8,071.8 $ 7,550.6
--------- --------- ---------
--------- --------- ---------
</TABLE>

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

(1) Includes all non-current assets, except deferred income taxes.

(2) Includes substantially all intangible assets.

NOTE 18--QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for 1997 and 1998 appears below:

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1997(1) QUARTER QUARTER QUARTER QUARTER TOTAL YEAR
- ------------------------------------------------------------ --------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Revenue..................................................... $ 823.8 $ 765.3 $ 817.7 $ 906.8 $ 3,313.6
Gross profit................................................ $ 538.3 $ 370.5 $ 504.5 $ 539.8 $ 1,953.1
Net income (loss)........................................... $ (19.3) $ (227.3) $ (37.8) $ (33.8) $ (318.2)
Net income (loss) per share:
Basic and diluted......................................... $ (0.13) $ (1.58) $ (0.26) $ (0.23) $ (2.21)

1998(2)
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue..................................................... $ 931.2 $ 890.0 $ 985.4 $ 1,086.8 $ 3,893.4
Gross profit................................................ $ 604.6 $ 100.2 $ 591.7 $ 640.5 $ 1,937.0
Net income (loss)........................................... $ 15.8 $ (318.0) $ (21.5) $ (12.9) $ (336.6)
Net income (loss) per share:
Basic and diluted......................................... $ 0.11 $ (2.21) $ (0.15) $ (0.09) $ (2.34)
</TABLE>

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

(1) The second quarter of 1997 included a pre-tax charge of approximately $250
million principally representing a reduction in the carrying value of excess
retail inventory and a reserve for the reorganization of international
operations and closing of under performing stores in domestic and
international markets as well as additional expenses associated with the
Company's corporate

F-25
<PAGE>
BLOCKBUSTER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(TABULAR DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS)

NOTE 18--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
relocation (see Note 4). In addition, the Company recognized a non-cash
charge of $27.1 million to write down certain non-strategic investments to
their estimated net realizable value.

(2) The second quarter of 1998 included a $424.3 million charge for a change in
estimate effected by a change in accounting principle for rental library.
During the fourth quarter of 1998, the Company revised its estimate of net
realizable value associated with the planned disposition of certain non-
strategic investments and recognized an additional provision of
approximately $10.5 million (See Notes 3 and 4).

F-26
<PAGE>
BLOCKBUSTER INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
<S> <C> <C>
1998 1999
--------- ---------
REVENUES:
Rental revenues......................................................................... $ 771.2 $ 952.0
Merchandise sales....................................................................... 141.3 143.0
Other revenues.......................................................................... 18.7 18.0
--------- ---------
931.2 1,113.0
--------- ---------

COST OF SALES:
Cost of rental revenues................................................................. 216.5 327.0
Cost of merchandise sold................................................................ 110.1 114.8
--------- ---------
326.6 441.8
--------- ---------
Gross profit............................................................................ 604.6 671.2

OPERATING EXPENSES:
General and administrative.............................................................. 410.7 472.1
Advertising............................................................................. 32.0 55.7
Depreciation............................................................................ 52.3 51.8
Amortization of intangibles............................................................. 42.6 43.0
--------- ---------
537.6 622.6
--------- ---------
Operating income.......................................................................... 67.0 48.6

Interest expense........................................................................ (6.9) (29.2)
Interest income......................................................................... 0.9 0.6
--------- ---------

Income before income taxes................................................................ 61.0 20.0
Provision for income taxes.............................................................. (45.2) (23.4)
--------- ---------
Net income (loss)......................................................................... $ 15.8 $ (3.4)
--------- ---------
--------- ---------
NET INCOME (LOSS) PER SHARE:
Basic and diluted....................................................................... $ 0.11 $ (0.02)
--------- ---------
--------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted....................................................................... 144 144
--------- ---------
--------- ---------
UNAUDITED PRO FORMA NET INCOME (LOSS) PER SHARE:
Basic and diluted....................................................................... $ 0.00
---------
---------
UNAUDITED PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted....................................................................... 175
---------
---------
</TABLE>

See notes to unaudited interim consolidated financial statements.

F-27
<PAGE>
BLOCKBUSTER INC.

INTERIM CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 99.0 $ 75.0
Receivables, less allowances of $22.7 (1998) and $20.4 (1999)............... 124.8 132.5
Merchandise inventories..................................................... 277.4 276.6
Prepaid assets.............................................................. 130.5 146.4
-------- --------------
Total current assets...................................................... 631.7 630.5

Rental library, net........................................................... 441.2 457.3
Deferred income taxes......................................................... 92.5 74.3
Property and equipment, net................................................... 995.3 1,005.3
Intangibles, net.............................................................. 6,055.6 6,074.3
Other assets.................................................................. 58.5 58.8
-------- --------------
$ 8,274.8 $ 8,300.5
-------- --------------
-------- --------------

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................................ $ 448.6 $ 350.8
Accrued expenses............................................................ 361.8 325.7
Current portion of capital lease obligations................................ 22.2 22.3
Deferred income taxes....................................................... 13.6 11.1
-------- --------------
Total current liabilities................................................. 846.2 709.9

Notes payable to Viacom....................................................... 1,576.4 1,690.4
Capital lease obligations, less current portion............................... 138.8 134.2
Other liabilities............................................................. 75.5 103.8
-------- --------------
2,636.9 2,638.3
Commitments and contingencies (Note 5)

Stockholder's equity:
Viacom's net equity investment.............................................. 5,695.8 5,723.8
Accumulated other comprehensive loss--foreign currency translation
adjustment................................................................ (57.9) (61.6)
-------- --------------
Total stockholder's equity................................................ 5,637.9 5,662.2
-------- --------------
$ 8,274.8 $ 8,300.5
-------- --------------
-------- --------------
</TABLE>

See notes to unaudited interim consolidated financial statements.

F-28
<PAGE>
BLOCKBUSTER INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
<S> <C> <C>
1998 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................................... $ 15.8 $ (3.4)
Adjustments to reconcile net income (loss) to net cash flow provided by operating
activities:
Depreciation and amortization......................................................... 279.4 266.2
Deferred income taxes................................................................. 60.4 35.1
Change in operating assets and liabilities:
Increase in receivables............................................................... (4.5) (7.9)
Decrease in merchandise inventories................................................... 7.3 2.5
Increase in prepaid and other assets.................................................. (29.8) (17.7)
Decrease in accounts payable.......................................................... (72.5) (96.4)
Decrease in accrued expenses and other liabilities.................................... (13.8) (11.9)
--------- ---------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES........................................... 242.3 166.5
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Rental library purchases................................................................ (194.9) (181.0)
Capital expenditures.................................................................... (38.5) (59.8)
Cash used for acquisitions.............................................................. (1.8) (85.0)
Investments in affiliated companies..................................................... 2.6 0.4
--------- ---------
NET CASH FLOW USED IN INVESTING ACTIVITIES................................................ (232.6) (325.4)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of credit facility....................................................... (46.6) --
Proceeds from term loan................................................................. 46.6 --
Net borrowings from (repayments of) notes due to Viacom................................. (26.8) 114.0
Capital lease payments.................................................................. (8.3) (9.4)
Advances from (repayments to) Viacom, net............................................... (30.8) 31.0
--------- ---------
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................. (65.9) 135.6
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................................................... (0.5) (0.7)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................. (56.7) (24.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................................ 129.6 99.0
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................................ $ 72.9 $ 75.0
--------- ---------
--------- ---------
</TABLE>

See notes to unaudited interim consolidated financial statements.

F-29
<PAGE>
BLOCKBUSTER INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1-BASIS OF PRESENTATION

The interim consolidated financial statements and related notes of the
business and operations of Blockbuster Inc. (collectively, the "Company" or
"Blockbuster"), which consists of various wholly owned entities owned directly
or indirectly by Viacom Inc., ("Viacom"), for the three months ended March 31,
1998 and 1999 and as of December 31, 1998 and March 31, 1999 have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and are unaudited. The interim consolidated financial statements are presented
on a carve-out basis and reflect the historical results of operations, financial
position and cash flows of the Company, including entities owned by Blockbuster
or purchased from affiliates of Viacom in the case of certain of its
international operations. In this context, no historical direct ownership
relationship existed among the various entities comprising Blockbuster;
accordingly, Viacom and its subsidiaries' net investment in Blockbuster is
included in the Stockholder's equity in the interim consolidated financial
statements.

In the opinion of management, the interim consolidated financial statements
include all recurring adjustments and normal accruals necessary to present
fairly the Company's consolidated financial position and its consolidated
results of operations for the dates and periods presented. Results for interim
periods are not necessarily indicative of the results to be expected during the
remainder of the current year or for any future period. All significant
intercompany accounts and transactions have been eliminated in consolidation.

These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto for the years
ended December 31, 1996, 1997 and 1998 presented herein.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) for the three months ended March 31 was as
follows:

<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
(IN MILLIONS)
Net income (loss).......................................................... $ 15.8 $ (3.4)
Currency translation adjustment............................................ 13.1 (3.7)
--------- ---------
Total comprehensive income (loss).......................................... $ 28.9 $ (7.1)
--------- ---------
--------- ---------
</TABLE>

NOTE 2-RELATED PARTY TRANSACTIONS

F-30
<PAGE>
BLOCKBUSTER INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE 2-RELATED PARTY TRANSACTIONS (CONTINUED)
the average of certain specified ratios of revenues and net assets. The charges
for such services for the three months ended March 31, 1998 and 1999 were $3.0
million and $3.1 million, respectively. Management believes that the
methodologies used to allocate these charges are reasonable; however, these
allocations of costs and expenses do not necessarily indicate the cash and
expenses that would have been or will be incurred by the Company on a
stand-alone basis. Viacom also pays insurance premiums on behalf of the Company
for certain worker's compensation, property, general liability, and group
insurance policies. Insurance expense related to these policies was $3.8 million
and $3.6 million for the three months ended March 31, 1998 and 1999,
respectively. Viacom also has a noncontributory defined benefit pension plan in
which the Company's employees are covered and provides other employee benefits,
including participation in a 401(k) savings plan. Viacom has charged the Company
$1.4 million and $1.2 million for pension and 401(k) savings plan expenses for
the three months ended March 31, 1998 and 1999, respectively.

Viacom generally does not charge the Company interest on intercompany
balances except for intercompany debt associated with certain foreign
operations, the notes associated with the $1.4 billion dividend payable to
Viacom discussed in Note 1 of the Consolidated Financial Statements and notes
associated with the acquisition of franchise operations discussed in Note 3
herein. Interest expense for the three months ended March 31, 1998 and 1999 was
$1.9 million and $24.8 million, respectively.

Blockbuster and Viacom will enter into a transition services agreement
whereby Viacom will provide the Company with cash management, accounting,
management information systems, legal, financial and tax services as well as
employee benefit plan and insurance administration. These services may change
upon agreement between Viacom and the Company. The fee for these services will
approximate Viacom's cost and could be subject to adjustment. The Company has
agreed to pay or reimburse Viacom for any out-of-pocket payments, costs and
expenses associated with these services. The services agreement expires upon the
closing of a split-off or backup distribution.

The Company, through the normal course of business, is involved in
transactions with companies owned by or affiliated with Viacom or certain of its
Board members. The Company purchases certain videocassettes for rental and sales
directly from Paramount Pictures Corporation. Total purchases were $0.2 million
and $14.0 million for the three months ended March 31, 1998 and 1999,
respectively. The Company also purchases certain home video games from Midway
Games, Inc. Total amounts paid for purchases were $3.9 million and $4.2 million
for the three months ended March 31, 1998 and 1999, respectively. These
transactions have been recognized in the interim consolidated financial
statements.

In conjunction with the sale by a related party of Blockbuster Music
("Music") to Wherehouse Entertainment, Inc. ("Wherehouse"), the Company assumed
certain liabilities as a result of the disposition of Blockbuster Music with a
corresponding reduction to Viacom's net equity investment. The nature of these
liabilities was predominantly for obligations related to closed Music stores
excluded from the sale and, to a lesser extent, certain transaction costs and
various costs to complete the transaction of operations from Music to
Wherehouse. These liabilities at the date of assignment aggregated approximately
$67 million of which $31.8 million remains in current liabilities at March 31,
1999.

All other transactions with companies owned by or affiliated with Viacom did
not have a material impact on the financial position or results of operations
presented herein.

F-31
<PAGE>
BLOCKBUSTER INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE 3-NOTES PAYABLE TO VIACOM

On December 31, 1998, the Company declared a cash dividend in the amount of
$1.4 billion payable to Viacom in the form of an interest-bearing promissory
note. On January 24, 1999, Blockbuster acquired 69 stores from a franchisee. The
purchase was funded with the proceeds of two notes payable to Viacom which
approximated $77 million. These notes bear interest at LIBOR plus 1% and will be
repaid with proceeds from the revolving credit agreement prior to the Company's
initial public offering as discussed in Note 1 of the consolidated financial
statements.

NOTE 4-NET INCOME (LOSS) PER SHARE

As discussed in Note 6, the Company was recapitalized to provide for Class A
common stock and Class B common stock. In accordance with SEC Staff Accounting
Bulletin No. 98, the capitalization of Class B common stock has been
retroactively reflected for the purposes of presenting historical net income
(loss) per share for periods prior to the Offering.

Unaudited pro forma basic and diluted net income (loss) per share include
the shares of both Class A and Class B common shares deemed to be outstanding as
of the date of the Offering. Unaudited pro forma basic and diluted net income
(loss) per share are the same since there are currently no Company options
outstanding. Pro forma basic and diluted net income (loss) per share have been
presented for the most recent annual and interim periods.

NOTE 5-COMMITMENTS AND CONTINGENCIES

In October 1998, Music stores were sold to Wherehouse. Certain of the leases
transferred in connection with this sale had previously been guaranteed either
by Viacom or its affiliates. The remaining lease terms expire on various dates
through 2007. Blockbuster has agreed to indemnify Viacom with respect to any
amount paid under these guarantees. At the time of the sale, the contingent
liability for base rent approximated $84 million, on an undiscounted basis, with
respect to these guarantees. The Company has not recognized any reserves related
to this contingent liability in the accompanying interim consolidated financial
statements. If Wherehouse defaults, related losses could materially affect
future operating income.

Pursuant to the tax matters agreement, the Company will generally be
responsible for, among other things, any taxes imposed by Viacom or its
Subsidiaries as a result of the split-off failing to qualify as a tax-free
transaction on account of any breach of the Company's representations or
agreements or any action or failure to act by the Company or any transactions
involving the Company's assets, stock or business (regardless of whether such
transaction is within its control) following the split-off.

On July 21, 1999, Ruben Loredo, doing business as Five Palms Video,
purporting to act as a class representative on behalf of himself and all others
similarly situated, filed a complaint in the District Court of Bexar County,
Texas, against Blockbuster. The plaintiff asserts that by entering into and
operating under the Company's revenue-sharing agreements, the Company has
attempted to and conspired with the studios to monopolize and restrain
competition in the market for the retail rental of videocassettes. The plaintiff
is seeking triple the amount of his alleged actual damages and triple the amount
of alleged actual damages of those similarly situated, under the Texas Free
Enterprise and Antitrust Act. The dollar amount that the plaintiff is alleging
as the actual damages to himself and those similarly situated is not set forth
in his complaint. The Company believes that the plaintiffs

F-32
<PAGE>
BLOCKBUSTER INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE 5-COMMITMENTS AND CONTINGENCIES (CONTINUED)

position is completely without merit, and the Company intends to vigorously
defend itself in the litigation.

In addition, another party, purporting to act as a class representative on
behalf of itself and all others similarly situated, filed a substantially
similar complaint in the United States District Court for the Western District
of Texas against Viacom and the studios' home video subsidiaries that have
operated under these revenue-sharing agreements with Blockbuster. This plaintiff
is seeking triple the amount of the alleged actual damages to itself and triple
the amount of alleged actual damages of those similarly situated, as well as
preliminary and permanent injunctive relief prohibiting any unlawful attempt or
conspiracy to monopolize the market for the retail rental of videocassettes. If
Viacom is required to pay any damage award as a result of this litigation,
Viacom may seek indemnification for its losses from the Company under the
release and indemnification agreement. See "Related Party Transactions--Release
and Indemnification Agreement."

The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of these known contingencies would not have a material adverse impact
on the Company's financial statements or liquidity. However, there can be no
assurances that future costs would not be material to results of operations or
liquidity of the Company for a particular period. In addition, the Company's
estimates of future costs are subject to change as circumstances change and
additional information becomes available during the course of litigation.

NOTE 6-SUBSEQUENT EVENTS

On June 21, 1999, Blockbuster entered into a $1.9 billion unsecured credit
agreement with a syndicate of banks. The credit agreement is comprised of a $700
million long-term revolving loan due July 1, 2004, a $600 million term loan due
in quarterly installments beginning April 1, 2002 and ending July 1, 2004, and a
$600 million short-term revolving loan due June 19, 2000. A varying commitment
fee is charged on the unused amount of the revolving loans. Interest rates are
based on the prime rate in the United States or LIBOR in the United Kingdom, at
the Company's option at the time of borrowing.

On June 23, 1999, the Company borrowed $1.6 billion, comprised of $400
million borrowed under the long-term revolving loan, $600 million borrowed under
the term loan, and $600 million under the short-term revolving loan. The
weighted average interest rates at June 30, 1999 for these borrowings are 6.9%,
6.9%, and 6.8%, respectively. The proceeds of the borrowings were used to pay
the principal and the accrued but unpaid interest related to the $1.4 billion
promissory note issued to Viacom as a dividend and the $77 million note issued
to Viacom for an acquisition of video stores, to fund a portion of the purchase
price to acquire certain international operations of the business from Viacom,
and to pay fees and expenses of approximately $15.4 million related to the
origination of the credit agreement.

The credit agreement contains covenants that limit the Company's ability to
pay dividends on or repurchase the Company's common stock or make other
distributions, other than dividends of $90 million, $115 million, $130 million,
$145 million and $160 million in the first five years following the completion
of this offering, respectively.

F-33
<PAGE>
BLOCKBUSTER INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE 6-SUBSEQUENT EVENTS (CONTINUED)
The credit agreement also requires compliance with financial covenants with
respect to a maximum leverage ratio and a minimum fixed charge ratio.

On or about June 23, 1999, the Company purchased certain of its
international operations from affiliates of Viacom. The total amount paid for
these international operations was $222 million. Approximately $65 million of
the purchase price was paid with borrowings under Company's new credit
agreement. The remainder, approximately $157 million, was paid with cash
contributed by Viacom.

On July 15, 1999, Blockbuster's Board of Directors adopted the 1999
Long-Term Management Incentive Plan (the "Plan") for the benefit of about 8,000
key employees. An aggregate of 25,000,000 shares of Class A common stock is
reserved for issuance under the Plan, which provides for the issuance of
stock-based incentive awards, including stock options to purchase shares of
Class A common stock, stock appreciation rights, restricted shares of Class A
common stock, restricted share units and phantom shares. In connection with its
initial public offering, Blockbuster has approved the grant of up to 11,600,000
options under the Plan to purchase shares of Class A common stock. The exercise
price of these options will be equal to the initial public offering price and
will generally vest over a five year period beginning on the first anniversary
of the date of grant.

The Company has entered into a promotional services and customer database
services and license agreement with MTV Networks, an affiliate of Viacom
("MTVN"). Under this agreement, for one year, the Company will provide certain
promotional and database services to MTVN and grant a license to MTVN to use our
customer database internally and/or to sublicense the database for internal use
to affiliates of MTVN. In return, MTVN will pay Blockbuster $4.5 million each
quarter for four quarters starting the third quarter of 1999 for a total of $18
million plus costs. In addition, during this one year period, MTVN will have an
option to pay the Company an additional $5 million to extend to perpetuity the
agreement regarding the customer database. If MTVN exercises this option, it
will provide Blockbuster, for internal use, with access to MTVN's Leisure Time
Study, a proprietary study of how consumers choose among the increasing number
of media, entertainment and other leisure time activities available to them. At
any time, the Company has the right to terminate this option or MTVN's perpetual
license for a fee of $25 million. In such event, our access to MTVN's Leisure
Time Study also terminates.

On August 3, 1999, the Company was recapitalized with Class A common stock
and Class B common stock of which 144,000,000 shares of Class B common stock
were simultaneously issued to Viacom International Inc. in exchange for 100
shares of common stock of the Company.

F-34
<PAGE>

PROSPECTUS COVER GATEFOLD
INSIDE BACK

{PHOTO OF TWO REWARDS
CARDS}

{PHOTO OF BLOCKBUSTER
ENTERTAINMENT AWARDS
PROMOTIONAL MATERIAL}

WWW.Blockbuster.Com

BLOCKBUSTER LOGO

Blockbuster name design
and related marks are
trademarks of Blockbuster
Inc.-C- 1999 Blockbuster
Inc. All rights reserved.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

31,000,000 Shares

Blockbuster Inc.

Class A Common Stock

[BLOCKBUSTER LOGO]

------

P R O S P E C T U S

, 1 9 9 9
---------

SALOMON SMITH BARNEY

BEAR, STEARNS & CO. INC.
------

CREDIT SUISSE FIRST BOSTON

GOLDMAN, SACHS & CO.

J.P. MORGAN & CO.
-------

BANC OF AMERICA SECURITIES LLC

ING BARINGS

PAINEWEBBER INCORPORATED

SCHRODER & CO. INC.

SG COWEN

WIT CAPITAL CORPORATION

Until , 1999, all dealers that buy, sell or trade our class A
common stock, whether or not they are participating in this offering, may be
required to deliver a prospectus. This is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
<PAGE>
P R O S P E C T U S
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED JULY 19, 1999

31,000,000 SHARES

[BLOCKBUSTER LOGO]

BLOCKBUSTER INC.

CLASS A COMMON STOCK

$ PER SHARE
---------

We are selling 31,000,000 shares of our class A common stock. Of the
31,000,000 shares of class A common stock that we are selling, 6,200,000 shares
are being offered outside the United States and Canada by a syndicate of
international underwriters and 24,800,000 shares are being offered concurrently
in the United States and Canada by a syndicate of U.S. underwriters.

In addition, the international underwriters may purchase up to 930,000
additional shares of our class A common stock under some circumstances. The U.S.
underwriters may also purchase up to 3,720,000 additional shares of our class A
common stock under some circumstances.

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

INVESTING IN THE CLASS A COMMON STOCK INVOLVES CERTAIN RISKS. WE REFER YOU
TO "RISK FACTORS" BEGINNING ON PAGE 10.

The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
--------------

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

JOINT BOOK-RUNNING MANAGERS
SALOMON SMITH BARNEY INTERNATIONAL BEAR, STEARNS INTERNATIONAL LIMITED
----------

CREDIT SUISSE FIRST BOSTON
GOLDMAN SACHS INTERNATIONAL
J.P. MORGAN SECURITIES LTD.
BANK OF AMERICA INTERNATIONAL LIMITED
ING BARINGS
PAINEWEBBER INTERNATIONAL
SCHRODERS
SG COWEN

, 1999
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

31,000,000 SHARES

BLOCKBUSTER INC.

CLASS A COMMON STOCK

[BLOCKBUSTER LOGO]

------

P R O S P E C T U S

, 1 9 9 9
---------

SALOMON SMITH BARNEY INTERNATIONAL
BEAR, STEARNS INTERNATIONAL LIMITED

------

CREDIT SUISSE FIRST BOSTON
GOLDMAN SACHS INTERNATIONAL
J.P. MORGAN SECURITIES LTD.
-------

BANK OF AMERICA INTERNATIONAL LIMITED
ING BARINGS
PAINEWEBBER INTERNATIONAL
SCHRODERS
SG COWEN

Until , 1999, all dealers that buy, sell or trade our class A common
stock, whether or not they are participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

<TABLE>
<S> <C>
SEC registration fee............................................ $ 178,393
NASD filing fee................................................. 30,500
NYSE listing fee................................................ 191,350
Blue Sky fees and expenses...................................... 5,000
Attorneys' fees and expenses.................................... 2,000,000
Accountants' fees and expenses.................................. 1,500,000
Transfer Agent's and Registrar's fees and expenses.............. 14,000
Printing and engraving fees..................................... 1,200,000
Miscellaneous................................................... 580,757
---------
Total....................................................... $5,700,000
---------
---------
</TABLE>

The amounts set forth above are estimates except for the SEC registration
fee and the NASD filing fee.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law provides, in summary,
that directors and officers of Delaware corporations are entitled, under certain
circumstances, to be indemnified against all expenses and liabilities, including
attorneys' fees, incurred by them as a result of suits brought against them in
their capacity as a director or officer, if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful; provided that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the Company,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, they are fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Any such indemnification may be made by the Company only as authorized
in each specific case upon a determination by the shareholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct.

The Company's Amended and Restated Certificate of Incorporation provides
that to the fullest extent permitted by the laws of the State of Delaware, as
the same may be amended from time to time, a director of the Company shall not
be personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director.

The Company's Certificate of Incorporation and By-Laws provide for
indemnification of its directors and officers to the fullest extent permitted by
Delaware law, as the same may be amended from time to time.

Section 8 of the Underwriting Agreement (Exhibit 1.1 hereto) contains
provisions for certain indemnification rights to the directors and officers of
the Registrant.

In addition, the Company maintains liability insurance for its directors and
officers.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Not applicable.

II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(A) EXHIBITS.

See the index to the exhibits.

(B) FINANCIAL STATEMENT SCHEDULES.

The schedules have been omitted because of the absence of circumstances
under which they could be required.

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding, is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933
shall be deemed to be part of this registration statement as of the
time it was declared effective.

(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.

The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the U.S. Underwriting Agreement and the
International Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.

II-2
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in Dallas,
Texas on August 3, 1999.

<TABLE>
<S> <C> <C>
BLOCKBUSTER INC.

BY: /S/ EDWARD B. STEAD
-----------------------------------------
Edward B. Stead
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
</TABLE>

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ ---------------------------
<C> <S>

* Chairman, President and
- ------------------------------ Chief Executive Officer
John F. Antioco

Executive Vice President,
* Chief Financial Officer
- ------------------------------ and Chief Accounting
Larry J. Zine Officer

* Director
- ------------------------------
Philippe P. Dauman

* Director
- ------------------------------
Thomas E. Dooley

* Director
- ------------------------------
Linda Griego

* Director
- ------------------------------
John L. Muething

* Director
- ------------------------------
Sumner M. Redstone
</TABLE>

<TABLE>
<S> <C> <C> <C>
*By: /s/ EDWARD B. STEAD
-------------------------
Edward B. Stead
ATTORNEY-IN-FACT

<CAPTION>
Dated: August 3, 1999

II-3
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>

1.1 Form of Underwriting Agreement.

3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant.

*3.2 Form of Bylaws of the Registrant.

*4.1 Specimen of the certificate representing the Class A Common Stock.

*5.1 Opinion of Shearman & Sterling as to the legality of the Class A Common Stock.

10.1 Form of Initial Public Offering and Split-Off Agreement among the Registrant, Viacom International
Inc. and Viacom Inc.

*10.2 Form of Release and Indemnification Agreement between the Registrant and Viacom Inc.

*10.3 Form of Transition Services Agreement between the Registrant and Viacom Inc.

*10.4 Form of Registration Rights Agreement between the Registrant and Viacom Inc.

*10.5 Form of Tax Matters Agreement between the Registrant and Viacom Inc.

*+10.6 Revenue-Sharing Agreement, dated as of November 21, 1997, between the Registrant and Buena Vista Home
Entertainment, Inc.

*+10.7 Revenue-Sharing Agreement, dated as of September 29, 1998, between the Registrant and Twentieth
Century Fox Home Entertainment, Inc.

*+10.8 Revenue-Sharing Agreement, dated as of August 25, 1998, between the Registrant and Columbia TriStar
Home Video, Inc..

*+10.9 Direct Revenue-Sharing Adjustable License Agreement, dated as of October 13, 1998, between the
Registrant and Universal Studios Home Video.

*+10.10 Revenue-Sharing Agreement, dated as of January 20, 1999, between the Registrant and Warner Home Video,
a division of Time Warner Entertainment Company, L.P.

*+10.11 Revenue-Sharing Term Sheet, dated as of July 29, 1999, between the Registrant and Paramount Home
Video.

*10.12 Employment Agreement between the Registrant and John F. Antioco, dated July 15, 1999.

*10.13 Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Jim
Notarnicola, dated June 1, 1998.

*10.14 Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Gary
Peterson, dated June 1, 1998.

*10.15 Amendment to the Employment Agreement between Blockbuster Entertainment Group, a business unit of
Viacom Inc., and Gary Peterson, dated December 1, 1998.

*10.16 Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and
Edward B. Stead, dated September 2, 1997.

*10.17 Amendment to the Employment Agreement between Blockbuster Entertainment Group, a business unit of
Viacom Inc., and Edward B. Stead, dated December 1, 1998.

*10.18 Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and
Nigel Travis, dated June 1, 1998.

*10.19 Amendment to the Employment Agreement between Blockbuster Entertainment Group, a business unit of
Viacom Inc., and Nigel Travis, dated December 1, 1998.

10.20 Blockbuster Inc. 1999 Long-Term Management Incentive Plan.

*10.21 Blockbuster Inc. Senior Executive Short-Term Incentive Plan.

*10.22 Credit Agreement, dated as of June 21, 1999, between the Registrant and the banks named therein.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
*10.23 Form of Promotional Services and Customer Database Services and License Agreement between the
Registrant and MTV Networks, a division of Viacom International Inc.

*21.1 List of Subsidiaries of the Registrant.

23.1 Consent of PricewaterhouseCoopers LLP.

*23.2 Consent of Shearman & Sterling (included in its opinion in Exhibit 5.1).

*24.1 Powers of Attorney with respect to John F. Antioco, Larry J. Zine, Philippe P. Dauman, Thomas E.
Dooley and Sumner M. Redstone.

*24.2 Powers of Attorney with respect to John L. Muething and Linda Griego.

*27.1 Financial Data Schedule (December 31, 1998).

*27.2 Financial Data Schedule (March 31, 1999).
</TABLE>

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

* Filed previously.

+ Exhibits for which Registrant is seeking confidential treatment for certain
portions. The confidential material in such exhibits have been redacted and
separately filed with the Securities and Exchange Commission.

<PAGE>

Exhibit 1.1

Blockbuster Inc.

24,800,000 Shares1
Class A Common Stock
($.01 par value)

U.S. Underwriting Agreement

New York, New York
August __, 1999

Salomon Smith Barney Inc.
Bear, Stearns & Co. Inc.
As U.S. Representatives of the several
U.S. Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013

Ladies and Gentlemen:

Blockbuster Inc., a corporation organized under the laws of
Delaware (the "Company"), proposes to sell to the several U.S. Underwriters, for
whom the U.S. Representatives are acting as representatives, 24,800,000 shares
of class A common stock, $.01 par value (the "Common Stock"), of the Company
(said shares to be issued and sold by the Company being hereinafter called the
"U.S. Underwritten Securities"). The Company also proposes to grant to the U.S.
Underwriters an option to purchase up to 3,720,000 additional shares of Common
Stock to cover over-allotments (the "U.S. Option Securities" and together with
the U.S. Underwritten Securities, the "U.S. Securities"). It is understood that
the Company is concurrently entering into the International Underwriting
Agreement providing for the sale by the Company of an aggregate of 6,200,000
shares of Common Stock (said shares to be sold by the Company pursuant to the
International Underwriting Agreement being hereinafter called the "International
Underwritten Securities") and providing for the grant to the International
Underwriters of an option to purchase from the Company up to 930,000 additional
shares of Common Stock (the "International Option Securities"). It is further
understood and agreed that

- ----------
1. Plus an option to purchase from the Company up to 3,720,000 additional
U.S. Securities to cover over-allotments.

<PAGE>
2

the International Underwriters and the U.S. Underwriters have entered into an
Agreement Between U.S. Underwriters and International Underwriters dated the
date hereof (the "Agreement Between U.S. Underwriters and International
Underwriters"), pursuant to which, among other things, the International
Underwriters may purchase from the U.S. Underwriters a portion of the U.S.
Securities to be sold pursuant to this U.S. Underwriting Agreement and the U.S.
Underwriters may purchase from the International Underwriters a portion of the
International Securities to be sold pursuant to the International Underwriting
Agreement. To the extent there are no additional U.S. Underwriters listed on
Schedule I other than you, the term U.S. Representatives as used in this U.S.
Underwriting Agreement shall mean you, as U.S. Underwriters, and the terms U.S.
Representatives and U.S. Underwriters shall mean either the singular or plural
as the context requires. The use of the neutral in this U.S. Underwriting
Agreement shall include the feminine and masculine wherever appropriate. Certain
terms used in this U.S. Underwriting Agreement are defined in Section 17 hereof.

As part of the offering contemplated by this Agreement,
Salomon Smith Barney Inc. has agreed to reserve out of the shares set forth
opposite its name on Schedule I to this Agreement, up to 1,550,000 shares, for
sale to certain employees, officers, and directors of the Company and other
parties associated with and designated by the Company (collectively,
"Participants"), as set forth in the Prospectuses under the heading
"Underwriting" (the "Directed Share Program"). The shares to be sold by Salomon
Smith Barney Inc. pursuant to the Directed Share Program (the "Directed Shares")
will be sold by Salomon Smith Barney Inc. pursuant to this Agreement at the
public offering price. Any Directed Shares not orally confirmed for purchase by
any Participants by the end of the business day on which this Agreement is
executed will be offered to the public by Salomon Smith Barney Inc. as set forth
in the Prospectuses.

1. REPRESENTATIONS AND WARRANTIES.

(i) The Company represents and warrants to, and agrees with,
each U.S. Underwriter as set forth below in this Section 1.

(a) The Company has prepared and filed with the Commission a
registration statement on Form S-1 (file number 333-77899), including
related Preliminary Prospectuses, for registration under the Act of the
offering and sale of the Securities. The Company has filed five
amendments thereto, including the related Preliminary Prospectuses,
each of which has previously been furnished to you. The Company will
next file with the Commission either (1) prior to the Effective Date of
such registration statement, a further amendment to such registration
statement (including the form of final prospectuses) or (2) after the
Effective Date of such registration statement, final prospectuses in
accordance with Rules 430A and 424(b). In the case of clause (2), the
Company has included in such registration statement, as amended at the
Effective Date, all information (other than Rule 430A Information)
required by the Act and the rules and regulations promulgated
thereunder to be included in such registration statement and the
Prospectuses. As filed, such amendment and form of final prospectuses,
or such final prospectuses, shall contain all Rule 430A Information,
together with all other such required information, and, except to the
extent the U.S. Representatives shall agree in

<PAGE>
3

writing to a modification, shall be in all substantive respects in the
form furnished to you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectuses) as the Company has advised you, prior
to the Execution Time, will be included or made therein.

It is understood that two forms of prospectuses are to be used
in connection with the offering and sale of the Securities: one form of
prospectus relating to the U.S. Securities, which are to be offered and
sold to United States and Canadian Persons, and one form of prospectus
relating to the International Securities, which are to be offered and
sold to persons other than United States and Canadian Persons. The U.S.
Prospectus and the International Prospectus are identical except for
the outside front cover page and the outside back cover page.

(b) On the Effective Date, the Registration Statement did or
will, and when the Prospectuses are first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined in this
U.S. Underwriting Agreement) and on any date on which Option Securities
are purchased, if such date is not the Closing Date (a "settlement
date"), each Prospectus (and any supplements thereto) will, comply in
all material respects with the applicable requirements of the Act and
the rules and regulations promulgated thereunder; on the Effective Date
and at the Execution Time, the Registration Statement did not or will
not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order
to make the statements therein not misleading; each Preliminary
Prospectus as of its date, did not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, each Prospectus, if not filed
pursuant to Rule 424(b), will not, and on the date of any filing
pursuant to Rule 424(b) and on the Closing Date and any settlement
date, each Prospectus (together with any supplement thereto) will not,
include any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
PROVIDED, HOWEVER, that the Company makes no representations or
warranties as to the information contained in or omitted from the
Registration Statement, or the Prospectuses (or any supplement thereto)
in reliance upon and in conformity with information furnished in
writing to the Company by or on behalf of any Underwriter through the
Representatives specifically for inclusion in the Registration
Statement or the Prospectuses (or any supplement thereto).

(c) Each of the Company and its subsidiaries (i) has been duly
incorporated and is validly existing as a corporation in good standing,
if applicable, under the laws of the jurisdiction in which it is
chartered or organized with full corporate power and authority to own
or lease, as the case may be, and to operate its properties and conduct
its business as described in the Prospectuses, except where the failure
to be duly incorporated, validly existing or in good

<PAGE>
4

standing, as applicable, individually and in the aggregate with all
other such failures to be duly incorporated, validly existing or in
good standing would not have a material adverse effect on the business,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, and (ii) is duly qualified to do
business as a foreign corporation and is in good standing under the
laws of each jurisdiction which requires such qualification, except
where the failure to be qualified or in good standing, as applicable,
individually and in the aggregate with all other such failures to be
qualified or in good standing would not have a material adverse effect
on the business, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole.

(d) All the outstanding shares of capital stock of each
subsidiary have been duly authorized and validly issued and are fully
paid and nonassessable, except where the failure to be duly authorized,
validly issued, fully paid and nonassessable, individually and in the
aggregate with all other such failures to be duly authorized, validly
issued, fully paid and nonassessable would not have a material adverse
effect on the business, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole and, except as
otherwise set forth in the Prospectuses, all outstanding shares of
capital stock of the subsidiaries are owned by the Company either
directly or through wholly owned subsidiaries free and clear of any
security interest or any other claims, liens or encumbrances, except
where the existence of any such security interest, claim, lien or
encumbrance, individually and in the aggregate with all other such
security interests, claims, liens and encumbrances would not have a
material adverse effect on the business, financial condition or results
of operations of the Company and its subsidiaries, taken as a whole.

(e) The Company's authorized equity capitalization is as set
forth in the Prospectuses; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectuses; the outstanding shares of common stock have been (and, on
the Closing Date, the outstanding shares of class B common stock will
be) duly authorized and validly issued and are (and, on the Closing
Date, the outstanding shares of class B common stock will be) fully
paid and nonassessable; the Securities being sold under the
Underwriting Agreements by the Company have been duly authorized, and,
when issued and delivered to and paid for by the U.S. Underwriters
pursuant to this U.S. Underwriting Agreement and by the International
Underwriters pursuant to the International Underwriting Agreement, will
be validly issued, fully paid and nonassessable; the certificates for
the Securities are in valid and sufficient form in accordance with all
applicable laws; except as set forth in the Prospectuses, the holders
of outstanding shares of capital stock of the Company are not entitled
to preemptive or other rights to subscribe for the Securities; and,
except as set forth in the Initial Public Offering and Split-Off
Agreement dated August __, 1999 among the Company, Viacom Inc. and
Viacom International Inc., no options, warrants or other rights to
purchase, agreements or other obligations to issue, or rights to
convert any obligations into or exchange any securities for, shares of
capital stock of or ownership interests in the Company are outstanding.

<PAGE>
5

(f) There is no franchise, contract or other document of a
character required to be described in the Registration Statement or
Prospectuses, or to be filed as an exhibit thereto, which is not
described or filed as required; and the statements in the Prospectuses
under the headings "Description of Capital Stock" and "Separation from
Viacom" fairly summarize, in all material respects, the matters therein
described.

(g) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Prospectuses, will not be an "investment
company" as defined in the Investment Company Act of 1940, as amended.

(h) No consent, approval, authorization, filing with or order
of any court or governmental agency or body is required in connection
with the transactions contemplated herein, except: (i) the registration
of the transactions contemplated herein under the Act; (ii) the
registration of the Common Stock under the Exchange Act; (iii) the
listing of the shares of Common Stock on the New York Stock Exchange;
and (iv) such consents, approvals, authorizations, filings or orders as
may be required under state securities or blue sky laws of any
jurisdiction, in connection with the purchase and distribution of the
Securities by the Underwriters in the manner contemplated herein and in
the Prospectuses.

(i) Neither the issue and sale of the Securities nor the
consummation of any of the other transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, result in a
breach or violation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its subsidiaries
pursuant to: (i) the certificate of incorporation or by-laws (or other
similar organization instruments with different names) of the Company
or any of its subsidiaries, (ii) the terms of any indenture, contract,
lease, mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which the
Company or any of its subsidiaries is a party or bound or to which its
or their property is subject, or (iii) any statute, law, rule,
regulation, judgment, order or decree applicable to the Company or any
of its subsidiaries of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its subsidiaries or any of its
or their properties, except, with respect to clauses (ii) and (iii)
above, for such conflicts, breaches, violations or impositions that,
individually and in the aggregate with all other such conflicts,
breaches, violations and impositions, would not have a material adverse
effect on the business, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole.

(j) Except as set forth in the Registration Rights Agreement
dated as of August __, 1999 between the Company and Viacom Inc., no
holders of securities of the Company have rights to the registration of
such securities under the Registration Statement or have rights to
require the Company to file a registration statement under the Act with
respect to such securities.

<PAGE>
6

(k) The combined historical financial statements and schedules
of the Company and its combined subsidiaries included in the
Prospectuses and the Registration Statement present fairly in all
material respects the financial condition, results of operations and
cash flows of the Company as of the dates and for the periods
indicated, comply as to form in all material respects with the
applicable accounting requirements of the Act and have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved (except as otherwise
noted therein). The selected combined historical and pro forma
financial and operating data set forth under the caption "Selected
Combined Historical and Pro Forma Financial and Operating Data" in the
Prospectuses and Registration Statement fairly present, on the basis
stated in the Prospectuses and the Registration Statement, the
information included therein.

(l) Other than as set forth in the Prospectuses, no actions,
suits or proceedings by or before any court or governmental agency,
authority or body or any arbitrator involving the Company or any of its
subsidiaries or its or their property are pending or, to the Company's
knowledge, threatened that (i) could reasonably be expected to have a
material adverse effect on the performance of this Agreement or the
consummation of any of the transactions contemplated hereby or (ii)
could reasonably be expected to have a material adverse effect on the
business, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole.

(m) Each of the Company and each of its subsidiaries owns or
leases all such properties as are necessary to the conduct of its
operations as presently conducted; has good title to all real and
personal property owned by them, in each case free and clear of all
liens, encumbrances and defects, except such as are described in the
Prospectuses, except where the existence of any such lien, encumbrance
or defect, individually and in the aggregate with all other such liens,
encumbrances and defects would not have a material adverse effect on
the business, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole; and holds valid,
subsisting and enforceable leases or subleases for any real property
and buildings held under lease by the Company and its subsidiaries,
except where the failure to hold a valid, subsisting and enforceable
lease or sublease, individually and in the aggregate with all other
such failures, would not have a material adverse effect on the
business, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole.

(n) Neither the Company nor any subsidiary is in violation or
default of (i) any provision of its charter or bylaws, (ii) the terms
of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which it is a party or bound or to which its
property is subject, or (iii) any statute, law, rule, regulation,
judgment, order or decree of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or such subsidiary or any of its
properties, as applicable, except, in the case of clauses (ii) and
(iii) above, for such violations or defaults which, individually and in
the aggregate with all other such

<PAGE>
7

violations and defaults, would not have a material adverse effect on
the business, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole.

(o) PricewaterhouseCoopers LLP, who have certified certain
financial statements of the Company and its combined subsidiaries and
delivered their report with respect to the audited combined financial
statements and schedules included in the Prospectuses, are independent
public accountants with respect to the Company within the meaning of
the Act and the applicable published rules and regulations of the
Commission thereunder.

(p) Except as set forth in the Prospectuses (exclusive of any
supplement thereto), the Company and its subsidiaries possess all
licenses, certificates, permits and other authorizations issued by the
appropriate federal, state or foreign regulatory authorities necessary
to conduct their respective businesses, and neither the Company nor any
such subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse
effect on the business, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole.

(q) The Company has not taken, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.

(r) The Company and its subsidiaries (i) are, to the Company's
knowledge, in compliance with any and all applicable foreign, federal,
state and local laws and regulations relating to the protection of
human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental
Laws"), (ii) have, to the Company's knowledge, received and are in
compliance with all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their respective
businesses and (iii) have not received notice of any actual or
potential liability for the investigation or remediation of any
disposal or release of hazardous or toxic substances or wastes,
pollutants or contaminants, except where such non-compliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals, or liability would not, individually or in the
aggregate, have a material adverse effect on the business, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole. Neither the Company nor any of the subsidiaries has
been named as a "potentially responsible party" under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as
amended.

(s) The Company and its subsidiaries do not maintain any
"plan" (as defined in Section 3(3) of the United States Retirement
Security Act of 1974 ("ERISA") and the

<PAGE>
8

regulations and published interpretations thereunder) that is subject
to Section 302 of ERISA or Title IV of ERISA, and any other "plan"
which the Company and its subsidiaries maintains and sponsors is in
compliance in all material respects with the presently applicable
provisions of ERISA and such regulations and published interpretations.
The Company and its subsidiaries have not incurred any unpaid liability
to the Pension Benefit Guaranty Corporation (other than for the payment
of premiums in the ordinary course) with respect to any such "plan"
ever maintained by the Company, any of its subsidiaries or any entity
treated as a single employer with either the Company or any of its
subsidiaries under Section 414(b), (c), or (m) of the Internal Revenue
Code of 1986, as amended.

(t) The Company and its subsidiaries own, possess, license or
have other rights to use, on reasonable terms, all trade and service
marks, trade and service mark registrations, trade names, copyrights,
licenses, inventions, trade secrets, technology, know-how and other
intellectual property (collectively, the "Intellectual Property")
necessary for the conduct of the Company's business as now conducted or
as proposed in the Prospectuses to be conducted. Except as set forth in
the Prospectuses under the caption "Business--Intellectual Property,"
(a) there are, to the Company's knowledge, no rights of third parties
to any such Intellectual Property; (b) there is, to the Company's
knowledge, no infringement by third parties of any such Intellectual
Property; (c) there is no pending or, to the Company's knowledge,
threatened action, suit, proceeding or claim by others challenging the
Company's or any of its subsidiaries' rights in or to any such
Intellectual Property, and the Company is unaware of any facts which
would form a reasonable basis for any such claim; (d) there is no
pending or, to the Company's knowledge, threatened action, suit,
proceeding or claim by others challenging the validity or scope of any
such Intellectual Property, and the Company is unaware of any facts
which would form a reasonable basis for any such claim; and (e) there
is no pending or, to the Company's knowledge, threatened action, suit,
proceeding or claim by others that the Company or any of its
subsidiaries infringes or otherwise violates any patent, trademark,
copyright, trade secret or other proprietary rights of others, and the
Company is unaware of any other fact which would form a reasonable
basis for any such claim; in each case, other than such rights
infringements, actions, suits, proceedings or claims that, individually
and in the aggregate with all other such rights, infringements,
actions, suits, proceedings or claims, would not have a material
adverse effect on the business, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole.

(u) The year 2000 statements in the Prospectuses under the
headings "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" fairly summarize, in all
material respects, the matters therein described.

(v) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
business, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Prospectuses (exclusive of any amendment thereof or supplement thereto
subsequent to the date of this Agreement).

<PAGE>
9

Furthermore, the Company represents and warrants to Salomon
Smith Barney Inc. that (i) the Registration Statement, the Prospectuses and any
Preliminary Prospectuses comply, and any further amendments or supplements
thereto will comply, in all material respects with any applicable laws or
regulations of foreign jurisdictions in which the Prospectuses or any
Preliminary Prospectuses, as amended or supplemented, if applicable, are
distributed in connection with the Directed Share Program, and (ii) no
authorization, approval, consent, license, order, registration or qualification
of or with any government, governmental instrumentality or court, other than
such as have been obtained, is necessary under the securities laws and
regulations of foreign jurisdictions in which the Directed Shares are offered
outside the United States.

The Company has not offered, or caused the Underwriters to
offer, shares to any person pursuant to the Directed Share Program with the
specific intent to unlawfully influence (i) a customer or supplier of the
Company to alter the customer's or supplier's level or type of business with the
Company, or (ii) a trade journalist or publication to write or publish favorable
information about the Company or its products.

Any certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters in connection
with the offering of the Securities shall be deemed a representation and
warranty by the Company, as to matters covered thereby, to each U.S.
Underwriter.

2. PURCHASE AND SALE. (a) Subject to the terms and conditions
and in reliance upon the representations and warranties in this U.S.
Underwriting Agreement set forth, the Company agrees to sell to each U.S.
Underwriter, and each U.S. Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $ ___________ per share, the
amount of the U.S. Underwritten Securities set forth opposite such U.S.
Underwriter's name in Schedule I to this U.S. Underwriting Agreement.

(b) Subject to the terms and conditions and in reliance upon
the representations and warranties set forth in this U.S. Underwriting
Agreement, the Company hereby grants an option to the several U.S. Underwriters
to purchase, severally and not jointly, up to 3,720,000 U.S. Option Securities
at the same purchase price per share as the U.S. Underwriters shall pay for the
U.S. Underwritten Securities. Said option may be exercised only to cover
over-allotments in the sale of the U.S. Underwritten Securities by the U.S.
Underwriters. Said option may be exercised in whole or in part at any time (but
not more than once with respect to the U.S. Underwritten Securities) on or
before the 30th day after the date of the U.S. Prospectus upon written or
telegraphic notice by the U.S. Representatives to the Company setting forth the
number of shares of the U.S. Option Securities as to which the several U.S.
Underwriters are exercising the option and the settlement date. The number of
U.S. Option Securities to be purchased by each U.S. Underwriter shall be the
same percentage of the total number of shares of the U.S. Option Securities to
be purchased by the several U.S. Underwriters as such U.S. Underwriter is
purchasing of the U.S. Underwritten Securities, subject to such adjustments as
you in your absolute discretion shall make to eliminate any fractional shares.

<PAGE>
10

3. DELIVERY AND PAYMENT. Delivery of and payment for the U.S.
Underwritten Securities and the U.S. Option Securities (if the option provided
for in Section 2(b) hereof shall have been exercised on or before the third
Business Day prior to the Closing Date) shall be made at 10:00 AM, New York City
time, on August __, 1999, or at such time on such later date not more than three
Business Days after the foregoing date as the U.S. Representatives and the
International Representatives shall designate, which date and time may be
postponed by agreement among the U.S. Representatives, the International
Representatives and the Company or as provided in Section 9 hereof (such date
and time of delivery and payment for the U.S. Securities being called in this
U.S. Underwriting Agreement, the "Closing Date"). Delivery of the U.S.
Securities shall be made to the U.S. Representatives for the respective accounts
of the several U.S. Underwriters against payment by the several U.S.
Underwriters through the U.S. Representatives of the respective aggregate
purchase prices of the U.S. Securities being sold by the Company to or upon the
order of the Company by wire transfer payable in immediately available funds to
the accounts specified by the Company. Delivery of the U.S. Underwritten
Securities and the U.S. Option Securities shall be made through the facilities
of The Depository Trust Company unless the U.S. Representatives shall otherwise
instruct.

If the option provided for in Section 2(b) hereof is exercised
after the third Business Day prior to the Closing Date, the Company will deliver
certificates for the U.S. Option Securities (at the expense of the Company) to
the U.S. Representatives, at 388 Greenwich Street, New York, New York, on the
date specified by the U.S. Representatives (which shall be within three Business
Days after exercise of said option) in such names and denominations as the U.S.
Representatives shall have requested for the respective accounts of the several
U.S. Underwriters, against payment by the several U.S. Underwriters through the
U.S. Representatives of the purchase price thereof to or upon the order of the
Company by wire transfer payable in immediately available funds to the accounts
specified by the Company. If settlement for the U.S. Option Securities occurs
after the Closing Date, the Company will deliver to the U.S. Representatives on
the settlement date for the U.S. Option Securities, and the obligation of the
U.S. Underwriters to purchase the U.S. Option Securities shall be conditioned
upon receipt of, supplemental opinions, certificates and letters confirming as
of such date the opinions, certificates and letters delivered on the Closing
Date pursuant to Section 6 hereof.

It is understood and agreed that the Closing Date shall occur
simultaneously with the "Closing Date" under the International Underwriting
Agreement, and that the settlement date, if any, shall occur simultaneously with
the "settlement date" under the International Underwriting Agreement.

<PAGE>
11

4. OFFERING BY UNDERWRITERS. It is understood that the several
U.S. Underwriters propose to offer the U.S. Securities for sale to the public as
set forth in the U.S. Prospectus.

5. AGREEMENTS.

(i) The Company agrees with the several U.S. Underwriters
that:

(a) The Company will use its reasonable best efforts to cause
the Registration Statement, if not effective at the Execution Time, and
any amendment thereof, to become effective. Prior to the termination of
the offering of the Securities, the Company will not file any amendment
of the Registration Statement or supplement to the Prospectuses or any
Rule 462(b) Registration Statement unless the Company has furnished you
a copy for your review prior to filing and will not file any such
proposed amendment or supplement to which you reasonably object.
Subject to the foregoing sentence, if the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the
Prospectuses is otherwise required under Rule 424(b), the Company will
cause the Prospectuses, properly completed, and any supplement thereto
to be filed with the Commission pursuant to the applicable paragraph of
Rule 424(b) within the time period prescribed and will provide evidence
satisfactory to the U.S. Representatives of such timely filing. The
Company will promptly advise the U.S. Representatives (1) when the
Registration Statement, if not effective at the Execution Time, shall
have become effective, (2) when the Prospectuses, and any supplement
thereto, shall have been filed (if required) with the Commission
pursuant to Rule 424(b) or when any Rule 462(b) Registration Statement
shall have been filed with the Commission, (3) when, prior to
termination of the offering of the Securities, any amendment to the
Registration Statement shall have been filed or become effective, (4)
of any request by the Commission or its staff for any amendment of the
Registration Statement, or any Rule 462(b) Registration Statement, or
for any supplement to the Prospectuses or for any additional
information, (5) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (6)
of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the institution or threatening of any proceeding for
such purpose. The Company will use its reasonable best efforts to
prevent the issuance of any such stop order or the suspension of any
such qualification and, if issued, to obtain as soon as possible the
withdrawal thereof.

(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which either of the Prospectuses as then supplemented
would include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading,
or if it shall be necessary to amend the Registration Statement or
supplement either of the Prospectuses to comply with the Act or the
rules and regulations promulgated thereunder, the Company promptly

<PAGE>
12

will (1) notify the U.S. Representatives of any such event; (2) prepare
and file with the Commission, subject to the second sentence of
paragraph (i)(a) of this Section 5, an amendment or supplement which
will correct such statement or omission or effect such compliance; and
(3) supply any supplemented Prospectuses to you in such quantities as
you may reasonably request.

(c) As soon as practicable, the Company will make generally
available to its security holders and to the U.S. Representatives an
earnings statement or statements of the Company and its subsidiaries
which will satisfy the provisions of last paragraph of Section 11(a) of
the Act and Rule 158 under the Act.

(d) The Company will furnish one signed copy of the
Registration Statement (including exhibits thereto) to each of the U.S.
Representatives and to counsel for the U.S. Underwriters and will
furnish to each other U.S. Underwriter a copy of the Registration
Statement (without exhibits thereto). So long as delivery of a
prospectus by a U.S. Underwriter or dealer may be required by the Act,
the Company will furnish as many copies of each U.S. Preliminary
Prospectus and the U.S. Prospectus and any supplement thereto as the
U.S. Representatives may reasonably request.

(e) The Company will use its reasonable efforts to arrange, if
necessary, for the qualification of the Securities for sale under the
applicable securities laws of such states and other jurisdictions as
the U.S. Representatives may designate and will maintain such
qualifications in effect so long as required for the distribution of
the U.S. Securities; provided that in no event shall the Company be
obligated to qualify to do business, or to subject itself to taxation
in respect thereof, in any jurisdiction where it is not now so
qualified or taxed, or to take any action that would subject it to
service of process in suits, other than those arising out of the
offering or sale of the Securities, in any jurisdiction where it is not
now so subject.

(f) Except as expressly contemplated hereby, the Company will
not, without the prior written consent of Salomon Smith Barney Inc.,
offer, sell, contract to sell, pledge, or otherwise dispose of, (or
enter into any transaction which is designed to, or might reasonably be
expected to, result in the disposition (whether by actual disposition
or effective economic disposition due to cash settlement or otherwise)
by the Company or any affiliate of the Company or any person in privity
with the Company or any affiliate of the Company) directly or
indirectly, including the filing (or participation in the filing) of a
registration statement with the Commission in respect of, or establish
or increase a put equivalent position or liquidate or decrease a call
equivalent position within the meaning of Section 16 of the Exchange
Act, any other shares of Common Stock or any securities convertible
into, or exercisable, or exchangeable for, shares of Common Stock; or
publicly announce an intention to effect any such transaction, for a
period of 180 days after the date of the U.S. Underwriting Agreement,
provided, however, that (i) the Company may issue and sell Common Stock
pursuant to any employee stock option plan, stock ownership plan or
dividend reinvestment plan of the Company described in the
Prospectuses, and may make public announcements with respect to the
transactions

<PAGE>
13

permitted by this clause (i); (ii) the Company may issue its class B
common stock to Viacom International, Inc. or its affiliates in
satisfaction of the Company's obligations under the Initial Public
Offering and Split-off Agreement dated August __, 1999 among the
Company, Viacom Inc. and Viacom International Inc.; and (iii) the
Company may issue and sell Common Stock in connection with the merger
with or acquisition of another corporation or entity or the acquisition
of the assets or properties of any such corporation or entity, and may
make public announcements with respect to the transactions permitted by
this clause (iii), so long as the recipient of the Common Stock agrees
prior to the consummation of any such transaction pursuant to an
instrument in form and substance reasonably satisfactory to Salomon
Smith Barney Inc. (which instrument will be deemed satisfactory if it
is substantially similar to the provisions of this Section 5(f)) to be
bound by the provisions of this Section 5(f) insofar as they relate to
the shares of Common Stock or other securities acquired.

(g) The Company will not take, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.

(h) The Company agrees to pay the costs and expenses relating
to the following matters: (i) the preparation, printing or reproduction
and filing with the Commission of the Registration Statement (including
financial statements and exhibits thereto), each Preliminary
Prospectus, each Prospectus, and each amendment or supplement to any of
them; (ii) the printing (or reproduction) and delivery (including
postage, air freight charges and charges for counting and packaging) of
such copies of the Registration Statement, each Preliminary Prospectus,
each Prospectus, and all amendments or supplements to any of them, as
may, in each case, be reasonably requested for use in connection with
the offering and sale of the Securities; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the
Securities, including any stamp or transfer taxes in connection with
the original issuance and sale of the Securities; (iv) the word
processing and printing (or reproduction) and delivery of this U.S.
Underwriting Agreement and the International Underwriting Agreement,
any blue sky memorandum and all other agreements or documents printed
(or reproduced) and delivered in connection with the offering of the
Securities; (v) the registration of the Securities under the Exchange
Act and the listing of the Securities on the New York Stock Exchange;
(vi) any registration or qualification of the Securities for offer and
sale under the securities or blue sky laws of the several states
(including filing fees and the reasonable fees and expenses of counsel
for the Underwriters relating to such registration and qualification);
(vii) any filings required to be made with the National Association of
Securities Dealers, Inc. (the "NASD")(including filing fees, the
reasonable fees and expenses of counsel for the Underwriters relating
to such filings and any counsel fees incurred on behalf of or
disbursements by Bear, Stearns & Co. Inc. in its capacity as "qualified
independent underwriter"); (viii) the transportation and other expenses
incurred by or on behalf of Company representatives in connection with
presentations to prospective purchasers of the Securities, it being
understood that the Company will pay

<PAGE>
14

all costs and expenses incident to any chartered air travel less the
commercial airline coach class fares to and from the cities in which
such presentations were made that would otherwise have been incurred by
the individuals representing the U.S. Underwriters who actually
traveled with the Company to and from such cities; (ix) the fees and
expenses of the Company's accountants and the fees and expenses of
counsel (including local and special counsel) for the Company; and (x)
all other costs and expenses incident to the performance by the Company
of their obligations under the Underwriting Agreements.

(i) The Company agrees to use the net proceeds received by it
from the sale of the Securities pursuant to this Agreement in the
manner specified in the Prospectuses under the heading "Use of
Proceeds".

(j) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the NASD or the NASD rules for sale, transfer, assignment,
pledge or hypothecation for a period of three months following the date
of the effectiveness of the Registration Statement. Salomon Smith
Barney Inc. will notify the Company as to which Participants will need
to be so restricted. The Company will direct the transfer restrictions
during such period of time.

(k) The Company agrees to pay all fees and disbursements of
counsel incurred by the Underwriters in connection with the Directed
Share Program, up to $100,000 in the aggregate, and all stamp duties,
similar taxes or duties or other taxes, if any, incurred by the
Underwriters in connection with the Directed Share Program.

Furthermore, the Company covenants with Salomon Smith Barney
Inc. that the Company will comply with all applicable securities and other
applicable laws, rules and regulations in each foreign jurisdiction in which the
Directed Shares are offered in connection with the Directed Share Program.

(ii) Each U.S. Underwriter agrees that (1) it is not
purchasing any of the U.S. Securities for the account of anyone other than a
United States or Canadian Person, (2) it has not offered or sold, and will not
offer or sell, directly or indirectly, any of the U.S. Securities or distribute
any U.S. Prospectus to any person outside the United States or Canada, or to
anyone other than a United States or Canadian Person, and (3) any dealer to whom
it may sell any of the U.S. Securities will represent that it is not purchasing
for the account of anyone other than a United States or Canadian Person and
agree that it will not offer or resell, directly or indirectly, any of the U.S.
Securities outside the United States or Canada, or to anyone other than a United
States or Canadian Person or to any other dealer who does not so represent and
agree; PROVIDED, HOWEVER, that the foregoing shall not restrict (A) purchases
and sales between the International Underwriters on the one hand and the U.S.
Underwriters on the other hand pursuant to the Agreement Between U.S.
Underwriters and International Underwriters, (B) stabilization transactions
contemplated under the Agreement Between U.S. Underwriters and International
Underwriters, conducted through Salomon Smith Barney Inc. (or through the U.S.
Representatives and International Representatives) as part of the distribution
of the Securities, and (C) sales to or through (or distributions of U.S.
Prospectuses or U.S. Preliminary

<PAGE>
15

Prospectuses to) United States or Canadian Persons who are investment
advisors, or who otherwise exercise investment discretion, and who are
purchasing for the account of anyone other than a United States or
Canadian Person.

(iii) The agreements of the U.S. Underwriters set forth in
paragraph (ii) of this Section 5 shall terminate upon the earlier of the
following events:

(a) a mutual agreement of the U.S. Representatives and the
International Representatives to terminate the selling restrictions set
forth in paragraph (ii) of this Section 5 and in Section 5(ii) of the
International Underwriting Agreement; or

(b) the expiration of a period of 30 days after the Closing
Date, unless (A) the U.S. Representatives shall have given notice to
the Company and the International Representatives that the distribution
of the U.S. Securities by the U.S. Underwriters has not yet been
completed, or (B) the International Representatives shall have given
notice to the Company and the U.S. Representatives that the
distribution of the International Securities by the International
Underwriters has not yet been completed. If such notice by the U.S.
Representatives or the International Representatives is given, the
agreements set forth in such paragraph (ii) shall survive until the
earlier of (1) the event referred to in clause (a) of this subsection
(iii) or (2) the expiration of an additional period of 30 days from the
date of any such notice.

6. CONDITIONS TO THE OBLIGATIONS OF THE U.S. UNDERWRITERS. The
obligations of the U.S. Underwriters to purchase the U.S. Underwritten
Securities and the U.S. Option Securities, as the case may be, shall be subject
to the accuracy of the representations and warranties on the part of the Company
contained in this U.S. Underwriting Agreement as of the Execution Time, the
Closing Date and any settlement date pursuant to Section 3 hereof, to the
accuracy of the statements of the Company made in any certificates pursuant to
the provisions hereof, to the performance by the Company of its obligations
under this U.S. Underwriting Agreement and to the following additional
conditions:

(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the U.S. Representatives and the
International Representatives agree in writing to a later time, the Registration
Statement will become effective not later than (i) 6:00 PM New York City time on
the date of determination of the public offering price, if such determination
occurred at or prior to 3:00 PM New York City time on such date or (ii) 9:30 AM
on the Business Day following the day on which the public offering price was
determined, if such determination occurred after 3:00 PM New York City time on
such date; if filing of either of the Prospectuses, or any supplement thereto,
is required pursuant to Rule 424(b), the Prospectuses, and any such supplement,
will be filed in the manner and within the time period required by Rule 424(b);
and no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or threatened.

<PAGE>
16

(b) (1) The Company shall have requested and caused Shearman &
Sterling, counsel for the Company, to have furnished to the Representatives
their opinion, dated the Closing Date and addressed to the Representatives, to
the effect that:

(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with full corporate power and authority to own or lease,
as the case may be, and to operate its properties and conduct its
business as described in the Prospectuses;

(ii) the outstanding shares of the Company's capital stock
have been duly authorized and validly issued and are fully paid and
nonassessable;

(iii) the Securities being sold under the Underwriting
Agreements by the Company have been duly authorized, and, when issued
and delivered to and paid for by the Underwriters pursuant to the
Underwriting Agreements, will be validly issued, fully paid and
nonassessable; and, except as set forth in the Prospectuses, to the
knowledge of such counsel, the holders of outstanding shares of capital
stock of the Company are not entitled to preemptive or other rights to
subscribe for the Securities;

(iv) the statements in the Prospectuses under the headings
"Description of Capital Stock", "Prospectus Summary--Separation from
Viacom" and "Separation from Viacom" fairly summarize the legal matters
therein described;

(v) the Underwriting Agreements have been duly authorized,
executed and delivered by the Company;

(vi) the Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Prospectuses, will not be, an "investment
company" as defined in the Investment Company Act of 1940, as amended;

(vii) no authorization, approval, consent, license or order
of, or filing with, any government, governmental instrumentality or
court is necessary for the issuance, sale and delivery by the Company
of the Securities pursuant to the Underwriting Agreements, except such
as have been obtained under the Act and the Exchange Act and such as
may be required under the securities or blue sky laws of the various
states;

(viii) neither the issue and sale of the Securities, nor the
consummation of any other of the transactions contemplated in the
Underwriting Agreements nor the fulfillment of the terms of the
Underwriting Agreements will conflict with, result in a breach or
violation of or imposition of any lien, charge or encumbrance upon any
property or assets of the Company pursuant to, (i) the charter or
by-laws of the Company, (ii) the terms, conditions or provisions of any
agreement or instrument filed as an exhibit to the Registration
Statement, or (iii) any statute, law, rule, regulation, judgment, order
or decree applicable to the Company or its subsidiaries of any court,
regulatory body, administrative agency, governmental body, arbitrator
or other authority having

<PAGE>
17

jurisdiction over the Company or its subsidiaries or any of its or
their properties, except with respect to clauses (ii) and (iii) above,
for such conflicts, breaches, violations or impositions that,
individually and in the aggregate with all other such conflicts,
breaches, violations or impositions, would not have a material adverse
effect on the business, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole;

(ix) Except as disclosed in the Prospectuses, to the knowledge
of such counsel, no holders of securities of the Company have rights to
the registration of such securities under the Registration Statement or
have rights to require the Company to file a registration statement
under the Act with respect to such securities;

(x) the Registration Statement has become effective under the
Act; any required filing of the Prospectuses, and any supplements
thereto, pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b); to the knowledge of such
counsel, no stop order suspending the effectiveness of the Registration
Statement has been issued, no proceedings for that purpose have been
instituted or threatened (the foregoing views in this clause (x) may be
expressed in an opening paragraph to such counsel's opinion); and

(xi) the Registration Statement and each of the Prospectuses
(other than the financial statements and other financial or
statistical data contained therein or omitted therefrom, as to which
such counsel need express no opinion) appear on their face to be
appropriately responsive in all material respects to the requirements
of the Act and the applicable rules and regulations of the Commission
thereunder; no facts came to such counsel's attention which gave them
reason to believe that (a) the Registration Statement (other than the
financial statements and other financial or statistical data contained
therein or omitted therefrom, as to which such counsel need express no
opinion), at the time it became effective, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or (b) the Prospectuses (other than the
financial statements and other financial or statistical data contained
therein or omitted therefrom, as to which such counsel need express no
opinion), as of their date or the Closing Date, contained an untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; to the
knowledge of such counsel, there are no pending or threatened legal or
governmental proceedings of a character required to be described in the
Prospectuses that are not so described; and, to the knowledge of such
counsel, there is no statute, regulation, franchise, contract or other
document of a character required to be described in, or filed as an
exhibit to, the Registration Statement that is not so described or
filed (the foregoing views in this clause (xi) may be expressed in a
letter separate from such counsel's opinion).

In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other
than the State of New York or the Federal

<PAGE>
18

laws of the United States, to the extent they deem proper and specified
in such opinion, upon the opinion of other counsel of good standing
whom they believe to be reliable and who are satisfactory to counsel
for the Underwriters and (B) as to matters of fact, to the extent they
deem proper, on certificates of responsible officers of the Company and
public officials. Reference to the Prospectuses in this paragraph (b)
include any supplements thereto at the Closing Date.

(2) The Company shall have requested and caused
Edward B. Stead, General Counsel for the Company, to have furnished to the
Representatives his opinion, dated the Closing Date and addressed to the
Representatives, to the effect that:

(i) the Company is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction
which requires such qualification, except where the failure to be so
qualified, individually and in the aggregate, with all other such
failures to be qualified would not have a material adverse effect on
the business, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole.

In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other
than the State of New York or the Federal laws of the United States, to
the extent he deems proper and specified in such opinion, upon the
opinion of other counsel of good standing whom he believes to be
reliable and who are satisfactory to counsel for the Underwriters and
(B) as to matters of fact, to the extent he deems proper, on
certificates of responsible officers of the Company and public
officials. Reference to the Prospectuses in this paragraph (b)(2)
include any supplements thereto at the Closing Date.

(3) The Company shall have requested and caused
Kenneth F. Koen, tax counsel for its parent, Viacom Inc., to have furnished to
the Representatives his opinion, dated the Closing Date and addressed to the
Representatives, to the effect that:

(i) the statements in the Prospectuses under the heading
"Material United States Tax Consequences to Non-United States Holders"
fairly summarize the legal matters therein described.

In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other
than the State of New York or the Federal laws of the United States, to
the extent he deems proper and specified in such opinion, upon the
opinion of other counsel of good standing whom he believes to be
reliable and who are satisfactory to counsel for the Underwriters and
(B) as to matters of fact, to the extent he deems proper, on
certificates of responsible officers of the Company and public
officials. Reference to the Prospectuses in this paragraph (b)(3)
include any supplements thereto at the Closing Date.

(c) The Representatives shall have received from Hughes
Hubbard & Reed LLP, counsel for the Underwriters, such opinion or opinions,
dated the Closing Date and

<PAGE>
19

addressed to the Representatives, with respect to the issuance and sale of the
Securities, the Registration Statement, the Prospectuses (together with any
supplement thereto) and other related matters as the Representatives may
reasonably require, and the Company shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon such
matters.

(d) The Company shall have furnished to the Representatives a
certificate of the Company, signed by (i) the Chief Executive Officer and
President of the Company and (ii) the Chief Financial Officer of the Company,
dated the Closing Date, to the effect that the signers of such certificate have
carefully examined the Registration Statement, the Prospectuses, any supplements
to the Prospectuses and the Underwriting Agreements and that:

(i) the representations and warranties of the Company in the
Underwriting Agreements are true and correct in all material respects
on and as of the Closing Date with the same effect as if made on the
Closing Date; provided, however, that if any such representation or
warranty is already qualified by materiality, such representation or
warranty as so qualified is true and correct in all respects on and as
of the Closing Date with the same effect as if made on the Closing Date
and the Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or prior to
the Closing Date;

(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the Company's knowledge,
threatened; and

(iii) since the date of the most recent financial statements
included in the Prospectuses (exclusive of any supplement thereto),
there has been no material adverse effect on the business, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole, except as set forth in the Prospectuses (exclusive of
any supplement thereto).

(e) The Company shall have requested and caused
PricewaterhouseCoopers LLP to have furnished to the Representatives letters,
dated respectively as of the Execution Time and as of the Closing Date, in form
and substance satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Act and the applicable rules
and regulations adopted by the Commission thereunder and that they have
performed a review of the unaudited consolidated interim financial statements of
the Company for the three-month periods ended March 31, 1998 and 1999 and as of
March 31, 1999 in accordance with Statement on Auditing Standards No. 71, and
stating in effect that:

(i) in their opinion the audited consolidated financial
statements included in the Registration Statement and the Prospectuses
and reported on by them comply as to form in all material respects with
the applicable accounting requirements of the Act and the related rules
and regulations adopted by the Commission;

<PAGE>
20

(ii) on the basis of a reading of the latest unaudited
financial data made available by the Company and its subsidiaries;
their limited review, in accordance with standards established under
Statement on Auditing Standards No. 71, of the unaudited consolidated
interim financial statements for the three-month periods ended March
31, 1998 and 1999, and as of March 31, 1999; carrying out certain
specified procedures (but not an examination in accordance with
generally accepted auditing standards) which would not necessarily
reveal matters of significance with respect to the comments set forth
in such letter; a reading of the minutes of the meetings of the
stockholders and directors of Viacom Inc.; a reading of the minutes of
the meetings of the stockholders, directors and the audit, compensation
and governance and nominations committees of the Company and its
subsidiaries; and inquiries of certain officials of the Company who
have responsibility for financial and accounting matters of the Company
and its subsidiaries as to transactions and events subsequent to
December 31, 1998, nothing came to their attention which caused them to
believe that:

(1) any unaudited consolidated financial statements
included in the Registration Statement and the Prospectuses do
not comply as to form in all material respects with applicable
accounting requirements of the Act and with the related rules
and regulations adopted by the Commission; and said unaudited
consolidated financial statements are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited consolidated
financial statements included in the Registration Statement
and the Prospectuses;

(2) with respect to the period subsequent to March
31, 1999, there were, at a specified date not more than five
days prior to the date of the letter, any increases in the
long-term debt of the Company and its subsidiaries (except
that with respect to the period from June 30, 1999 to the date
of such letter, such increase shall be in excess of
$5,000,000) or any changes in the capital stock of the Company
or any decreases, as of June 30, 1999, in the stockholders'
equity of the Company as compared with the amounts shown on
the March 31, 1999 consolidated balance sheet included in the
Registration Statement and the Prospectuses, or for the period
from April 1, 1999 to June 30, 1999 there were any decreases,
as compared with the corresponding period in the prior year in
revenues, operating income, income before income taxes and
depreciation and amortization of the Company and its
subsidiaries, or for the period from June 30, 1999 to the
specified date not more than five days prior to the date of
the letter there were any decreases, as compared with the
corresponding period in the prior year, in revenues, except in
all instances for increases or decreases set forth in such
letter, in which case the letter shall be accompanied by an
explanation by the Company as to the significance thereof
unless said explanation is not deemed necessary by the
Representatives;

(3) the information included in the Registration
Statement and Prospectuses in response to Regulation S-K, Item
301 (Selected Financial Data)

<PAGE>
21

and Item 402 (Executive Compensation) is not in conformity
with the applicable disclosure requirements of Regulation S-K;

(iii) they have performed certain other specified procedures
as a result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company and its subsidiaries) set
forth in the Registration Statement and the Prospectuses, including the
information set forth under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "Prospectus
Summary", "Capitalization", "Selected Consolidated Historical and Pro
Forma Financial and Operating Data", "Business" and "Risk Factors" in
the Prospectuses, agrees with the accounting records of the Company and
its subsidiaries, excluding any questions of legal interpretation; and

(iv) on the basis of a reading of the unaudited pro forma
consolidated balance sheet as of March 31, 1999 and the unaudited pro
forma consolidated statements of operations for the year ended December
31, 1998 and the three-month period ended March 31, 1999, in each case
included in the Registration Statement and the Prospectuses; and
carrying out certain specified procedures, which include making
inquiries of certain officials of the Company who have responsibility
for financial and accounting matters and proving the arithmetic
accuracy of the application of the pro forma adjustments to the
historical amounts in the unaudited pro forma consolidated financial
statements, nothing came to their attention which caused them to
believe that the unaudited pro forma consolidated financial statements
do not comply as to form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X or that the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of such unaudited pro forma consolidated
financial statements.

References to the Prospectuses in this paragraph (e) include
any supplement thereto at the date of the letter.

(f) Subsequent to the Execution Time or, if earlier, the
dates as of which information is given in the Registration Statement (exclusive
of any amendment thereof) and the Prospectuses (exclusive of any supplement
thereto), there shall not have been (i) any change or decrease specified in the
letter or letters referred to in paragraph (e) of this Section 6 or (ii) any
change, or any development involving a prospective change, in or affecting the
condition (financial or otherwise), earnings, business or properties of the
Company and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in or
contemplated in the Prospectuses (exclusive of any supplement thereto) the
effect of which, in any case referred to in clause (i) or (ii) above, is, in the
sole judgment of the U.S. Representatives, so material and adverse as to make it
impractical or inadvisable to proceed with the offering or delivery of the U.S.
Securities as contemplated by the Registration Statement (exclusive of any
amendment thereof) and the Prospectuses (exclusive of any supplement thereto).

<PAGE>
22

(g) The closing of the purchase of the U.S. Underwritten
Securities to be issued and sold by the Company pursuant to the U.S.
Underwriting Agreement shall occur concurrently with the closing of the
International Underwritten Securities to be issued and sold by the Company
pursuant to the International Underwriting Agreement.

(h) The Securities shall have been duly admitted for listing
and authorized for trading on the New York Stock Exchange, subject only to
official notice of issuance, and satisfactory evidence of such actions shall
have been provided to the Representatives.

(i) At the Execution Time, the Company shall have furnished to
the Representatives a letter substantially in the form of Exhibit A hereto from
each executive officer and director of the Company and from Viacom Inc. (on
behalf of itself and its subsidiaries), in each case, addressed to the
Representatives.

(j) Prior to the Closing Date, the Company shall have
furnished to the Representatives such further information, certificates and
documents as the Representatives may reasonably request.

If any of the conditions specified in this Section 6 shall not
have been fulfilled when and as provided in this U.S. Underwriting Agreement and
the International Underwriting Agreement, or if any of the opinions and
certificates mentioned above or elsewhere in this U.S. Underwriting Agreement
shall not be reasonably satisfactory in form and substance to the U.S.
Representatives and counsel for the Underwriters, this U.S. Underwriting
Agreement and all obligations of the U.S. Underwriters under this U.S.
Underwriting Agreement may be canceled at, or at any time prior to, the Closing
Date by the U.S. Representatives. Notice of such cancelation shall be given to
the Company in writing or by telephone or facsimile confirmed in writing.

The documents required to be delivered by this Section 6 shall
be delivered at the office of Hughes Hubbard & Reed LLP, counsel for the
Underwriters, One Battery Park Plaza, New York, New York 10004 on the Closing
Date.

7. REIMBURSEMENT OF U.S. UNDERWRITERS' EXPENSES. If the sale
of the U.S. Securities provided for in this U.S. Underwriting Agreement is not
consummated because any condition to the obligations of the U.S. Underwriters
set forth in Section 6 hereof is not satisfied, because of any termination
pursuant to Section 10 hereof or because of any refusal, inability or failure on
the part of the Company to perform any agreement in this U.S. Underwriting
Agreement or comply with any provision hereof other than by reason of a default
by any of the U.S. Underwriters, the Company will reimburse the U.S.
Underwriters severally through Salomon Smith Barney Inc. on demand for all
reasonable out-of-pocket expenses (including reasonable fees and disbursements
of counsel) that shall have been incurred by them solely and directly in
connection with the transactions contemplated by this Agreement.

8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each U.S. Underwriter, the directors, officers,
employees and agents of each U.S. Underwriter and each person who controls any
U.S. Underwriter within the meaning of

<PAGE>
23

either the Act or the Exchange Act against any and all losses, claims, damages
or liabilities, joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or other Federal or state statutory law
or regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the registration statement for the registration of the Securities
as originally filed or in any amendment thereof, or in any U.S. or International
Preliminary Prospectus, or in either of the Prospectuses (or in any other
prospectus of the Company (whether or not filed with the Commission)), or in any
amendment thereof or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
agrees to reimburse each such indemnified party, as incurred, for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of any U.S. Underwriter through the U.S.
Representatives specifically for inclusion therein; PROVIDED, FURTHER, that with
respect to any untrue statement or omission of material fact made in any
Preliminary Prospectuses, the indemnity agreement contained in this Section 8(a)
shall not inure to the benefit of any U.S. Underwriter from whom the person
asserting any such loss, claim, damage or liability purchased the Securities or
any person controlling such U.S. Underwriter, to the extent that any such loss,
claim, damage or liability of such U.S. Underwriter occurs under the
circumstance where it shall have been determined by a court of competent
jurisdiction by final and nonappealable judgment that (w) the Company had
previously furnished copies of the Prospectuses to the Representatives, (x)
delivery of the U.S. Prospectus was required by the Act to be made to such
person, (y) the untrue statement or omission of a material fact contained in the
Preliminary Prospectuses was corrected in the U.S. Prospectus and (z) there was
not sent or given to such person, at or prior to the written confirmation of the
sale of such Securities to such person, a copy of the U.S. Prospectus. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.

(b) The Company agrees to indemnify and hold harmless Salomon
Smith Barney Inc. and each person who controls Salomon Smith Barney Inc. within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act ("Salomon Smith Barney Entities"), from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in the prospectus wrapper
material prepared by or with the consent of the Company for distribution in
foreign jurisdictions in connection with the Directed Share Program attached to
the Prospectuses or any Preliminary Prospectuses, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statement therein, when considered in conjunction with
the Prospectuses or any applicable Preliminary Prospectuses, not misleading;
(ii) caused by the failure of any Participant to pay for and accept delivery of
the shares which immediately following the

<PAGE>
24

effectiveness of the Registration Statement, were subject to a properly
confirmed agreement to purchase; or (iii) related to, arising out of, or in
connection with the Directed Share Program, provided that, the Company shall not
be responsible under this subparagraph (iii) for any losses, claims, damages or
liabilities (or expenses relating thereto) that are finally judicially
determined to have resulted from the bad faith, willful misconduct or gross
negligence of any Salomon Smith Barney Entities.

(c) The Company also agrees to indemnify and hold harmless
Bear, Stearns & Co. Inc. and each person, if any, who controls Bear, Stearns &
Co. Inc. within the meaning of either Section 15 of the Act, or Section 20 of
the Exchange Act, from and against any and all losses, claims, damages,
liabilities and judgments incurred as a result of its participation as a
"qualified independent underwriter" within the meaning of Rule 2720 of the
National Association of Securities Dealers' Conduct Rules in connection with the
offering of the Securities, except to the extent any such losses, claims,
damages, liabilities and judgments are found in a final judgment by a court of
competent jurisdiction (not subject to further appeal) to have resulted
primarily and directly from the gross negligence or willful misconduct of Bear,
Stearns & Co. Inc.

(d) Each U.S. Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signs the Registration Statement, and each person who controls the
Company within the meaning of either the Act or the Exchange Act, to the same
extent as the foregoing indemnity in paragraph (a) above to each U.S.
Underwriter, but only with reference to written information relating to such
U.S. Underwriter furnished to the Company by or on behalf of such U.S.
Underwriter through the U.S. Representatives specifically for inclusion in the
documents referred to in the foregoing indemnity in paragraph (a) above. This
indemnity agreement will be in addition to any liability which any U.S.
Underwriter may otherwise have hereunder. The Company acknowledges that the
statements set forth in the last paragraph of the cover page regarding delivery
of the U.S. Securities, and, under the heading "Underwriting", (i) the first and
second sentences of the fourth paragraph (related to concessions and
reallowances) and the fourth and fifth sentences of the seventeenth paragraph
(related to the qualified independent underwriter) and (ii) the eleventh
paragraph (related to the intersyndicate agreement), the thirteenth paragraph
(related to United Kingdom offers), the fourteenth paragraph (related to
Canadian offers) and the fifteenth paragraph (related to stabilization,
syndicate covering transactions and penalty bids) in any U.S. or International
Preliminary Prospectus and the Prospectuses constitute the only information
furnished in writing by or on behalf of the several U.S. Underwriters for
inclusion in any U.S. or International Preliminary Prospectus or the
Prospectuses.

(e) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a), (b), (c) or (d) above
unless and to the extent it did not otherwise learn of such action and such
failure results in the forfeiture by the indemnifying party of substantial
rights and defenses and (ii) will not, in any

<PAGE>
25

event, relieve the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided in paragraph (a), (b),
(c) or (d) above. The indemnifying party shall be entitled to appoint counsel of
the indemnifying party's choice at the indemnifying party's expense to represent
the indemnified party in any action for which indemnification is sought (in
which case the indemnifying party shall not thereafter be responsible for the
fees and expenses of any separate counsel retained by the indemnified party or
parties except as set forth below); PROVIDED, HOWEVER, that such counsel shall
be satisfactory to the indemnified party. Notwithstanding the indemnifying
party's election to appoint counsel to represent the indemnified party in an
action, the indemnified party shall have the right to employ separate counsel
(including local counsel), and the indemnifying party shall bear the reasonable
fees, costs and expenses of such separate counsel if (i) the use of counsel
chosen by the indemnifying party to represent the indemnified party would
present such counsel with a conflict of interest, (ii) the actual or potential
defendants in, or targets of, any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, (iii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of the institution of such action or (iv)
the indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. An indemnifying party will
not, without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought under this U.S. Underwriting
Agreement (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding. Notwithstanding anything
contained herein to the contrary, if indemnity may be sought pursuant to Section
8, paragraph (b) hereof in respect of such action or proceeding, then in
addition to such separate firm for the indemnified parties, the indemnifying
party shall be liable for the reasonable fees and expenses of not more than one
separate firm (in addition to any local counsel) for Salomon Smith Barney Inc.
for the defense of any losses, claims, damages and liabilities arising out of
the Directed Share Program, and all persons who control Salomon Smith Barney
Inc. within the meaning of either Section 15 of the Act or Section 20 of the
Exchange Act. Notwithstanding anything contained herein to the contrary, if
indemnity may be sought pursuant to Section 8, paragraph (c) hereof in respect
of such action or proceeding, then in addition to such separate firm for the
indemnified parties, the indemnifying party shall be liable for the reasonable
fees and expenses of not more than one separate firm (in addition to any local
counsel) for Bear, Stearns & Co. Inc. in its capacity as a "qualified
independent underwriter" and all persons, if any, who control Bear, Stearns &
Co. Inc. within the meaning of either Section 15 of the Act or Section 20 of the
Exchange Act.

(f) In the event that the indemnity provided in paragraph (a),
(b), (c) or (d) of this Section 8 is unavailable to or insufficient to hold
harmless an indemnified party for any reason, the Company and the U.S.
Underwriters agree to contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in

<PAGE>
26

connection with investigating or defending same) (collectively "Losses") to
which the Company and one or more of the U.S. Underwriters may be subject in
such proportion as is appropriate to reflect the relative benefits received by
the Company on the one hand and by the U.S. Underwriters on the other from the
offering of the U.S. Securities; PROVIDED, HOWEVER, that in no case shall any
U.S. Underwriter (except as may be provided in any agreement among underwriters
relating to the offering of the Securities) be responsible for any amount in
excess of the underwriting discount or commission applicable to the Securities
purchased by such U.S. Underwriter under this U.S. Underwriting Agreement. If
the allocation provided by the immediately preceding sentence is unavailable for
any reason, the Company and the U.S. Underwriters severally shall contribute in
such proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company on the one hand and of the U.S.
Underwriters on the other in connection with the statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
Benefits received by the Company shall be deemed to be equal to the total net
proceeds from the offering (before deducting expenses) received by the Company,
and benefits received by the U.S. Underwriters shall be deemed to be equal to
the total underwriting discounts and commissions, in each case as set forth on
the cover page of the U.S. Prospectus. Relative fault shall be determined by
reference to, among other things, whether any untrue or any alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information provided by the Company on the one hand or
the U.S. Underwriters on the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the U.S. Underwriters agree that
it would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph (f), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls an U.S. Underwriter within the meaning
of either the Act or the Exchange Act and each director, officer, employee and
agent of an U.S. Underwriter shall have the same rights to contribution as such
U.S. Underwriter, and each person who controls the Company within the meaning of
either the Act or the Exchange Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company shall have
the same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (f).

9. DEFAULT BY A U.S. UNDERWRITER. If any one or more U.S.
Underwriters shall fail to purchase and pay for any of the U.S. Securities
agreed to be purchased by such U.S. Underwriter or U.S. Underwriters under this
U.S. Underwriting Agreement and such failure to purchase shall constitute a
default in the performance of its or their obligations under this U.S.
Underwriting Agreement, the remaining U.S. Underwriters shall be obligated
severally to take up and pay for (in the respective proportions which the amount
of U.S. Securities set forth opposite their names in Schedule I hereto bears to
the aggregate amount of U.S. Securities set forth opposite the names of all the
remaining U.S. Underwriters) the U.S. Securities which the defaulting U.S.

<PAGE>
27

Underwriter or U.S. Underwriters agreed but failed to purchase; PROVIDED,
HOWEVER, that in the event that the aggregate amount of U.S. Securities which
the defaulting U.S. Underwriter or U.S. Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of U.S. Securities set forth
in Schedule I hereto, the remaining U.S. Underwriters shall have the right to
purchase all, but shall not be under any obligation to purchase any, of the U.S.
Securities, and if such nondefaulting U.S. Underwriters do not purchase all the
U.S. Securities, this U.S. Underwriting Agreement will terminate without
liability to any nondefaulting U.S. Underwriter or the Company. In the event of
a default by any U.S. Underwriter as set forth in this Section 9, the Closing
Date shall be postponed for such period, not exceeding five Business Days, as
the U.S. Representatives shall determine in order that the required changes in
the Registration Statement and the Prospectuses or in any other documents or
arrangements may be effected. Nothing contained in this U.S. Underwriting
Agreement shall relieve any defaulting U.S. Underwriter of its liability, if
any, to the Company and any nondefaulting U.S. Underwriter for damages
occasioned by its default under this U.S. Underwriting Agreement.

10. TERMINATION. This U.S. Underwriting Agreement shall be
subject to termination in the absolute discretion of the U.S. Representatives,
by notice given to the Company prior to delivery of and payment for the U.S.
Securities, if at any time prior to such time (i) trading in the Company's
Common Stock shall have been suspended by the Commission or the New York Stock
Exchange or trading in securities generally on the New York Stock Exchange shall
have been suspended or limited or minimum prices shall have been established on
such Exchange, (ii) a banking moratorium shall have been declared either by
Federal or New York State authorities or (iii) there shall have occurred any
outbreak or escalation of hostilities, declaration by the United States of a
national emergency or war, or other calamity or crisis the effect of which on
financial markets is such as to make it, in the sole judgment of the U.S.
Representatives, impractical or inadvisable to proceed with the offering or
delivery of the Securities as contemplated by the U.S. Prospectus (exclusive of
any supplement thereto).

11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers and of the U.S. Underwriters set forth in or made
pursuant to this U.S. Underwriting Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any U.S.
Underwriter or the Company or any of the officers, directors, employees, agents
or controlling persons referred to in Section 8 hereof, and will survive
delivery of and payment for the U.S. Securities. The provisions of Sections 7
and 8 hereof shall survive the termination or cancelation of this U.S.
Underwriting Agreement.

12. NOTICES. All communications under this U.S. Underwriting
Agreement will be in writing and effective only on receipt, and, if sent to the
U.S. Representatives, will be mailed, delivered or telefaxed to the Salomon
Smith Barney Inc. General Counsel (fax no.:(212) 816-7912) and confirmed to such
General Counsel at Salomon Smith Barney Inc., 388 Greenwich Street, New York,
New York 10013, Attention: General Counsel; or, if sent to the Company, will be
mailed, delivered or telefaxed to Edward B. Stead, General Counsel and confirmed
to it at Blockbuster Inc., 1201 Elm Street, Dallas, Texas 75270, attention of
the Legal Department.

<PAGE>
28

13. SUCCESSORS. This U.S. Underwriting Agreement will inure to
the benefit of and be binding upon the parties hereto and their respective
successors and the officers, directors, employees, agents and controlling
persons referred to in Section 8 hereof, and no other person will have any right
or obligation under this U.S. Underwriting Agreement.

14. APPLICABLE LAW. THIS U.S. UNDERWRITING AGREEMENT WILL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WITHIN THE STATE OF NEW YORK.

15. COUNTERPARTS. This U.S. Underwriting Agreement may be
signed in one or more counterparts, each of which shall constitute an original
and all of which together shall constitute one and the same agreement.

16. HEADINGS. The section headings used in this U.S.
Underwriting Agreement are for convenience only and shall not affect the
construction hereof.

17. DEFINITIONS. The terms which follow, when used in this
U.S. Underwriting Agreement, shall have the meanings indicated.

"Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.

"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or
trust companies are authorized or obligated by law to close in New York
City.

"Commission" shall mean the Securities and Exchange
Commission.

"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments
thereto and any Rule 462(b) Registration Statement became or become
effective.

"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission promulgated
thereunder.

"Execution Time" shall mean the date and time that this U.S.
Underwriting Agreement is executed and delivered by the parties hereto.

"International Preliminary Prospectus" shall have the meaning
set forth under "U.S. Preliminary Prospectus."

"International Prospectus" shall mean such form of prospectus
relating to the International Securities as first filed pursuant to
Rule 424(b) after the Execution Time or, if no filing pursuant to Rule
424(b) is made, such form of prospectus included in the Registration
Statement at the Effective Date.

<PAGE>
29

"International Representative" shall mean the addressees of
the International Underwriting Agreement.

"International Securities" shall mean the International
Underwritten Securities and the International Option Securities.

"International Underwriters" shall mean the several
underwriters named in Schedule I to the International Underwriting
Agreement.

"International Underwriting Agreement" shall mean the
International Underwriting Agreement dated the date hereof related to
the sale of the International Securities by the Company to the
International Underwriters.

"Option Securities" shall mean the U.S. Option Securities and
the International Option Securities.

"Preliminary Prospectus" shall have the meaning set forth
under "U.S. Preliminary Prospectus."

"Prospectuses" and "each Prospectus" shall mean the U.S.
Prospectus and the International Prospectus.

"Registration Statement" shall mean the registration statement
referred to in paragraph 1(i)(a) above, including exhibits and
financial statements, as amended at the Execution Time (or, if not
effective at the Execution Time, in the form in which it shall become
effective) and, in the event any post-effective amendment thereto or
any Rule 462(b) Registration Statement becomes effective prior to the
Closing Date, shall also mean such registration statement as so amended
or such Rule 462(b) Registration Statement, as the case may be. Such
term shall include any Rule 430A Information deemed to be included
therein at the Effective Date as provided by Rule 430A.

"Representatives" shall mean the U.S. Representatives and the
International Representatives.

"Rule 424", "Rule 430A" and "Rule 462" refer to such rules
under the Act.

"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule
430A.

"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b)
relating to the offering covered by the registration statement referred
to in Section 1(a)(i) hereof.

"Securities" shall mean the U.S. Securities and the
International Securities.

<PAGE>
30

"subsidiary" or "subsidiaries" shall have the meaning set
forth in Rule 1-02 of Regulation S-X of the rules and regulations of
the Act.

"Underwriter" and "Underwriters" shall mean the U.S.
Underwriters and the International Underwriters.

"Underwriting Agreements" shall mean the U.S. Underwriting
Agreement and the International Underwriting Agreement.

"Underwritten Securities" shall mean the International
Underwritten Securities and the U.S. Underwritten Securities.

"U.S. Preliminary Prospectus" and the "International
Preliminary Prospectus", respectively, shall mean any preliminary
prospectus with respect to the offering of the U.S. Securities and the
International Securities, as the case may be, referred to in paragraph
1(i)(a) above and any preliminary prospectus with respect to the
offering of the U.S. Securities and the International Securities, as
the case may be, included in the Registration Statement at the
Effective Date that omits Rule 430A Information; and the U.S.
Preliminary Prospectus and the International Preliminary Prospectus are
hereinafter collectively called the "Preliminary Prospectuses".

"U.S. Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the
Execution Time or, if no filing pursuant to Rule 424(b) is required,
shall mean the form of final prospectus relating to the Securities
included in the Registration Statement at the Effective Date.

"U.S. Representatives" shall mean the addressees of the U.S.
Underwriting Agreement.

"U.S. Securities" shall mean the U.S. Underwritten Securities
and the U.S. Option Securities.

"U.S. Underwriting Agreement" shall mean this agreement
relating to the sale of the U.S. Securities by the Company to the U.S.
Underwriters.

"U.S. Underwriters" shall mean the several underwriters named
in Schedule I to the U.S. Underwriting Agreement.

"United States or Canadian Person" shall mean any person who
is a national or resident of the United States or Canada, any
corporation, partnership, or other entity created or organized in or
under the laws of the United States or Canada or of any political
subdivision thereof, or any estate or trust the income of which is
subject to United States or Canadian Federal income taxation,
regardless of its source (other than any non-United States or
non-Canadian branch of any United States or Canadian Person), and shall
include any United States or Canadian branch of a person other than a
United States or Canadian Person. "U.S." or "United States" shall mean
the United States of

<PAGE>
31

America (including the states thereof and the District of Columbia),
its territories, its possessions and other areas subject to its
jurisdiction.

If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company and the several U.S. Underwriters.

Very truly yours,

BLOCKBUSTER INC.

By:
---------------------------------
Name:
Title:

The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.

SALOMON SMITH BARNEY INC.
BEAR, STEARNS & CO. INC.

By: SALOMON SMITH BARNEY INC.

By
-----------------------------
Name:
Title:

For themselves and the other
several U.S. Underwriters
named in Schedule I to the foregoing
Agreement.
<PAGE>

SCHEDULE I

NUMBER OF UNDERWRITTEN
SECURITIES TO BE
UNDERWRITERS PURCHASED
- ------------ ----------------------

Salomon Smith Barney Inc...............................

Bear, Stearns & Co. Inc................................

Credit Suisse First Boston Corporation.................

Goldman, Sachs & Co....................................

J.P. Morgan Securities Inc.............................

Banc of America Securities LLC.........................

ING Barings LLC........................................

PaineWebber Incorporated...............................

Schroder & Co. Inc.....................................

SG Cowen Securities Corporation........................

Wit Capital Corporation................................

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

Total . . . . . . . . .
<PAGE>

[FORM OF LOCK-UP AGREEMENT] EXHIBIT A

[LETTERHEAD OF VIACOM INC. (ON BEHALF OF ITSELF AND ITS SUBSIDIARIES) AND
OF EACH EXECUTIVE OFFICER OR DIRECTOR OF THE COMPANY]

BLOCKBUSTER INC.
PUBLIC OFFERING OF COMMON STOCK

August __, 1999

Salomon Smith Barney Inc. and
Bear, Stearns & Co. Inc.
As Representatives of the several U.S. Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013

Salomon Brothers International Limited and
Bear, Stearns International Limited
As Representatives of the several International Underwriters,
c/o Salomon Brothers International Limited
Victoria Plaza
111 Buckingham Palace Road
London SW1W OSB
ENGLAND

Ladies and Gentlemen:

This letter is being delivered to you in connection with the
proposed U.S. Underwriting Agreement and International Underwriting Agreement
(the "Underwriting Agreements"), between Blockbuster Inc., a Delaware
corporation (the "Company"), and each of you as representatives of a group of
U.S. Underwriters and International Underwriters named therein, relating to an
underwritten public offering of Class A Common Stock, $.01 par value per share
(the "Common Stock"), of the Company.

In order to induce you and the other U.S. Underwriters and
International Underwriters to enter into the Underwriting Agreements, the
undersigned will not, [and will cause its subsidiaries (other than Blockbuster
Inc. and its subsidiaries, to the extent they are
<PAGE>

permitted under the Underwriting Agreements) not to,]* without the prior written
consent of Salomon Smith Barney Inc. and Salomon Brothers International Limited,
offer, sell, contract to sell, pledge or otherwise dispose of, (or enter into
any transaction which is designed to, or might reasonably be expected to, result
in the disposition (whether by actual disposition or effective economic
disposition due to cash settlement or otherwise) by the Company or any affiliate
of the Company or any person in privity with the Company or any affiliate of the
Company) directly or indirectly, including the filing (or participation in the
filing of) a registration statement with the Securities and Exchange Commission
in respect of, or establish or increase a put equivalent position or liquidate
or decrease a call equivalent position within the meaning of Section 16 of the
Securities Exchange Act of 1934, as amended, and the rules and regulations of
the Securities and Exchange Commission promulgated thereunder with respect to,
any shares of capital stock of the Company or any securities convertible into,
or exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, for a period of 180 days after the
date of the Underwriting Agreements, other than shares of Common Stock disposed
of as bona fide gifts approved by Salomon Smith Barney Inc.

[Notwithstanding the foregoing, Viacom Inc. and its
subsidiaries (other than Blockbuster Inc. and its subsidiaries) may issue and
sell Common Stock in connection with the merger with or acquisition of another
corporation or entity or the acquisition of the assets or properties of any such
corporation or entity, and may make public announcements with respect to the
transactions permitted by this paragraph, so long as the recipient of the Common
Stock agrees prior to the consummation of any such transaction pursuant to an
instrument in form and substance reasonably satisfactory to Salomon Smith Barney
Inc. (which instrument will be deemed satisfactory if it is substantially
similar to the provisions of this letter agreement) to be bound by the
provisions of this letter agreement insofar as they relate to the shares of
Common Stock or other securities acquired.]*

[It is agreed and understood that nothing in this agreement
shall prohibit the undersigned from (1) exercising any stock option granted as a
direct or indirect result of any Company program, including but not limited to,
any form of "cashless" exercise generally available for such grants, provided
that the net resulting shares from stock exercise are not sold during the period
of this agreement; (2) using any Company stock or stock options as collateral
for a loan provided that the holder of said collateral executes this agreement
or an agreement substantially similar in form; (3) gifting any Company stock to
family members or family trusts provided that such family members or family
trusts execute this agreement or an agreement substantially similar in form.]**

- ----------
* Included in Viacom Inc. letter only.
** Included in Company executive officer and director letters only.
<PAGE>

In furtherance of the foregoing, the Company and First Chicago
Trust Company of New York, a division of EquiServe, L.P., its transfer agent,
are hereby authorized to decline to make any transfer of securities if such
transfer would constitute a violation or breach of this letter agreement.

If for any reason the Underwriting Agreements shall be
terminated prior to the Closing Date (as defined in the Underwriting
Agreements), the agreement set forth above shall likewise be terminated.

Yours very truly,

[SIGNATURE OF VIACOM INC. AND OF EACH EXECUTIVE
OFFICER OR DIRECTOR OF THE COMPANY]

[NAME AND ADDRESS OF VIACOM INC. AND OF EACH
EXECUTIVE OFFICER OR DIRECTOR OF THE COMPANY]

<PAGE>

Exhibit 3.1

FORM OF

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION

BLOCKBUSTER INC.

Blockbuster Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"DGCL"), does hereby amend and restate the certificate of incorporation of the
corporation, which was originally filed on October 16, 1989, under the name SBQ,
Inc. and does certify that this amended and restated certificate of
incorporation has been duly adopted in accordance with Sections 242 and 245 of
the DGCL.

Article I

NAME

Section 1.01. NAME. The name of the corporation is:
Blockbuster Inc.

Article II

REGISTERED OFFICE AND AGENT

Section 2.01. ADDRESS. The address of the registered office of
the corporation in the State of Delaware is 1013 Centre Road, Wilmington, County
of New Castle, Delaware 19805-1297. The name of its registered agent at such
address is Corporation Service Company.
<PAGE>

Article III

PURPOSE

Section 3.01. PURPOSE. The purpose of the corporation is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware as the same exist or may hereafter
be amended.

Article IV

DESCRIPTION AND AUTHORIZATION OF STOCK

Section 4.01. AUTHORIZED SHARES. (a) The total number of
shares of stock that the corporation shall have authority to issue is
1,000,000,000 of which:

(i) 400,000,000 shares shall be shares of Class A Common
Stock, par value $0.01 per share (the "Class A Common Stock");

(ii) 500,000,000 shares shall be shares of Class B Common
Stock, par value $0.01 per share (the "Class B Common Stock") (the
Class A Common Stock and the Class B Common Stock being collectively
referred to herein as the "Common Stock"); and

(iii) 100,000,000 shares shall be shares of Preferred Stock,
par value $0.01 per share (the "Preferred Stock").

(b) The number of authorized shares of any class or classes of
stock may be increased or decreased (but not below the number of shares thereof
then outstanding) by the affirmative vote of a majority of the combined voting
power of Voting Stock (as defined below) of the corporation irrespective of the
provisions of Section 242(b)(2) of the DGCL.

(c) For purposes of this amended and restated certificate of
incorporation, "Voting Stock" shall mean the shares of the then outstanding
capital stock entitled to vote generally on the election of directors or other
matters submitted to a vote of the stockholders of the corporation and shall
exclude any class or series of capital stock only entitled to vote in the event
of dividend arrearages thereon, whether or not at the time of determination
there are any such dividend arrearages.

Section 4.02. POWERS, PREFERENCES AND RIGHTS OF THE CLASS A
COMMON STOCK AND THE CLASS B COMMON STOCK. Except as otherwise required by law
or as set forth below in this Article IV, the powers, preferences and rights and
relative participating, optional or other special rights and qualifications,
limitations or restrictions of the Class A Common Stock and Class B Common Stock
shall be identical in all respects.

2
<PAGE>

(a) VOTES, RIGHTS AND POWERS. (i) At every meeting of the
stockholders of the corporation, every holder of Class A Common Stock shall be
entitled to one vote in person or by proxy for each share of Class A Common
Stock standing in his or her name on the transfer books of the corporation, and
every holder of Class B Common Stock shall be entitled to five votes in person
or by proxy for each share of Class B Common Stock standing in his or her name
on the transfer books of the corporation, in connection with the election of
directors and all other matters submitted to a vote of stockholders of the
corporation. Except as may be otherwise required by law or by this amended and
restated certificate of incorporation, the holders of Class A Common Stock and
Class B Common Stock shall vote together as a single class, and their votes
shall be counted and totaled together, subject to any voting rights that may be
granted to holders of Preferred Stock, on all matters submitted to a vote of the
stockholders of the corporation. Notwithstanding any other provision of this
amended and restated certificate of incorporation to the contrary, holders of
Class A Common Stock shall not be eligible to vote on any alteration or change
in the powers, preferences, or special rights of the Class B Common Stock that
would not adversely affect the rights of the Class A Common Stock; PROVIDED
that, for the foregoing purposes, any provision for the voluntary, mandatory or
other conversion or exchange of the Class B Common Stock into or for Class A
Common Stock on a one for one basis shall be deemed not to adversely affect the
rights of the Class A Common Stock.

(ii) Every reference in this amended and restated certificate
of incorporation to a majority or other proportion of shares, or a majority or
other proportion of the votes of shares, of Voting Stock, Common Stock, Class A
Common Stock or Class B Common Stock shall refer to such majority or other
proportion of the votes to which such shares of Voting Stock, Common Stock,
Class A Common Stock or Class B Common Stock are entitled.

(iii) No stockholder shall be entitled to exercise any right
of cumulative voting.

(b) DIVIDENDS. Subject to the rights of the holders of
Preferred Stock, and subject to any other provisions of this amended and
restated certificate of incorporation, holders of Class A Common Stock and Class
B Common Stock shall be entitled to receive such dividends and other
distributions in cash, stock of any corporation (other than Common Stock of the
corporation) or property of the corporation as may be declared thereon by the
board of directors from time to time out of assets or funds of the corporation
legally available therefor and shall share equally on a per share basis in all
such dividends and other distributions. In the case of dividends or other
distributions payable in Common Stock, including distributions pursuant to stock
splits or divisions of Common Stock of the corporation, only shares of Class A
Common Stock shall be paid or distributed with respect to Class A Common Stock
and only shares of Class B Common Stock shall be paid or distributed with
respect to Class B Common Stock. The number of shares of Class A Common Stock
and Class B Common Stock so distributed shall be equal in number on a per share
basis. Neither the shares of Class A Common Stock nor the shares of Class B
Common Stock may be reclassified, subdivided or combined unless such
reclassification, subdivision or combination occurs simultaneously and in the
same proportion for each class.

3
<PAGE>

(c) DISTRIBUTION OF ASSETS UPON LIQUIDATION. In the event of
any dissolution, liquidation or winding up of the affairs of the corporation,
whether voluntary or involuntary, after payment or provision for payment in full
of the amounts required to be paid to the holders of Preferred Stock, the
remaining assets and funds of the corporation shall be distributed pro rata to
the holders of Class A Common Stock and Class B Common Stock. For the purposes
of this paragraph (c), the voluntary sale, conveyance, lease, exchange or
transfer (for cash, shares of stock, securities or other consideration) of all
or substantially all of the assets of the corporation or a consolidation or
merger of the corporation with one or more other corporations (whether or not
the corporation is the corporation surviving such consolidation or merger) shall
not be deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary.

(d) CONVERSION. (i) Prior to a Tax-Free Split-Off (as defined
in subparagraph (d)(vii) below), each share of Class B Common Stock is
convertible at the option of the holder thereof into one share of Class A Common
Stock. At the time of a voluntary conversion, the holder of shares of Class B
Common Stock shall deliver to the office or agency of the corporation maintained
for the transfer of the Class B Common Stock (x) the certificate or certificates
representing the shares of Class B Common Stock to be converted, duly endorsed
in blank or accompanied by proper instruments of transfer, together with any
payment required for taxes in accordance with subparagraph (d)(iv), and (y)
written notice to the corporation stating that such holder elects to convert
such share or shares and stating the name and address in which each certificate
for shares of Class A Common Stock issued upon such conversion is to be issued.
To the extent permitted by law and subject to the taking of any necessary action
or making any filing contemplated by subparagraph (d)(v) and subject to the
requirements of this paragraph (d), such voluntary conversion shall be deemed to
have been effected at the close of business on the date when such delivery is
made to the corporation or such transfer agent of the shares to be converted.

(ii) To the extent that Viacom Inc., a Delaware corporation,
("Viacom") beneficially owns 80% or more of the economic value of the
corporation immediately prior to the Tax-Free Split-Off, each share of Class B
Common Stock shall automatically convert into one share of Class A Common Stock
immediately prior to the Tax-Free Split-Off unless, prior to such Tax-Free
Split-Off, Viacom delivers to the corporation an opinion of Viacom's counsel to
the effect that such conversion is likely to prevent or materially delay
obtaining a favorable ruling from the Internal Revenue Service that the Tax-Free
Split-Off would qualify as a tax-free transaction under the Code (as defined
below) or will otherwise create a significant risk of material adverse tax
consequences to Viacom or its stockholders.

The corporation shall at all times reserve and keep available,
free from preemptive rights, out of the aggregate of its authorized but unissued
Common Stock and its issued Common Stock held in its treasury for the purpose of
effecting any conversion of the Class B Common Stock pursuant to this
subparagraph (d)(ii), the full number of shares of Class A Common Stock then
deliverable upon any such conversion of all outstanding shares of Class B Common
Stock. The corporation will provide notice of any automatic conversion of shares
of Class B Common

4
<PAGE>

Stock to holders of record of the Common Stock as soon as practicable. Such
notice may be provided by issuing a press release; PROVIDED, HOWEVER, that no
failure to give such notice nor any defect therein shall affect the validity of
the automatic conversion of any shares of Class B Common Stock.

Immediately upon such conversion, the rights of the holders of shares
of Class B Common Stock as such shall cease and such holders shall be treated
for all purposes as having become the record owners of the shares of Class A
Common Stock issuable upon such conversion; PROVIDED, HOWEVER, that such persons
shall be entitled to receive when paid any dividends declared on the Class B
Common Stock as of a record date preceding the time of such conversion and
unpaid as of the time of such conversion.

(iii) Following the Tax-Free Split-Off, any outstanding shares
of Class B Common Stock shall no longer be convertible into shares of Class A
Common Stock.

(iv) The corporation will not be required to pay any
documentary, stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of shares of Class A Common Stock on the conversion of shares
of Class B Common Stock pursuant to subparagraphs (d)(i) and (ii) above and no
such issue or delivery shall be made unless and until the person requesting such
issue has paid to the corporation the amount of any such tax or has established,
to the satisfaction of the corporation, that such tax has been paid.

(v) Concurrently with any conversion of Class B Common
Stock into Class A Common Stock effected pursuant to subparagraphs (d)(i) and
(ii) above, each share of Class B Common Stock that is converted (x) shall be
retired and canceled and shall not be reissued and (y) shall proportionally
decrease the number of shares of Common Stock of such class designated
hereby. The secretary of the corporation or such other officer of the
corporation that the board of directors may authorize shall be, and hereby
is, authorized and directed to file with the Secretary of State of the State
of Delaware an amendment to this amended and restated certificate of
incorporation to effect any such decrease in designated shares of Common
Stock. No undesignated shares of Common Stock shall be designated shares of
Class B Common Stock following an automatic conversion of shares of Class B
Common Stock pursuant to subparagraph (d)(ii) above.

(vi) Immediately upon the effectiveness of this amended and
restated certificate of incorporation, the shares of common stock of the
corporation, par value $0.001 per share, that are issued and outstanding
immediately prior to such effectiveness, shall be changed into and reclassified
as 144,000,000 shares of Class B Common Stock.

(vii) For purposes of this amended and restated certificate of
incorporation, the term "Tax-Free Split-Off" shall mean any transfer effected in
connection with the distribution of Class A Common Stock and/or Class B Common
Stock to security holders of Viacom (including any distribution in exchange for
shares of capital stock or securities of Viacom) intended to qualify as a
tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as
amended from time to time (the "Code").

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Section 4.03. POWERS AND RIGHTS OF THE PREFERRED STOCK. Any
unissued or treasury shares of the Preferred Stock may be issued from time to
time in one or more series for such consideration as may be fixed from time
to time by resolution of the board of directors and each share of a series
shall be identical in all respects with the other shares of such series,
except that, if the dividends thereon are cumulative, the date from which
they shall be cumulative may differ. Before any shares of Preferred Stock of
any particular series shall be issued, a certificate shall be filed with the
Secretary of State of Delaware setting forth a resolution by the board of
directors which sets the voting powers, if any, and the designations,
preferences and relative, participating, optional, dividend or other special
rights, and such qualifications, limitations, restrictions, conditions or
other characteristics to be attached to the Preferred Stock of such series
and such other matters as may be required. The board of directors shall fix
and determine, and is hereby expressly empowered to fix and determine, in the
manner provided by law, the particulars of the shares of such series (so far
as not inconsistent with the provisions of this Article IV applicable to all
series of Preferred Stock), including, but not limited to, the following:

(i) the distinctive designation of such series;

(ii) the number of shares which shall constitute such series,
which number may be increased (except where otherwise provided by the board of
directors in creating such series) or decreased (but not below the number of
shares thereof then outstanding) from time to time by like action of the board
of directors;

(iii) the rate of dividends payable on shares of such series,
if any, the conditions upon which such dividends shall be payable, the
preference to or the relation to the payment of dividends payable on any other
class or classes or series of stock, and the date from which dividends shall be
cumulative in the event the board of directors determines that dividends shall
be cumulative;

(iv) whether or not the shares of such series shall be
redeemable and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable, and the amount
per share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;

(v) the rights of the shares of such series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
corporation, and the relative rights of priority, if any, of payment of shares
of that series;

(vi) whether such series shall have conversion or exchange
privileges and, if so, the terms and conditions of such conversion, including,
but not limited to, provision for adjustment of the conversion rate upon such
events and in such manner as the board of directors shall determine;

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(vii) whether such series shall have restrictions on the
issuance of shares of the same series or any other series, if any;

(viii) whether such series shall have voting rights in
addition to the voting rights provided by law and, if so, the terms of such
voting rights; and

(ix) any other relative rights, preferences and limitations of
such series.

Section 4.04. NO PREEMPTIVE RIGHTS. Except as otherwise
provided in this amended and restated certificate of incorporation, no holder
of shares of this corporation of any class shall be entitled, as such, as a
matter of right, to subscribe for or purchase shares of any class now or
hereafter authorized, or to purchase or subscribe for securities convertible
into or exchangeable for shares of the corporation or to which there shall be
attached or appertain any warrants or rights entitling the holders thereof to
purchase or subscribe for shares.

Article V

AMENDMENT OF BYLAWS

Section 5.01. AMENDMENT OF BYLAWS BY DIRECTORS. In furtherance
and not in limitation of the powers conferred by statute, the board of directors
is expressly authorized to make, repeal, alter, amend and rescind the bylaws of
the corporation.

Section 5.02. AMENDMENT OF BYLAWS BY THE STOCKHOLDERS.
The bylaws may be altered, amended or repealed, in whole or in part, and new
bylaws may be adopted by the affirmative vote of stockholders with at least a
majority of the combined voting power of Voting Stock; PROVIDED, HOWEVER,
that any such proposed alteration, amendment or repeal of, or the adoption of
any bylaw inconsistent with the provisions contained in the sections entitled
"Special Meetings" (Section 2.03), "Advance Notice of Stockholder Proposals"
(Section 2.09), "No Stockholder Action by Written Consent" (Section 2.12),
"Number of Directors" (Section 3.02), "Election of Directors" (Section 3.03),
"Vacancies," (Section 3.05), "Removal of Directors," (Section 3.06) and
"Amendments" (Section 9.01) of the bylaws of the corporation shall require
the affirmative vote of not less than 75% of the combined voting power of
Voting Stock; and PROVIDED FURTHER, however, that in the case of any such
stockholder action at a meeting of stockholders, notice of the proposed
alteration, amendment, repeal or adoption of the new bylaw or bylaws must be
contained in the notice of such meeting. In the event that any term or
provision of the bylaws is inconsistent, or conflicts, with the terms or
provisions of this amended and restated certificate of incorporation, this
amended and restated certificate of incorporation shall control.

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Article VI

BOARD OF DIRECTORS

Section 6.01. CLASSIFIED BOARD. (a) The business and affairs
of the corporation shall be managed by or under the direction of a board of
directors initially consisting of six directors, the exact number of directors
to be not less than three nor more than twelve (subject to any rights of the
holders of Preferred Stock to elect additional directors under specified
circumstances) as determined from time to time by resolution adopted by
affirmative vote of a majority of the whole board of directors. As used in this
amended and restated certificate of incorporation, the term "whole board" means
the total number of directors which the corporation would have if there were no
vacancies.

(b) The board of directors (exclusive of directors to be
elected by the holders of any one or more series of Preferred Stock voting
separately as a class or classes) shall be divided into three classes, Class I,
Class II, and Class III. The number of directors in each class shall be the
whole number contained in the quotient arrived at by dividing the authorized
number of directors by three, and if a fraction is also contained in such
quotient, then if such fraction is one-third, the extra director shall be a
member of Class I and if the fraction is two-thirds, one of the extra directors
shall be a member of Class I and the other shall be a member of Class II. Each
director shall serve for a term ending on the date of the third annual meeting
following the annual meeting at which such director was elected; PROVIDED,
HOWEVER, that the directors first elected to Class I shall serve for an initial
term which expires in 2000, the directors first elected to Class II shall serve
for an initial term which expires in 2001, and the directors first elected to
Class III shall serve for an initial term which expires in 2002.

(c) At each succeeding annual meeting of stockholders
beginning in 2000, successors to the class of directors whose term expires at
that annual meeting shall be elected for a three-year term. If the number of
directors is changed, any increase or decrease shall be apportioned among the
classes so as to maintain the number of directors in each class as nearly equal
as possible, and any additional director of any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class, but in no case will a decrease
in the number of directors shorten the term of any incumbent director. A
director shall hold office until the annual meeting of the year in which his
term expires and until his successor shall be elected and shall qualify,
subject, however, to death, resignation or removal from office. Any vacancy on
the board of directors may be filled by a majority of the directors then in
office, even if less than a quorum, or by a sole remaining director.

(d) Any director elected to fill a vacancy not resulting from
an increase in the number of directors shall have the same remaining term as
that of his predecessor.

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Section 6.02. REMOVAL. (a) Subject to the right of the holders
of any class or series of Preferred Stock then outstanding, any director or the
whole board of directors may be removed, with or without cause, by the
affirmative vote of a majority of the combined voting power of Voting Stock;
PROVIDED, HOWEVER, that on and after the Trigger Date (as defined in paragraph
(b) below), a director may only be removed for cause, such removal to be by the
affirmative vote of a majority of the combined voting power of the Voting Stock.
To the extent permitted by the laws of Delaware, "cause" shall be determined by
the board of directors. Notwithstanding the foregoing, whenever holders of
outstanding shares of one or more series of Preferred Stock are entitled to
elect directors of the corporation pursuant to the provisions applicable in the
case of arrearages in the payment of dividends or other defaults contained in
the resolution or resolutions of the board of directors providing for the
establishment of any such series, any such director of the corporation so
elected may be removed in accordance with the provisions of such resolution or
resolutions.

(b) For purposes of this amended and restated certificate of
incorporation, "Trigger Date" shall mean the first date on which Viacom ceases
to beneficially own shares representing more than 50% of the votes entitled to
be cast by the Voting Stock.

(c) Promptly upon becoming aware of the occurrence of a
Trigger Date, the corporation shall notify stockholders of such occurrence in
any reasonably practicable manner.

Section 6.03. BALLOTS. Elections of directors at an annual or
special meeting of stockholders need not be by written ballot unless the bylaws
of the corporation shall provide otherwise.

Section 6.04. ELIMINATION OF CERTAIN PERSONAL LIABILITY OF
DIRECTORS. To the fullest extent permitted by the laws of Delaware, as the same
may exist or may hereafter be amended, a director of this corporation shall not
be personally liable to the corporation or its stockholders for monetary damages
for breach of any fiduciary duty as a director.

Section 6.05. GENERAL POWERS. (a) In addition to the powers
and authority hereinbefore or by statute expressly conferred upon them, the
directors are hereby empowered to exercise all such powers and do all such acts
and things as may be exercised or done by the corporation, subject,
nevertheless, to the laws of Delaware, this amended and restated certificate of
incorporation, and any bylaws adopted by the stockholders; PROVIDED, HOWEVER,
that no bylaws hereafter adopted by the stockholders shall invalidate any prior
act of the directors which would have been valid if such bylaws had not been
adopted.

(b) So long as Viacom beneficially owns shares representing
30% or more of the combined voting power of Voting Stock, nominations and
shareholder proposals by Viacom shall not be subject to the advance notice
procedures (including the form, content, or timing requirements contained
therein) of Section 2.09 of Article II of the bylaws.

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Article VII

CERTAIN TRANSACTIONS WITH STOCKHOLDERS
AND CORPORATE OPPORTUNITIES

Section 7.01. CERTAIN ACKNOWLEDGMENTS. (a) In recognition and
anticipation (i) that the corporation will cease to be an indirect wholly-owned
subsidiary of Viacom but that Viacom will remain, for the period of time, a
significant stockholder of the corporation, (ii) that the corporation may from
time to time enter into contractual, corporate or business relations with one or
more of its directors or officers, or one or more corporations, partnerships,
associations or other organizations in which one or more of its directors or
officers have a financial interest (collectively, "Related Entities"), (iii)
that directors, officers, and/or employees of Viacom may serve as directors of
the Corporation, (iv) that Viacom engages and is expected to continue to engage
in the same or similar lines of business as those in which the Corporation,
directly or indirectly, may engage and/or other business activities that overlap
with or compete with those in which the Corporation, directly or indirectly, may
engage, (v) that the Corporation will engage in material business transactions
with Viacom and that the Corporation is expected to benefit therefrom, and (vi)
that, as a consequence of the foregoing, it is in the best interests of the
Corporation that the respective rights and duties of the Corporation and of
Viacom, and the duties of any directors of the Corporation who are also
directors, officers or employees of Viacom, be determined and delineated in
respect of any transactions between, or opportunities that may be suitable for
both, the Corporation, on the one hand, and Viacom, on the other hand, the
provisions of this Article shall regulate and define the conduct of certain of
the business and affairs of the Corporation in relation to Viacom.

(b) For purposes of this Article VII only:

1. the term "Corporation" shall mean the corporation and all
corporations, partnerships, joint ventures, associations and other
entities in which the Corporation beneficially owns (directly or
indirectly) more than 50% of the outstanding voting stock, voting power
or similar voting interests, and

2. the term "Viacom" shall mean Viacom and all corporations,
partnerships, joint ventures, associations and other entities (other
than the Corporation, defined in accordance with clause (i) of this
Section 7.01) in which Viacom beneficially owns (directly or
indirectly) more than 50% of the outstanding voting stock, voting power
or similar voting interests.

Section 7.02. SIMILAR BUSINESS ACTIVITIES. Except as Viacom
may otherwise agree in writing, Viacom shall not have a duty to refrain from
engaging directly or indirectly in the same or similar business activities or
lines of business as the Corporation.

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Section 7.03. CONTRACTS OR TRANSACTIONS. (a) No contract or
transaction (or any amendment, modification or termination thereof) between the
Corporation and Viacom or any Related Entity or between the Corporation and one
or more of the directors or officers of the Corporation, Viacom or any Related
Entity, shall be void or voidable solely for the reason that Viacom, any Related
Entity or any one or more of the directors or officers of the Corporation,
Viacom or any Related Entity are parties thereto, or solely because any such
directors or officers are present at or participate in the meeting of the board
of directors or committee thereof that authorizes the contract, transaction,
amendment, modification or termination or solely because his or their votes are
counted for such purpose but any such contract or transaction (or any amendment,
modification or termination thereof) shall be governed by the provisions of this
amended and restated certificate of incorporation, the Corporation's bylaws, the
laws of Delaware and other applicable law.

(b) Directors of the Corporation who are also directors or
officers of Viacom or any Related Entity may be counted in determining the
presence of a quorum at a meeting of the board of directors or of a committee
that authorizes or approves any such contract or transaction (or amendment,
modification or termination thereof). Outstanding shares of Common Stock owned
by Viacom and any Related Entities may be counted in determining the presence of
a quorum at a meeting of stockholders that authorizes or approves any such
contract or transaction (or amendment, modification or termination thereof).

(c) For purposes of this Article VII, any contract or
transaction with any corporation, partnership, joint venture, association or
other entity in which the Corporation beneficially owns (directly or indirectly)
more than 50% of the outstanding voting stock, voting power, partnership
interest or similar voting interests, or with any officer or director thereof,
shall be deemed to be a contract or transaction with the Corporation.

Section 7.04. NOTICE. Any person or entity purchasing or
otherwise acquiring any interest in any shares of capital stock of the
Corporation shall be deemed to have notice of and to have consented to the
provisions of this Article VII.

Section 7.05. ALTERATION, AMENDMENT, CHANGE OR REPEAL.
Notwithstanding anything in this amended and restated certificate of
incorporation to the contrary, the foregoing provisions of this Article VII as
they apply to Viacom shall expire on the date that Viacom ceases to own
beneficially Common Stock representing at least 20% of the combined voting power
of the Voting Stock and no person who is a director or officer of the
Corporation is also a director or officer of Viacom; PROVIDED HOWEVER, that
nothing in the foregoing provisions of this Article VII shall contradict or
limit the provisions set forth under Section 144 of the DGCL. Neither the
alteration, amendment, change or repeal of any provision of this Article VII nor
the adoption of any provision of this amended and restated certificate of
incorporation inconsistent with any provision of this Article VII shall
eliminate or reduce the effect of this Article VII in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article VII,
would accrue or arise, prior to such alteration, amendment, repeal or adoption.

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Article VIII

INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS

Section 8.01. INDEMNIFICATION. (a) The corporation shall
indemnify any person (and the heirs, executors or administrators of such person)
who was or is a party or is threatened to be made a party to any threatened,
pending, or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director or officer of
the corporation, or such director or officer is or was serving at the request of
the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding had no reasonable cause to believe the person's conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which the person reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any
criminal action or proceeding, had reasonable cause to believe that the person's
conduct was unlawful.

(b) The corporation shall indemnify any person (and the heirs,
executors or administrators of such person) who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that the person is or was a director or officer of the
corporation, or such director or officer is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by the person in
connection with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.

(c) The corporation may, by action of its board of directors,
provide indemnification to such of its other employees and agents to such effect
as the board of directors

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shall determine to be appropriate and authorized by the laws of Delaware as they
may exist from time to time.

(d) To the extent that a present or former director or officer
of the corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in paragraphs (a) and (b) of this
Article VIII, or in defense of any claim, issue or matter therein, such director
or officer shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such director or officer in connection
therewith.

(e) Any indemnification under paragraphs (a), (b) and (c) of
this Article VIII (unless ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the person is proper in the circumstances because the person
has met the applicable standard of conduct set forth in paragraphs (a), (b) and
(c) of this Article VIII. Such determination shall be made, with respect to a
person who is a director or officer at the time of such determination, (1) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (2) by a committee of such
directors designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the stockholders.

(f) Expenses (including attorneys' fees) incurred by a
director or officer in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such director or officer is not
entitled to be indemnified by the corporation as authorized in this Article
VIII.

(g) The indemnification and advancement of expenses provided
by, or granted pursuant to, the other sections of this Article VIII shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any law, bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office.

(h) For purposes of this Article VIII, references to "the
corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees or
agents so that any person who is or was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provisions of this Article VIII with

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respect to the resulting or surviving corporation as such person would have with
respect to such constituent corporation if its separate existence had continued.

(i) For purposes of this Article VIII, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the corporation"
shall include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves service by, such director,
officer, employee or agent with respect to any employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner such person reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this Article VIII.

(j) The indemnification and advancement of expenses provided
by, or granted pursuant to, this Article VIII shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.

Section 8.02. INSURANCE. The corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any such capacity,
or arising out of such person's status as such, whether or not the corporation
would have the power to indemnify such person against such liability under the
provisions of this Article VIII.

Section 8.03. CONTRACTUAL NATURE. Neither any repeal or
modification of this Article or, to the fullest extent permitted by the laws of
Delaware, any repeal or modification of laws, shall be prospective only and
shall not affect any rights or obligations then existing with respect to any
state of facts then or theretofore existing or any action, suit or proceeding
theretofore or thereafter brought based in whole or in part upon any such state
of facts.

Article IX

AMENDMENTS

Section 9.01. GENERAL. Neither the alteration, amendment,
change or repeal of any provision of this Article IX nor the adoption of any
provision inconsistent with any provision of this Article IX shall eliminate or
reduce the effect of this Article IX in respect of any matter occurring, or any
cause of action, suit or claim that, but for this Article IX, would accrue or
arise, prior to such alteration, amendment, change, repeal or adoption.

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Section 9.02. AMENDMENT OF CERTAIN ARTICLES. Notwithstanding
any other provision of this amended and restated certificate of incorporation to
the contrary, the provisions set forth in this Article IX and in Section 5.02 of
Article V, Sections 6.01 and 6.02 of Article VI and Article VII may not be
amended, altered, changed, or repealed in any respect unless such amendment,
alteration, change or repealing is approved by the affirmative vote of not less
than 75% of the combined voting power of the Voting Stock; PROVIDED that with
respect to any proposed amendment, alteration or change to this amended and
restated certificate of incorporation, or repealing of any provision of this
amended and restated certificate of incorporation, which would amend, alter or
change the powers, preferences or special rights of the shares of Class A Common
Stock or Class B Common Stock so as to affect them adversely, the affirmative
vote of not less than a majority of the outstanding shares affected by the
proposed amendment, voting as a separate class, shall be required in addition to
the vote otherwise required pursuant to this Article IX.

Section 9.03. AMENDMENTS GENERALLY. Subject to the provisions
of Section 9.02 of this Article IX, the corporation reserves the right to amend,
alter, change or repeal any provision contained in this amended and restated
certificate of incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred on stockholders herein are granted subject to
this reservation.

Article X

COMPROMISE AND REORGANIZATION

Section 10.01. COMPROMISE AND REORGANIZATION. Whenever a
compromise or arrangement is proposed between this corporation and its creditors
or any class of them and/or between this corporation and its stockholders or any
class of them, any court of equitable jurisdiction within the State of Delaware
may, on the application in a summary way of this corporation or of any creditor
or stockholder thereof or on the application of any receiver or receivers
appointed for this corporation under the provisions of Section 291 of the DGCL
or on the application of trustees in dissolution or of any receiver or receivers
appointed for this corporation under the provisions of Section 279 of the DGCL
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this corporation, as the
case may be, agrees to any compromise or arrangement and to any reorganization
of the corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.

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IN WITNESS WHEREOF, this amended and restated certificate of
incorporation, having been duly adopted by the written consent of the sole
stockholder of the corporation in accordance with the provisions of Sections
228, 242 and 245 of the DGCL, has been executed this __th day of _______ 1999.

BLOCKBUSTER INC.

By:
-----------------------------
Name: Edward B. Stead
Title: Executive Vice President,
General Counsel and Secretary

<PAGE>

Exhibit 10.1

FORM OF INITIAL PUBLIC OFFERING AND SPLIT-OFF AGREEMENT

DATED AS OF , 1999

AMONG

VIACOM INC.

VIACOM INTERNATIONAL INC.

AND

BLOCKBUSTER INC.
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INITIAL PUBLIC OFFERING AND SPLIT-OFF AGREEMENT

INITIAL PUBLIC OFFERING AND SPLIT-OFF AGREEMENT (this
"AGREEMENT") dated as of , 1999, among Viacom Inc., a Delaware corporation
("VIACOM"), Viacom International Inc., a Delaware corporation and a wholly owned
subsidiary of Viacom ("VIACOM INTERNATIONAL"), and Blockbuster Inc., a Delaware
corporation and an indirect, wholly owned subsidiary of Viacom ("BLOCKBUSTER").
Certain capitalized terms used herein are defined in Article I of this
Agreement.

RECITALS

WHEREAS, since September 29, 1994, Viacom has owned and operated
the businesses and operations related to Blockbuster;

WHEREAS, Viacom presently intends to split off Blockbuster in a
tax-free transaction;

WHEREAS, prior to such split-off, Blockbuster proposes to issue
shares of its common stock in an initial public offering registered under the
Securities Act of 1933, as amended; and

WHEREAS, the parties intend in this Agreement, including the
Exhibits attached hereto, to set forth the principal arrangements between them
regarding such initial public offering and such split-off.

NOW, THEREFORE, in consideration of the premises and the
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:

ARTICLE I
DEFINITIONS

Section 1.01. DEFINITIONS. As used in this Agreement, the
following terms will have the following meanings, applicable both to the
singular and the plural forms of the terms described:

"AFFILIATES" means, with respect to any specified Person, any
Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with such specified
Person; PROVIDED, HOWEVER, that prior to the Split-Off, Affiliates of
Blockbuster or Viacom shall only include Persons who would be affiliates of
Blockbuster or Viacom, respectively, assuming that the Split-Off had occurred
immediately prior to the determination as to whether such Person was an
affiliate of Blockbuster or Viacom, respectively.
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"AGREEMENT" has the meaning ascribed thereto in the Preamble.

"ANCILLARY AGREEMENTS" means the Registration Rights Agreement,
Transition Services Agreement, the Release and Indemnification Agreement and the
Tax Matters Agreement.

"ANNUAL FINANCIAL STATEMENTS" has the meaning ascribed thereto in
Section 5.01(v).

"APPLICABLE STOCK" means at any time the (i) shares of
Blockbuster Common Stock owned by Viacom and its Affiliates that were owned on
the date hereof, PLUS (ii) shares of Blockbuster Class B Common Stock purchased
by Viacom and its Affiliates pursuant to Article VII, PLUS (iii) shares of
Blockbuster Common Stock that were issued to Viacom and its Affiliates in
respect of shares described in either clause (i) or clause (ii) in any
reclassification, share combination, share subdivision, share dividend, share
exchange, merger, consolidation or similar transaction or event.

"BLOCKBUSTER" has the meaning ascribed thereto in the Preamble.

"BLOCKBUSTER BUSINESS" has the meaning ascribed thereto in
Section 2.01(a)(i) of the Release and Indemnification Agreement.

"BLOCKBUSTER CLASS A COMMON STOCK" means the class A common
stock, par value $0.01 per share of Blockbuster.

"BLOCKBUSTER CLASS B COMMON STOCK" means the class B common
stock, par value $0.01 per share of Blockbuster.

"BLOCKBUSTER CLASS B COMMON STOCK OPTION" has the meaning
ascribed thereto in Section 7.01(a).

"BLOCKBUSTER CLASS B COMMON STOCK OPTION NOTICE" has the meaning
ascribed thereto in Section 7.02.

"BLOCKBUSTER COMMON STOCK" means the Blockbuster Class B Common
Stock, the Blockbuster Class A Common Stock, any other class of Blockbuster's
capital stock representing the right to vote generally for the election of
directors and, for so long as Blockbuster continues to be a subsidiary
corporation includible in a consolidated federal income tax return of the Viacom
Group, any other security of Blockbuster treated as stock for purposes of
Section 1504 of the Code.

"BLOCKBUSTER PUBLIC DOCUMENTS" has the meaning ascribed thereto
in Section 5.01(viii).

"BLOCKBUSTER PUBLIC FILINGS" has the meaning ascribed thereto in
Section 5.01(xii).

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"BLOCKBUSTER TRANSFER AGENT" means the company designated by
Blockbuster as the transfer agent and registrar for the Blockbuster Class A
Common Stock and the Blockbuster Class B Common Stock.

"BLOCKBUSTER'S AUDITORS" has the meaning ascribed thereto in
Section 5.01(xiii).

"BUSINESS" means the Blockbuster Business or the Viacom Business,
as the case may be.

"BUSINESS DAY" means any day other than a Saturday, a Sunday, or
a day on which banking institutions located in the State of New York are
authorized or obligated by law or executive order to close.

"CODE" means the Internal Revenue Code of 1986, as amended from
time to time, together with the rules and regulations promulgated thereunder.

"CONFIDENTIAL INFORMATION" means, with respect to any party
hereto, (i) any Information concerning such party, its business or any of its
Affiliates that was obtained by another party hereto, (ii) any Information
concerning such party that is obtained by another party under Section 4.03, or
(iii) any other Information obtained by, or furnished to, another party hereto.

"CONTROL" means the possession, direct or indirect, of the power
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, together with the rules and regulations promulgated
thereunder.

"INDEMNIFIED PARTY" means any Person who is entitled to received
payment or defense from an Indemnifying Party pursuant to this Agreement.

"INDEMNIFYING PARTY" means any party who is required to pay or
defend any other Person pursuant to this Agreement.

"INFORMATION" means all records, books, contracts, instruments,
computer data and other data.

"IPO" means the initial public offering by Blockbuster of shares
of Blockbuster Class A Common Stock as contemplated by the IPO Registration
Statement.

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"IPO EFFECTIVE DATE" means the date on which the IPO Registration
Statement is declared effective by the SEC.

"IPO REGISTRATION STATEMENT" means the Registration Statement on
Form S-1, Registration No. 333-77899, of Blockbuster, including all exhibits
thereto and as supplemented and amended from time to time.

"ISSUANCE EVENT" has the meaning ascribed thereto in Section
7.02.

"ISSUANCE EVENT DATE" has the meaning ascribed thereto in Section
7.02.

"LOSSES" has the meaning ascribed thereto in Section 2.01(a) of
the Release and Indemnification Agreement.

"MARKET PRICE" of any shares of Blockbuster Class A Common Stock
on any date means (i) the average of the last sale price of such shares on each
of the five trading days immediately preceding such date on the New York Stock
Exchange, Inc. or, if such shares are not listed thereon, on the principal
national securities exchange or automated interdealer quotation system on which
such shares are traded or (ii) if such sale prices are unavailable or such
shares are not so traded, the value of such shares on such date determined in
accordance with agreed-upon procedures reasonably satisfactory to Blockbuster
and Viacom.

"NONVOTING STOCK" means any class of Blockbuster' capital stock
not representing the right to vote generally for the election of directors.

"NONVOTING STOCK OPTION" has the meaning ascribed thereto in
Section 7.01(c).

"NONVOTING STOCK OPTION NOTICE" has the meaning ascribed thereto
in Section 7.02.

"OWNERSHIP PERCENTAGE" means, at any time, the fraction,
expressed as a percentage and rounded to the next highest thousandth of a
percent, whose numerator is the aggregate Value of the Applicable Stock and
whose denominator is the sum of the aggregate Value of the outstanding shares of
Blockbuster Common Stock; PROVIDED, HOWEVER, that any shares of Blockbuster
Common Stock issued by Blockbuster in violation of its obligations under Article
VII of this Agreement shall not be deemed outstanding for the purpose of
determining the Ownership Percentage. For purposes of this definition, "VALUE"
means, with respect to any share of stock, the value of such share determined by
Viacom under principles applicable for purposes of Section 1504 of the Code.

"OWNING PARTY" has the meaning ascribed thereto in Section 4.02.

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"PERSON" means any individual, corporation, limited or general
partnership, limited liability company, joint venture association, joint stock
company, trust unincorporated organization or government or any agency or
political subdivision thereof.

"PRIOR RELATIONSHIP" means the ownership relationship between
Viacom and Blockbuster at any time prior to the Split-Off Date.

"PUBLIC FILINGS" has the meaning ascribed thereto in Section
5.01(xii).

"QUARTERLY FINANCIAL STATEMENTS" has the meaning ascribed thereto
in Section 5.01(iv).

"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement to be entered into on or before the IPO Effective Date between Viacom
and Blockbuster, in substantially the form attached hereto as Exhibit C.

"REGULATION S-K" means Regulation S-K of the General Rules and
Regulations promulgated by the SEC.

"REGULATION S-X" means Regulation S-X of the General Rules and
Regulations promulgated by the SEC.

"RELATED PARTIES" has the meaning ascribed thereto in Section
4.03.

"RELEASE AND INDEMNIFICATION AGREEMENT" means the Release and
Indemnification Agreement to be entered into on or before the IPO Effective Date
between Viacom and Blockbuster, in substantially the form attached hereto as
Exhibit A.

"REPRESENTATIVES" means directors, officers, employees, agents,
consultants, advisors, accountants, attorneys and representatives.

"REQUESTOR" has the meaning ascribed thereto in Section 4.03.

"RETENTION PERIOD" has the meaning ascribed thereto in Section
4.04.

"SEC" means the Securities and Exchange Commission.

"SECURITIES ACT" means the Securities Act of 1933, as amended
from time to time, together with the rules and regulations promulgated
thereunder.

"SPLIT-OFF" means the distribution of Blockbuster Common Stock by
Viacom in one or more transactions occurring after the IPO that collectively
have the effect that all or a

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substantial part of the shares of Blockbuster Common Stock held by Viacom are
distributed to all or some of the stockholders of Viacom, whenever such
transaction(s) shall occur.

"SPLIT-OFF DATE" is the date upon which the Split-Off is
consummated.

"SUBSIDIARY" means, with respect to any Person, any other Person
a majority of the equity ownership or voting stock of which is at the time
owned, directly or indirectly, by such Person and/or one or more other
Subsidiaries of such Person; PROVIDED, HOWEVER, that prior to the Split-Off, a
Subsidiary of Viacom shall only include Persons who would be a Subsidiary of
Viacom assuming the Split-Off has occurred immediately prior to the
determination as to whether such Person were a Subsidiary of Viacom.

"TAX MATTERS AGREEMENT" means the Tax Matters Agreement to be
entered into on or before the IPO Effective Date between Viacom and Blockbuster,
in substantially the form as attached hereto as Exhibit D.

"THIRD PARTY CLAIM" has the meaning ascribed thereto in Section
8.01(b).

"TRANSITION SERVICES AGREEMENT" means the Transition Services
Agreement to be entered into on or before the IPO Effective Date between Viacom
and Blockbuster, in substantially the form attached hereto as Exhibit B.

"UNDERWRITING AGREEMENT" means the Underwriting Agreement between
Blockbuster and the underwriters relating to the IPO, as amended from time to
time.

"VIACOM" has the meaning ascribed thereto in the Preamble.

"VIACOM ANNUAL STATEMENTS" has the meaning ascribed thereto in
Section 5.01(xiv).

"VIACOM BUSINESS" means any assets, business or operations of
Viacom or any of its Affiliates other than the Blockbuster Business.

"VIACOM CLASS A COMMON STOCK" means the class A common stock, par
value $0.01 per share, of Viacom.

"VIACOM CLASS B COMMON STOCK" means the class B common stock, par
value $0.01 per share, of Viacom.

"VIACOM COMMON STOCK" means the Viacom Class A Common Stock and
the Viacom Class B Common Stock.

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"VIACOM GROUP" includes for federal income tax purposes, Viacom,
its Affiliates, Blockbuster and its Affiliates.

"VIACOM INTERNATIONAL" has the meaning ascribed thereto in the
Preamble.

"VIACOM PUBLIC FILINGS" has the meaning ascribed thereto in
Section 5.01(xii).

"VIACOM'S AUDITORS" has the meaning ascribed thereto in Section
5.01(xiv).

"VIACOM TRANSFER AGENT" means the company designated by Viacom as
the transfer agent and registrar for the Viacom Common Stock.

"WHEREHOUSE STOCK PURCHASE AGREEMENT" means the Stock Purchase
Agreement, dated as of August 10, 1998, between Viacom International and
Wherehouse Entertainment, Inc.

ARTICLE II
THE IPO AND THE SPLIT-OFF

Section 2.01. THE IPO AND OTHER PRIMARY OFFERINGS. Until the
Split-Off Date, Blockbuster shall consult with, and cooperate in all respects
with, Viacom in connection with any primary offering of the Blockbuster Common
Stock or any other securities of Blockbuster and shall, at Viacom's direction,
promptly take any and all actions necessary or desirable to consummate such
transactions.

Section 2.02. THE SPLIT-OFF. Viacom currently intends, following
the consummation of the IPO, to complete the Split-Off at a date after September
29, 1999. Viacom shall, in its sole and absolute discretion, determine whether
to proceed with all or part of the Split-Off and all terms of the Split-Off,
including, without limitation, the form, structure and terms of any
transaction(s) and/or offering(s) to effect the Split-Off and the timing of and
conditions to the consummation of the Split-Off. In addition, Viacom may at any
time and from time to time until the completion of the Split-Off abandon, modify
or change any or all of the terms of the Split-Off, including, without
limitation, by accelerating or delaying the timing of the consummation of all or
part of the Split-Off. Blockbuster shall cooperate with Viacom in all
commercially reasonable respects to accomplish the Split-Off and shall, at
Viacom's direction, promptly take any and all actions necessary or desirable to
effect the Split-Off, including, without limitation, the registration under the
Securities Act of Blockbuster Common Stock on an appropriate registration form
or forms to be designated by Viacom. Viacom shall select any investment
banker(s) and manager(s) in connection with the Split-Off, as well as any other
institutions providing services in connection with the Split-Off.

Section 2.03. CERTAIN STOCKHOLDER MATTERS. From and after the
distribution of Blockbuster Common Stock in connection with any transaction(s)
included as part of the

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Split-Off and until such Blockbuster Common Stock is duly transferred in
accordance with applicable law, Blockbuster shall regard the Persons receiving
Blockbuster Common Stock in such transaction(s) as record holders of Blockbuster
Common Stock in accordance with the terms of such transaction(s) without
requiring any action on the part of such Persons. Blockbuster agrees that,
subject to any transfers of such stock, (a) each such holder shall be entitled
to receive all dividends payable on, and exercise voting rights and all other
rights and privileges with respect to, the shares of Blockbuster Common Stock
then held by such holder and (b) each such holder shall be entitled, without any
action on the part of such holder, to receive one or more certificates
representing, or other evidence of ownership of, the shares of Blockbuster
Common Stock then held by such holder. Viacom shall cooperate, and shall
instruct the Viacom Transfer Agent to cooperate, with Blockbuster and the
Blockbuster Transfer Agent, and Blockbuster shall cooperate, and shall instruct
the Blockbuster Transfer Agent to cooperate, with Viacom and the Viacom Transfer
Agent, in connection with all aspects of the Split-Off and all other matters
relating to the issuance and delivery of certificates representing, or other
evidence of ownership of, the shares of Blockbuster Common Stock distributed to
the holders of Viacom Common Stock in connection with any transaction(s)
included as part of the Split-Off. Following the Split-Off, Viacom shall
promptly, but in no event no later than two business days thereafter, instruct
the Viacom Transfer Agent to deliver to the Blockbuster Transfer Agent true,
correct and complete copies of the stock and transfer records reflecting the
holders of Viacom Common Stock receiving shares of Blockbuster Common Stock in
connection with any transaction(s) included as part of the Split-Off.

Section 2.04. PRIOR RELATIONSHIP. Blockbuster, with respect to
Blockbuster and its Affiliates, and Viacom, with respect to Viacom and its
Affiliates, agree to take all commercially reasonable action to discontinue
their respective uses as promptly as is commercially reasonable of any printed
material that indicates an ownership or other relationship between or among
Viacom and Blockbuster or any of their respective Affiliates that has changed as
a result of the IPO, the Split-Off or any other transactions contemplated
hereby; PROVIDED that this Section 2.04 shall not prohibit the use of printed
material containing appropriate and accurate references to such relationship.

Section 2.05. FURTHER ASSURANCES REGARDING THE SPLIT-OFF. In
addition to the actions specifically provided for elsewhere in this Agreement,
Blockbuster shall, at Viacom's direction, use all commercially reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things commercially reasonably necessary, proper or expeditious under
applicable laws, regulations and agreements in order to consummate and make
effective the Split-Off as promptly as reasonably practicable. Without limiting
the generality of the foregoing, Blockbuster shall, at Viacom's direction,
cooperate with Viacom, and execute and deliver, or use all commercially
reasonable efforts to cause to have executed and delivered, all instruments,
including instruments of conveyance, assignment and transfer, and to make all
filings with, and to obtain all consents, approvals or authorizations of, any
domestic or foreign governmental or regulatory authority requested by Viacom in
order to consummate and make effective the Split-Off.

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ARTICLE III
EXPENSES

Section 3.01. GENERAL. Except as otherwise provided in this
Agreement, the Ancillary Agreements or any other agreement between the parties
relating to the IPO or the Split-Off, all costs and expenses of either party
hereto in connection with the IPO and the Split-Off shall be paid by the party
that incurs such costs and expenses.

Section 3.02. CERTAIN EXPENSES RELATING TO THE IPO AND ANY OTHER
PRIMARY OFFERINGS BY BLOCKBUSTER. Except for the fees and disbursements related
to Viacom's counsel, accountants and other advisors, Blockbuster shall pay or
cause to be paid all third party expenses relating to the IPO or any other
primary offering by Blockbuster prior to the Split-Off Date, including (i) the
preparation, printing and filing of the IPO Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto or any other registration statements, (ii) the preparation, printing and
delivery to any underwriters of any underwriting agreement, any agreement among
underwriters and any other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Blockbuster Common Stock
or any other securities of Blockbuster, (iii) the preparation, issuance and
delivery of the certificates for the Blockbuster Common Stock or any other
securities of Blockbuster to any underwriters or any other purchasers, including
any stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Blockbuster Common Stock or any other
securities of Blockbuster to any underwriters or any other securities, (iv) the
qualification of the Blockbuster Common Stock or any other securities of
Blockbuster under the securities laws in accordance with any state (Blue Sky
laws), including filing fees and the reasonable fees and disbursements of
counsel for any underwriters in connection therewith and in connection with the
preparation of the Blue Sky Survey and any supplement thereto, (v) the printing
and delivery to any underwriters of copies of each preliminary prospectus, any
term sheets and of the final prospectus and any amendments or supplements
thereto, (vi) the preparation, printing and delivery to any underwriters of
copies of the Blue Sky Survey and any supplement thereto, (vii) the fees and
expenses of any transfer agent or registrar for the Blockbuster Common Stock or
any other securities of Blockbuster, (viii) the filing fees incident to, and the
reasonable fees and disbursements of counsel to any underwriters in connection
with, the review by the National Association of Securities Dealers, Inc. (the
"NASD") of the terms of the sale of the Blockbuster Common Stock or any other
securities of Blockbuster and (ix) the fees and expenses incurred in connection
with the listing of the Blockbuster Common Stock or any other securities of
Blockbuster on the New York Stock Exchange, any other national securities
exchange or any national over the counter quotation system.

Section 3.03. CERTAIN EXPENSES RELATING TO THE SPLIT-OFF.
Except for the fees and disbursements related to Blockbuster's counsel,
accountants and other advisors, Viacom shall pay or cause to be paid all
third party expenses relating to the Split-Off, including (i) the fees and
expenses of the underwriter or dealer-manager, (ii) the preparation,
printing, filing (including under federal and state securities laws), mailing
and publishing of the offering materials relating to the Blockbuster Common
Stock, (iii) the preparation, printing and

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delivery of any certificates or documents entered into in connection with the
Split-Off, (iv) the fees and expenses of any exchange agent, information
agent, transfer agent or registrar for the Blockbuster Common Stock, (v) the
fees and expenses incurred in connection with the listing of the Blockbuster
Common Stock with the NASD or the New York Stock Exchange, any other national
securities exchange or any national over the counter quotation system, if
applicable and (vi) any other fees incurred in connection with the Split-Off.

ARTICLE IV
ACCESS TO INFORMATION

Section 4.01. RESTRICTIONS ON DISCLOSURE OF INFORMATION. (a)
Without limiting any rights or obligations under any other agreement between or
among the parties hereto and/or any of their respective Affiliates relating to
confidentiality, for a period of three years following the date hereof, each of
the parties hereto agrees that it shall not, and shall not permit any of its
Affiliates or Representatives to, disclose any Confidential Information to any
Person, other than to such Affiliates or Representatives on a need-to-know basis
in connection with the purpose for which the Confidential Information was
originally disclosed. Such Information shall no longer be deemed Confidential
Information, to the extent that it is or was (i) in the public domain other than
by the breach of this Agreement or by breach of any other agreement between or
among the parties hereto and/or any of their respective Affiliates, (ii)
available to such party outside the context of the Prior Relationship on a
nonconfidential basis prior to its disclosure by the other party, (iii) lawfully
acquired outside the context of the Prior Relationship on a nonconfidential
basis or independently developed by, or on behalf of, such party by Persons who
do not have access to, or descriptions of, any such Confidential Information,
(iv) required to be disclosed by law, governmental order or the rules and
regulations of the SEC, or (v) mutually agreed to by the parties.

(b) Each of the parties hereto shall maintain, and shall cause
its respective Affiliates to maintain, policies and procedures, and develop such
further policies and procedures as shall from time to time become necessary or
appropriate, to ensure compliance with this Section 4.01.

Section 4.02. LEGALLY REQUIRED DISCLOSURE OF CONFIDENTIAL
INFORMATION. If any of the parties to this Agreement or any of their respective
Affiliates or Representatives become legally required to disclose any
Confidential Information, such disclosing party shall promptly notify the party
owning the Confidential Information (the "OWNING PARTY") and shall use all
commercially reasonable efforts to cooperate with the Owning Party so that the
Owning Party may seek a protective order or other appropriate remedy and/or
waive compliance with this Section 4.02. All expenses reasonably incurred in
seeking a protective order or other remedy shall be borne by the Owning Party.
If such protective order or other remedy is not obtained, or if the Owning Party
waives compliance with this Section 4.02, the disclosing party or its Affiliate
or Representative, as applicable, shall (a) disclose only that portion of the
Confidential Information it is compelled by law to disclose, (b) use all
commercially reasonable efforts to obtain reliable

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assurance requested by the Owning Party that confidential treatment will be
accorded such Confidential Information, and (c) promptly provide the Owning
Party with a copy of the Confidential Information so disclosed, in the same form
and format so disclosed, together with a description of all Persons to whom such
Confidential Information was disclosed.

Section 4.03. ACCESS TO INFORMATION. (a) During the Retention
Period, each of the parties hereto shall cooperate with and afford, and shall
cause their respective Affiliates, Representatives, Subsidiaries, successors
and/or assignees, and shall use reasonable efforts to cause joint ventures that
are not Affiliates (collectively, "RELATED PARTIES") to cooperate with, and
afford to the other party, reasonable access upon reasonable advance written
request to all information (other than information created after the Split-Off
Date (i) the disclosure of which would have the effect of waiving a legal
privilege, or (ii) which is the subject of a confidentiality agreement between
such party and a third party which prohibits disclosure to the other party,
PROVIDED that such party shall use all commercially reasonable efforts to obtain
such third party's consent to disclosure of such information) within such
party's or any Related Party's possession. Access to the requested information
shall be provided so long as it relates to the requesting party's (the
"REQUESTOR") assets, business and operations, and access is reasonably required
by the Requestor as a result of the parties' Prior Relationship for purposes of
auditing, accounting, claims or litigation (except for claims or litigation
between the parties hereto), employee benefits, regulatory or tax purposes or
fulfilling disclosure or reporting obligations including, without limitation,
information reasonably necessary for the preparation of reports required by or
filed under the Securities Act or the Exchange Act with respect to any period
entirely or partially prior to the Split-Off Date or any other reasonable
purpose.

(b) Each party agrees to cooperate fully to allow access to each
others employees (i) to the extent that they are reasonably necessary to discuss
and explain all requested Information with and to the requesting party and (ii)
with respect to any claims brought against the other involving the conduct of
the Blockbuster Business prior to the Split-Off Date.

Section 4.04. RECORD RETENTION. (a) BOOKS AND RECORDS. Viacom and
Blockbuster shall preserve and keep all of their respective books and records in
the possession of such party or its Related Parties, whether in electronic form
or otherwise, for no less than the later of (i) the record retention policy of
Viacom and Blockbuster as in effect as of the Split-Off Date or (ii) any period
as may be required by any laws, regulations or rulings promulgated thereunder of
any jurisdiction (or of any political subdivision or taxing authority thereof)
(the "RETENTION PERIOD"), at such party's sole cost and expense. Viacom shall
deliver to Blockbuster on the Split-Off Date any and all original corporate
organization books that Viacom has in its possession relating solely to the
Blockbuster Business, copies of which Viacom may retain at its own expense. Upon
reasonable prior written request, Viacom and Blockbuster shall deliver to the
other copies of any and all books and records that Viacom or Blockbuster, as the
case may be, has in its possession relating to the Blockbuster Business.

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ARTICLE V
COVENANTS

Section 5.01. FINANCIAL AND OTHER INFORMATION. Blockbuster (and
Viacom with respect to clause (xii) below) agrees that, for so long as Viacom is
required to consolidate Blockbuster's results of operations and financial
position (determined in accordance with generally accepted accounting principles
consistently applied):

(i) Blockbuster shall, and shall cause each of its Subsidiaries
to, maintain a system of internal accounting controls in accordance with
generally accepted accounting principles and SEC and tax related
requirements that will provide reasonable assurance that Blockbuster's
and such Subsidiaries' books, records and accounts fairly reflect all
transactions and dispositions of assets.

(ii) Blockbuster shall, and shall cause each of its Subsidiaries
to, maintain a fiscal year which commences and ends on the same dates as
does Viacom's fiscal year of each calendar year.

(iii) As soon as practicable, and in any event within ten
Business Days after the end of each month in each fiscal year of
Blockbuster, Blockbuster shall deliver to Viacom (a) a monthly
consolidated income statement and related schedules for Blockbuster and
its Subsidiaries and (b) a year-to-date consolidated income statement
and related schedules for Blockbuster and its Subsidiaries. As soon as
practicable, and in any event within 20 Business Days (x) after the end
of each of the first three quarters in each fiscal year of Blockbuster,
and (y) after the end of each such fiscal year, Blockbuster shall
deliver to Viacom a consolidated balance sheet and related schedules and
statement of cash flows and related schedules for Blockbuster and its
Subsidiaries for such fiscal quarter or year end, as the case may be.

(iv) As soon as practicable, and in any event within 35 days
after the end of each of the first three quarters in each fiscal year of
Blockbuster and no later than ten days before Blockbuster intends to
file its Quarterly Financial Statements (as defined below) with the SEC,
Blockbuster shall deliver to Viacom drafts of (A) the consolidated
financial statements of Blockbuster and its Subsidiaries (and notes
thereto) for such periods and for the period from the beginning of the
current fiscal year to the end of such quarter, setting forth in each
case in comparative form for each such fiscal quarter of Blockbuster the
consolidated figures (and notes thereto) for the corresponding quarter
and periods of the previous fiscal year and all in reasonable detail and
prepared in accordance with Article 10 of Regulation S-X, and (B) a
discussion and analysis by management of Blockbuster's and its
Subsidiaries' financial condition and results of operations for such
fiscal period, including, without limitation, an explanation of any
material adverse change, all in reasonable detail and prepared in
accordance with Item 303(b) of Regulation S-K. The information set forth
in subsections (A) and (B) above is herein referred to as the

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"QUARTERLY FINANCIAL STATEMENTS." No later than the earlier of (x) two
Business Days prior to the date Blockbuster publicly files the Quarterly
Financial Statements with the SEC or otherwise makes such Quarterly
Financial Statements publicly available or (y) two Business Days prior
to the date on which Viacom has notified Blockbuster that it intends to
file its quarterly financial statements with the SEC, Blockbuster shall
deliver to Viacom the substantially final form of the Quarterly
Financial Statements certified by the chief financial officer of
Blockbuster as presenting fairly, in all material respects, the
financial condition and results of operations of Blockbuster and its
Subsidiaries; PROVIDED that Blockbuster and Viacom shall actively
consult with each other regarding any changes (whether or not
substantive) which Blockbuster may consider making to its Quarterly
Financial Statements and related disclosures prior to the filing with
the SEC. In addition to the foregoing, no (a) Quarterly Financial
Statement or (b) any other document which refers, or contains
information with respect, to the ownership of Blockbuster by Viacom, the
separation of Blockbuster from Viacom or the Split-Off shall be filed
with the SEC or otherwise made public by Blockbuster or any of its
Subsidiaries without the prior consent of Viacom which shall not be
unreasonably withheld. In any event, Blockbuster shall deliver to Viacom
its final Quarterly Report on Form 10-Q no later than 45 days after the
end of each of the first three quarters in each fiscal year of
Blockbuster. If the time period required by the SEC for Blockbuster to
file its Quarterly Report on Form 10-Q is changed, Blockbuster and
Viacom shall renegotiate in good faith to set more appropriate time
periods relating to the dates as set forth in this Section 5.01(iv). As
soon as practicable but in no event two Business Days prior to issuance,
Blockbuster shall deliver to Viacom copies of substantially final drafts
of all of its quarterly earnings releases. In addition, within such two
day period, Blockbuster shall actively consult with Viacom regarding any
changes (other than typographical or other similar minor changes) to
such substantially final drafts. Immediately following the issuance
thereof, Blockbuster shall deliver to Viacom final copies of such
earnings releases. Viacom shall determine, in its sole discretion, the
timing of Blockbuster's quarterly earnings releases; provided that
Blockbuster and Viacom will consult with each other on such timing if
the senior management of Blockbuster notifies Viacom that Blockbuster
is required by law as advised by its counsel not to release its
earnings at such time as initially determined by Viacom.

(v) Blockbuster shall deliver to Viacom as soon as practicable,
and in any event within 60 days after the end of each fiscal year of
Blockbuster and no later than 15 days before Blockbuster intends to file
its Annual Financial Statements with the SEC, (A) drafts of the
consolidated financial statements of Blockbuster (and notes thereto) for
such year, setting forth in each case in comparative form the
consolidated figures (and notes thereto) for the previous fiscal year
and all in reasonable detail and prepared in accordance with Regulation
S-X and (B) a discussion and analysis by management of Blockbuster's and
its Subsidiaries' financial condition and results of operations for such
year, including, without limitation, an explanation of any material
adverse change, all in reasonable detail and prepared in accordance with
Item 303(a) of Regulation S-K. The information set forth in (A) and (B)
above is herein referred to as the "ANNUAL FINANCIAL STATEMENTS."
Blockbuster shall deliver to Viacom all material revisions to such
drafts as soon as any such revisions are prepared or made. No later than
the earlier of (x) five Business Days prior to the date Blockbuster
publicly files the Annual Financial Statements with the SEC

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or otherwise makes such Annual Financial Statements publicly available
or (y) five Business Days prior to the date on which Viacom has
notified Blockbuster that it intends to file its annual financial
statements with the SEC, Blockbuster shall deliver to Viacom the final
form of the Annual Financial Statements certified by the chief financial
officer of Blockbuster as presenting fairly, in all material respects,
the financial condition and results of operations of Blockbuster and its
Subsidiaries; PROVIDED that Blockbuster and Viacom shall actively
consult with each other regarding any changes (whether or not
substantive) which Blockbuster may consider making to its Annual
Financial Statements and related disclosures prior to the filing with
the SEC. In addition to the foregoing, no (a) Annual Financial Statement
or (b) any other document which refers, or contains information with
respect, to the ownership of Blockbuster by Viacom, the separation of
Blockbuster from Viacom or the Split-Off shall be filed with the SEC or
otherwise made public by Blockbuster or any of its Subsidiaries without
the prior consent of Viacom which shall not be unreasonably withheld. In
any event, Blockbuster shall deliver to Viacom its final Annual Report
on Form 10-K no later than 90 days after the end of each fiscal year of
Blockbuster. If the time period required by the SEC for Blockbuster to
file its Annual Report on Form 10-K is changed, Blockbuster and Viacom
shall renegotiate in good faith to set more appropriate time periods
relating to the dates as set forth in this Section 5.01(v). As soon as
practicable but in no event two Business Days prior to issuance,
Blockbuster shall deliver to Viacom copies of substantially final drafts
of its annual earnings releases. In addition, within such two day
period, Blockbuster shall actively consult with Viacom regarding any
changes (other than typographical or other similar minor changes) to
such substantially final drafts. Immediately following the issuance
thereof, Blockbuster shall deliver to Viacom final copies of the
earnings release. Viacom shall determine, in its sole discretion, the
timing of Blockbuster's annual earnings release; provided that
Blockbuster and Viacom will consult with each other on such timing if
the senior management of Blockbuster notifies Viacom that Blockbuster
is required by law as advised by its counsel not to release its
earnings at such time as initially determined by Viacom.

(vi) Blockbuster shall deliver to Viacom all Quarterly and Annual
Financial Statements of each Subsidiary of Blockbuster which is itself
required to file financial statements with the SEC or otherwise make
such financial statements publicly available, with such financial
statements to be provided in the same manner and detail and on the same
time schedule as those financial statements of Blockbuster required to
be delivered to Viacom pursuant to this Section 5.01.

(vii) All information provided by Blockbuster or any of its
Subsidiaries to Viacom pursuant to Sections 5.01(iii) through (vi)
inclusive shall be consistent in terms of format and detail and
otherwise with the procedures in effect on the date hereof with respect
to the provision of such financial information by the Blockbuster
Business and/or Blockbuster and its Subsidiaries, as applicable, to
Viacom (and, where appropriate, as presently presented in financial
reports to Viacom's Board of Directors), with such changes therein as
may be requested by Viacom from time to time consistent with changes in
reporting by sectors and Subsidiaries of Viacom in accordance with
generally accepted accounting principles.

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(viii) Blockbuster and each of its Subsidiaries which files
information with the SEC shall deliver to Viacom: (A) as soon as the
same are prepared, substantially final drafts of (x) all reports,
notices and proxy and information statements to be sent or made
available by Blockbuster or any of its Subsidiaries to their security
holders, (y) all regular, periodic and other reports to be filed under
Sections 13, 14 and 15 of the Exchange Act (including current reports on
Form 8-K and annual reports to stockholders), and (z) all registration
statements and prospectuses to be filed by Blockbuster or any of its
Subsidiaries with the SEC or any securities exchange pursuant to the
listed company manual (or similar requirements) of such exchange
(collectively, the documents identified in clauses (x), (y) and (z) are
referred to herein as "BLOCKBUSTER PUBLIC DOCUMENTS"); and (B) as soon
as practicable, but in no event later than [four] Business Days prior to
the date the same are printed, sent or filed, whichever is earliest,
substantially final drafts of all such Blockbuster Public Documents;
PROVIDED that Blockbuster and Viacom shall actively consult with each
other regarding any changes (whether or not substantive) which
Blockbuster may consider making to any of its Blockbuster Public
Documents and related disclosures prior to any anticipated filing with
the SEC. In addition to the foregoing, no (a) Blockbuster Public
Document or (b) any other document which refers, or contains information
with respect, to the ownership of Blockbuster by Viacom, the separation
of Blockbuster from Viacom or the Split-Off shall be filed with the SEC
or otherwise made public by Blockbuster or any of its Subsidiaries
without the prior consent of Viacom which consent shall not unreasonably
be withheld.

(ix) Blockbuster shall, as promptly as practicable, deliver to
Viacom copies of all annual and other budgets and financial projections
(consistent in terms of format and detail and otherwise with the
procedures in effect on the date hereof) relating to Blockbuster or any
of its Subsidiaries and shall provide Viacom an opportunity to meet with
management of Blockbuster to discuss such budgets and projections.

(x) With reasonable promptness, Blockbuster shall deliver to
Viacom such additional financial and other information and data with
respect to Blockbuster and its Subsidiaries and their business,
properties, financial positions, results of operations and prospects as
from time to time may be reasonably requested by Viacom.

(xi) Except with respect to Blockbuster's quarterly and annual
earnings releases, Blockbuster shall deliver to Viacom as soon as
practicable but in no event two Business Days prior to issuance, copies
of substantially final drafts of all press releases and other statements
to be made available by Blockbuster or any of its Subsidiaries to
employees of Blockbuster or any of its Subsidiaries or to the public
concerning material developments in the business, properties, earnings,
results of operations, financial condition or prospects of Blockbuster
or any of its Subsidiaries or the relationship between (A) Blockbuster
or any of its Subsidiaries and (B) Viacom or any of its Affiliates. In
addition, within such two day period, prior to the issuance of any such
press release or public statement, Blockbuster shall actively consult
with Viacom regarding any changes

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(other than typographical or other similar minor changes) to such
substantially final drafts. Immediately following the issuance thereof,
Blockbuster shall deliver to Viacom copies of final drafts of all press
releases and other public statements.

(xii) Viacom and Blockbuster shall cooperate fully, and cause
their respective accountants to cooperate fully, to the extent requested
by the other party in the preparation of the other party's public
earnings releases, annual reports on Form 10-K, quarterly reports on
Form 10-Q, any current reports on Form 8-K and any other proxy,
information and registration statements, reports, notices, prospectuses
and any other filings made by Viacom or Blockbuster with the SEC, any
national securities exchange or otherwise made publicly available
(collectively, "VIACOM PUBLIC FILINGS" and the "BLOCKBUSTER PUBLIC
FILINGS" and together, the "PUBLIC FILINGS"). Viacom and Blockbuster
agree to provide to each other all information that the other party
reasonably requests in connection with any Public Filings or that, in
the judgment of either party's, is required to be disclosed or
incorporated by reference therein under any law, rule or regulation.
Such information shall be provided by such party in a timely manner on
the dates requested by the other party (which may be earlier than the
dates on which such party otherwise would be required hereunder to have
such information available) to enable the other party to prepare, print
and release all Public Filings on such dates as such party shall
determine. Viacom and Blockbuster shall use its reasonable best efforts
to cause their respective accountants to consent to any reference to
them as experts in any Public Filing required under any law, rule or
regulation. If and to the extent requested by either party, the other
party shall diligently and promptly review all drafts of such Public
Filing and prepare in a diligent and timely fashion any portion of such
Public Filing pertaining to that party. Prior to any printing or public
release of any Public Filing, an appropriate executive officer of Viacom
or Blockbuster shall, if requested by the other party, certify that the
information provided by such party relating to such party, its
Affiliates or its business in such Public Filing is accurate, true and
correct in all material respects. Unless required by law, rule,
regulation or generally accepted accounted principle, Blockbuster shall
not publicly release any financial or other information which
significantly conflicts with the information with respect to
Blockbuster, any of its Affiliates or the Blockbuster Business that is
included in any Viacom Public Filing without Viacom's prior written
consent. Prior to the release or filing thereof, Viacom and Blockbuster
shall provide each other with a draft of any portion of a Public Filing
containing information relating to the other party and its Subsidiaries
and shall give such party an opportunity to review such information and
comment thereon; PROVIDED that the other party shall determine in its
sole discretion the final form and content of all Public Filings.

(xiii) Blockbuster shall not change its independent certified
public accountants ("BLOCKBUSTER'S AUDITORS") without Viacom's prior
consent.

(xiv) Blockbuster shall use its reasonable best efforts to enable
the Blockbuster Auditors to complete their audit such that they will
date their opinion on Blockbuster's

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audited annual financial statements on the same date that Viacom's
independent certified public accountants ("VIACOM'S AUDITORS") date
their opinion on Viacom's audited annual financial statements (the
"VIACOM ANNUAL STATEMENTS"), and to enable Viacom to meet its timetable
for the printing, filing and public dissemination of the Viacom Annual
Statements.

(xv) Blockbuster shall authorize Blockbuster's Auditors to make
available to Viacom's Auditors both the personnel who performed or are
performing the annual audit of Blockbuster and work papers related to
the annual audit of Blockbuster, in all cases within a reasonable time
prior to Blockbuster's Auditors' opinion date, so that Viacom's Auditors
are able to perform the procedures they consider necessary to take
responsibility for the work of Blockbuster's Auditors as it relates to
Viacom's Auditors' report on Viacom's statements, all within sufficient
time to enable Viacom to meet its timetable for the printing, filing and
public dissemination of the Viacom Annual Statements.

(xvi) Blockbuster shall provide Viacom's internal auditors access
to Blockbuster's and its Subsidiaries, books and records so that Viacom
may conduct reasonable audits relating to the financial statements
provided by Blockbuster pursuant hereto as well as to the internal
accounting controls and operations of Blockbuster and its Subsidiaries.

(xvii) Blockbuster shall give Viacom as much prior notice as is
reasonably practical of any proposed determination of, or any changes
in, its accounting estimates or accounting principles from those in
effect on the date hereof. Blockbuster will consult with Viacom and, if
requested by Viacom, Blockbuster will consult with Viacom's independent
public accountants with respect thereto. Blockbuster will not make such
determination or changes without Viacom's prior consent, which shall not
be unreasonably withheld.

(xviii) Notwithstanding clause (xvii) above, Blockbuster shall
make any changes in its accounting estimates or accounting principles
that are requested by Viacom in order for Blockbuster's accounting
estimates and principles to be consistent with those of Viacom.

Nothing in this Section 5.01 shall require Blockbuster to violate any agreement
with any of its customers, suppliers or other third parties regarding the
confidentiality of commercially sensitive information relating to that customer,
suppliers or other third parties or its business; PROVIDED that in the event
that Blockbuster is required under this Section 5.01 to disclose any such
information, Blockbuster shall use all commercially reasonable efforts to seek
to obtain such customer's, suppliers' or other third parties, consent to the
disclosure of such information.

For the purposes of these covenants, Viacom and Blockbuster
understand and appreciate that their mutual interests will be best served by
effecting a rapid and fair resolution of

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any claims or disputes which may arise out of this Section 5.01. Therefore, each
party agrees to use its reasonable best efforts to resolve all such disputes as
rapidly as possible on a fair and equitable basis. Toward this end, each party
agrees to develop and follow a process for presenting, rapidly assessing, and
settling claims and other disputes on a fair and equitable basis. If any dispute
or claim arising under this Section 5.01 cannot be readily resolved by the
parties, the parties agree to refer the matter to the chief financial officers
of each party who shall meet and attempt to resolve the dispute within fifteen
days from the date the dispute was brought before their attention. If any
dispute or claim arising under this Section 5.01 cannot be resolved by chief
financial officers, the parties agree to refer the matter to a senior auditing
partner of a nationally recognized accounting firm not currently providing
services to either party.

Section 5.02. NO VIOLATIONS. (a) For so long as the Ownership
Percentage is equal to or greater than 50%, Blockbuster covenants and agrees
that it will not take any action or enter into any commitment or agreement which
may reasonably be anticipated to result, with or without notice and with or
without lapse of time or otherwise, in a contravention or event of default by
any of its Affiliates of (i) any provisions of applicable law or regulation,
including but not limited to provisions pertaining to the Code or the Employee
Retirement Income Security Act of 1974, as amended, (ii) any provision of
Viacom's certificate of incorporation or bylaws, (iii) any credit agreement or
other material agreements (including agreements relating to covenants not to
compete) binding upon Viacom or (iv) any judgment, order or decree of any
governmental body, agency or court having jurisdiction over Viacom or any of its
respective assets.

(b) Blockbuster and Viacom agree to provide to the other any
information and documentation requested by the other for the purpose of
evaluating and ensuring compliance with Section 5.02(a) hereof.

(c) Notwithstanding the foregoing Section 5.01, nothing in this
Agreement is intended to limit or restrict in any way Viacom's right's as a
stockholder of Blockbuster.

Section 5.03. OTHER AGREEMENTS. On or prior to the consummation
of the IPO, Viacom and Blockbuster shall have executed and delivered to each
other each of the Ancillary Agreements.

ARTICLE VI
ASSIGNMENT AND ASSUMPTION

Section 6.01. ASSIGNMENT OF OBLIGATIONS. Pursuant to the
assignment provision of Section 10.07 of the Wherehouse Stock Purchase
Agreement, Viacom International hereby transfers, conveys, sets over and assigns
to Blockbuster any and all rights under the Wherehouse Stock Purchase Agreement
and any ancillary agreements executed in connection therewith.

Section 6.02. ASSUMPTION OF OBLIGATIONS. Blockbuster hereby
undertakes, assumes and agrees to perform all of the duties, obligations and
liabilities of Viacom International

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under the Wherehouse Stock Purchase Agreement and any ancillary agreements
executed in connection therewith.

Section 6.03. ASSIGNMENT OF CERTAIN EMPLOYMENT AGREEMENTS. On
or about the Split-Off Date, Viacom will transfer, convey, set over and
assign to Blockbuster any and all employment agreements between "Blockbuster
Entertainment Group, a business unit of Viacom," and the employees who are a
party to such employment agreements.

Section 6.04. ASSUMPTION OF CERTAIN EMPLOYMENT AGREEMENTS. On
or about the Split-Off Date, Blockbuster will undertake, assume and agree to
perform all of the duties, obligations and liabilities of "Blockbuster
Entertainment Group, a business unit of Viacom," under the employment
agreements referred to in Section 6.03 herein.

ARTICLE VII
OPTIONS

Section 7.01. OPTIONS. (a) Blockbuster hereby grants to Viacom
International, on the terms and conditions set forth herein, a continuing right
(the "BLOCKBUSTER CLASS B COMMON STOCK OPTION") to purchase from Blockbuster, at
the times set forth herein, such number of shares of Blockbuster Class B Common
Stock as is necessary to allow the Viacom International to maintain the
Ownership Percentage. The exercise price for the shares of Blockbuster Class B
Common Stock purchased pursuant to the Blockbuster Class B Common Stock Option
shall be the Market Price of the Blockbuster Class A Common Stock as of the date
of first delivery of notice of exercise of the Blockbuster Class B Common Stock
Option by Viacom International to Blockbuster.

(b) The provisions of Section 7.01(a) hereof notwithstanding, the
Blockbuster Class B Common Stock Option granted pursuant to Section 7.01(a)
shall not apply and shall not be exercisable in connection with the issuance by
Blockbuster of any shares of Blockbuster Common Stock pursuant to any stock
option or other executive or employee benefit or compensation plan maintained by
Blockbuster, so long as, from and after the date hereof and prior to the
issuance of such shares, Blockbuster or Viacom International has repurchased
from shareholders and Blockbuster has not subsequently reissued a number of
shares equal or greater to the number of shares to be issued in any such
issuance.

(c) Blockbuster hereby grants to Viacom International, on the
terms and conditions set forth herein, a continuing right (the "NONVOTING STOCK
OPTION" and, together with the Blockbuster Class B Common Stock Option, the
"OPTIONS") to purchase from Blockbuster, at the times set forth herein, such
number of shares of Nonvoting Stock as is necessary to allow the Viacom
International to own 80 percent of each class of outstanding Nonvoting Stock.
The exercise price for the shares of Nonvoting Stock purchased pursuant to the
Nonvoting Stock Option shall be the price at which such Nonvoting Stock is then
being sold to third parties, or, if no Nonvoting Stock is being sold, the fair
market value thereof as determined in good faith by an independent investment
advisor.

Section 7.02. NOTICE. At least two business days prior to the
issuance of any shares of Blockbuster Common Stock (other than in connection
with the IPO, including the full exercise of all underwriters' over-allotment
options granted in connection therewith and other than issuances of Blockbuster
Common Stock Viacom International) or the first date on which any event could
occur that, in the absence of a full or partial exercise of the Blockbuster
Class B Common Stock Option, would result in a reduction in the Ownership
Percentage, Blockbuster will notify Viacom International in writing (a
"BLOCKBUSTER CLASS B COMMON STOCK OPTION NOTICE") of any plans it has to issue
such shares or the date on which such event could first occur.

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At least two business days prior to the issuance of any shares of Nonvoting
Stock (other than issuances of Nonvoting Stock to Viacom International) or the
first date on which any event could occur that, in the absence of a full or
partial exercise of the Nonvoting Stock Option, would result in the Viacom
International owning less than 80 percent of each class of outstanding Nonvoting
Stock, Blockbuster will notify Viacom International in writing (a "NONVOTING
STOCK OPTION NOTICE" and, together with a Blockbuster Class B Common Stock
Option Notice, an "OPTION NOTICE") of any plans it has to issue such shares or
the date on which such event could first occur. Each Option Notice must specify
the date on which Blockbuster intends to issue such additional shares or on
which such event could first occur (such issuance or event being referred to
herein as an "ISSUANCE EVENT" and the date of such issuance or event as an
"ISSUANCE EVENT DATE"), the number of shares Blockbuster intends to issue or may
issue and the other terms and conditions of such Issuance Event.

Section 7.03. OPTION EXERCISE AND PAYMENT. The Blockbuster Class
B Common Stock Option may be exercised by Viacom International for a number of
shares equal to or less than the number of shares that are necessary for the
Viacom International to maintain, in the aggregate, the then-current Ownership
Percentage. The Nonvoting Stock Option may be exercised by Viacom International
for a number of shares equal to or less than the number of shares that are
necessary for the Viacom International to own, in the aggregate, 80 percent of
each class of outstanding Nonvoting Stock. Each Option may be exercised at any
time after receipt of an applicable Option Notice and prior to the applicable
Issuance Event Date by the delivery to Blockbuster of a written notice to such
effect specifying (i) the number of shares of Blockbuster Class B Common Stock
or Nonvoting Stock, as the case may be, to be purchased by Viacom International
and (ii) a calculation of the exercise price for such shares. Upon any such
exercise of either Option, Blockbuster will, prior to the applicable Issuance
Event Date, deliver to Viacom International, against payment therefor,
certificates (issued in the name of Viacom International) representing the
shares of Blockbuster Class B Common Stock or Nonvoting Stock, as the case may
be, being purchased upon such exercise. Payment for such shares shall be made by
wire transfer or intrabank transfer of immediately-available funds to such
account as shall be specified by Blockbuster, for the full purchase price for
such shares.

Section 7.04. EFFECT OF FAILURE TO EXERCISE. Except as provided
in Section 7.06, any failure by Viacom International to exercise either Option,
or any exercise for less than all shares purchasable under either Option, in
connection with any particular Issuance Event shall not affect Viacom
International's right to exercise the relevant Option in connection with any
subsequent Issuance Event.

Section 7.05. IPO. Notwithstanding the foregoing, Viacom
International shall not be entitled to exercise the Blockbuster Class B Common
Stock Option in connection with the IPO of the Blockbuster Class A Common Stock
if, upon the completion of the IPO, including the full exercise of all
underwriters' over-allotment options granted in connection therewith, the
Ownership Percentage would be greater than 80%.

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Section 7.06. TERMINATION OF OPTIONS. The Options shall terminate
upon the occurrence of any Issuance Event that, after considering Viacom
International's response thereto and to any other Issuance Events, results in
the Ownership Percentage being less than 45%, other than any Issuance Event in
violation of this Agreement.

ARTICLE VIII
INDEMNIFICATION

Section 8.01. INDEMNIFICATION PROCEDURES. (a) The indemnification
procedures set forth in Section 8.01(b) herein are applicable to any indemnity
granted pursuant to the Ancillary Agreements (other than the Tax Matters
Agreement).

(b) If a claim or demand is made against an Indemnified Party by
any Person who is not a party to the Ancillary Agreements (a "THIRD PARTY
CLAIM") as to which such Indemnified Party is entitled to indemnification
pursuant to the Ancillary Agreements, such Indemnified Party shall give the
Indemnifying Party notice of such Third Party Claim, as promptly as practicable,
but in any event no later than 15 days of the receipt by the Indemnified Party
of such notice; PROVIDED, HOWEVER, that the failure to provide such notice shall
not release the Indemnifying Party from any of its obligations under the
Ancillary Agreements except to the extent the Indemnifying Party is materially
prejudiced by such failure and shall not relieve the Indemnifying Party from any
other obligation or liability that it may have to any Indemnified Party
otherwise than under the Ancillary Agreements. If the Indemnifying Party
acknowledges in writing its obligations to indemnify the Indemnified Party
hereunder against any Losses that may result from such Third Party Claim, then
such Indemnifying Party shall be entitled to assume and control the defense of
such Third Party Claim at its expense and through counsel of its choice, subject
to the approval of the Indemnified Party (which approval shall not be
unreasonably withheld or delayed), if it gives notice of its intention to do so
to the Indemnified Party within 15 business days of the receipt of such notice
from the Indemnified Party; PROVIDED, HOWEVER, that if there exists or is
reasonably likely to exist a conflict of interest that would make it
inappropriate in the reasonable judgment of the Indemnified Party for the same
counsel to represent both the Indemnified Party and the Indemnifying Party, then
the Indemnified Party shall be entitled to retain its own counsel, in each
jurisdiction for which the Indemnified Party determines counsel is required to
participate in such defense, at the expense of the Indemnifying Party. In the
event the Indemnifying Party exercises the right to undertake any such defense
against any such Third Party Claim as provided above, the Indemnified Party
shall cooperate with the Indemnifying Party in such defense and make available
to the Indemnifying Party, at the Indemnifying Party's expense, all witnesses,
pertinent records, materials and information in the Indemnified Party's
possession or under the Indemnified Party's control relating thereto as is
reasonably required by the Indemnifying Party, subject to reimbursement of
reasonable out-of-pocket expenses. Similarly, in the event the Indemnified Party
is, directly or indirectly, conducting the defense against any such Third Party
Claim, the Indemnifying Party shall cooperate with the Indemnified Party in such
defense and make available to the Indemnified Party all such witnesses, records,
materials and information in the Indemnifying Party's possession or under the
Indemnifying Party's control

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relating thereto as is reasonably required by the Indemnified Party, subject to
reimbursement of reasonable out-of-pocket expenses. No such Third Party Claim
may be settled by the Indemnifying Party without the prior written consent of
the Indemnified Party (which shall not be unreasonably withheld or delayed)
unless such settlement is solely for money and includes an unconditional release
of each Indemnified Party from any and all Losses arising out of such action,
claim, suit or proceeding and would not otherwise adversely affect the
Indemnified Party. No such Third Party Claim may be settled by the Indemnified
Party without the prior written consent of the Indemnifying Party which shall
not be unreasonably withheld or delayed.

Notwithstanding the foregoing, the Indemnifying Party shall not
be entitled to assume the defense of any Third Party Claim and shall be liable
for the fees and expenses of counsel incurred by the Indemnified Party in
defending such Third Party Claim if the Third Party Claim seeks an order,
injunction or other equitable relief or relief for other than money damages
against the Indemnified Party which the Indemnified Party reasonably determines,
after conferring with its counsel, cannot be separated from any related claim
for money damages. If such equitable relief or other relief portion of the Third
Party Claim can be so separated from that for money damages, the Indemnifying
Party shall be entitled to assume the defense of the portion relating to money
damages.

ARTICLE IX
CONDITION TO CONSUMMATION OF TRANSACTIONS; TERMINATION

Section 9.01. CONDITION. Consummation of the transactions
provided for in this Agreement and the Ancillary Agreements is conditioned upon,
and shall only be effected upon or after (i) the final approval of the IPO by
the Board of Directors of Blockbuster and Viacom, (ii) the final approval of the
Split-Off by the Board of Directors of Viacom and (iii) the closing of the IPO.

Section 9.02. TERMINATION. This Agreement may be terminated and
the IPO and Split-Off abandoned by the Board of Directors of Viacom in its sole
discretion, without the approval of Blockbuster at any time prior to the IPO
Effective Date or Split-Off Date, as applicable. In the event of any such
termination, no party shall have any liability of any kind to the other party.

ARTICLE X
MISCELLANEOUS

Section 10.01. LIMITATION OF LIABILITY. Neither Viacom nor
Blockbuster shall be liable to the other for any special, indirect, incidental
or consequential damages of the other arising in connection with this Agreement.

Section 10.02. FURTHER ASSURANCES. Each party agrees to execute,
acknowledge, deliver, file, record and publish such further certificates,
amendments to certificates, instruments

22
<PAGE>

and documents, and do all such other acts and things as may be required by law,
or as may be required to carry out the intent and purposes of this Agreement and
the Ancillary Agreements and the translations contemplated thereby.

Section 10.03. WAIVER. The observance of any term of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively) by the party entitled to enforce such term, but
such waiver shall be effective only if it is in writing signed by a duly
authorized officer of the party against which such waiver is to be asserted.
Unless other expressly provided in this Agreement, no delay or omission on the
part of any party in exercising any right or privilege under this Agreement
shall operate as a waiver thereof, nor shall any waiver on the part of any party
of any right or privilege under this Agreement operates as a waiver of any other
right or privilege under this Agreement nor shall any single or partial exercise
of any right or privilege preclude any other or future exercise thereof or the
exercise of any other right or privilege under this Agreement. No failure by
either party to take any action or assert any right or privilege hereunder shall
be deemed to be a waiver of such right or privilege in the event of the
continuation or repetition of the circumstances giving rise to such right unless
expressly waived in writing by the party against whom the existence of such
waiver is asserted.

Section 10.04. REMEDIES. Each of Viacom and Blockbuster
acknowledges and agrees that under certain circumstances the breach by Viacom or
any of its Affiliates or Blockbuster or any of its Affiliates of a term or
provision of this Agreement will materially and irreparably harm the other
party, that money damages will accordingly not be an adequate remedy for such
breach and that the non-defaulting party, in its sole discretion and in addition
to its rights under this Agreement and any other remedies it may have at law or
in equity, may apply to any court of law or equity of competent jurisdiction for
specific performance and/or other injunctive relief in order to enforce or
prevent any breach of the provisions of this Agreement.

Section 10.05. PERFORMANCE. Each of the parties hereto shall use
all commercially reasonable efforts to cause to be performed all actions,
agreements and obligations set forth herein to be performed by any Affiliate of
such party.

Section 10.06. REFERENCES; CONSTRUCTION. The table of contents
and the section and other headings and subheadings contained in this Agreement
and the exhibits hereto are solely for the purpose of reference, are not part of
the agreement of the parties hereto, and shall not in any way affect the meaning
or interpretation of this Agreement or any exhibit hereto. All references to
days or months shall be deemed references to calendar days or months. Unless the
context otherwise requires, any reference to a "Section" or an "Exhibit" shall
be deemed to refer to a section of this Agreement or an exhibit to this
Agreement, as applicable. The words "hereof," "herein" and "hereunder" and words
of similar import referring to this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement. This Agreement shall be
construed without regard to any presumption or rule requiring construction or
interpretation against the party drafting or causing the document to be drafted.

23
<PAGE>

Section 10.07. AMENDMENTS. This Agreement shall not be
supplemented, amended or modified in any manner whatsoever (including without
limitation by course of dealing or of performance or usage of trade) except in
writing signed by the parties.

Section 10.08. SUCCESSORS AND ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and permitted assigns. Except as set forth below, this Agreement may
not be assigned by any party by operation of law or otherwise without the
express written consent of the other party (which consent may be granted or
withheld). The Option granted to Viacom International pursuant to Article VII
hereof may be assigned to Viacom or any Subsidiary of Viacom.

Section 10.09. SEVERABILITY. Wherever possible, each provision of
this Agreement shall be interpreted in such a manner as to be effective and
valid under applicable law. If any portion of this Agreement is declared invalid
for any reason in any jurisdiction, such declaration shall have no effect upon
the remaining portions of this Agreement, which shall continue in full force and
effect as if this Agreement had been executed with the invalid portions thereof
deleted; PROVIDED that the entirety of this Agreement shall continue in full
force and effect in all other jurisdictions.

Section 10.10. ENTIRE AGREEMENT. Other than the Ancillary
Agreements, this Agreement constitutes the entire agreement of the parties
hereto with respect to the subject matter hereof and thereof and supersede all
prior agreements, including Article 7 of the Asset Purchase Agreement dated June
7, 1999 between Viacom Entertainment Canada Inc. and Blockbuster Canada Inc.,
and undertakings, both written and oral, between the parties with respect to the
subject matter hereof and thereof.

Section 10.11. NOTICES. All notices, consents, requests,
approvals, and other communications provided for or required herein, and all
legal process in regard thereto, must be in writing and shall be deemed validly
given, made or served, (a) when delivered personally or sent by telecopy to the
facsimile number indicated below with a required confirmation copy sent in
accordance with subsection (c) below; or (b) on the next business day after
delivery to a nationally-recognized express delivery service with instructions
and payment for overnight delivery; or (c) on the fifth (5th) day after
deposited in any depository regularly maintained by the United States postal
service, postage prepaid, certified or registered mail, return receipt
requested, addressed to the following addresses or to such other address as the
party to be notified shall have specified to the other party in accordance with
this section:

If to Viacom:

Viacom Inc.
1515 Broadway
New York New York 10036
Attention: Michael D. Fricklas, General Counsel

24
<PAGE>

Phone Number: 212-258-6070
Fax Number: 212-258-6099

If to Blockbuster:

Blockbuster Inc.
1201 Elm Street
Dallas, Texas 75270
Attention: Ed Stead, General Counsel
Phone Number: 214-854-3499
Fax Number: 214-854-3677

Section 10.12. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York. Each of the
parties hereto agrees that any dispute relating to or arising from this
Agreement or the transactions contemplated hereby shall be resolved only in the
court of the State of New York sitting in the County of New York or the United
States District Court for the Southern District of New York and the appellate
court having jurisdiction of appeals in such courts. In that context, and
without limiting the generality of the foregoing, each of the parties hereby
irrevocably and unconditionally:

(a) submits for itself and its property in any legal suit, action
or proceeding relating to this Agreement or any transaction contemplated
hereby, or for recognition and enforcement of any judgment in respect
thereof, to the exclusive jurisdiction of the courts of the State of New
York sitting in the County of New York or the United States District
Court for the Southern District of New York and appellate court having
jurisdiction of appeals in such courts, and each of the parties hereto
irrevocably and unconditionally agrees that all claims in respect of any
such suit, action, or proceeding shall be heard and determined in such
New York State court or, to the extent permitted by law, in such federal
court;

(b) consents that any such suit, action or proceeding may and
shall be brought in such courts and waives any objection that it may now
or hereafter have to the venue or jurisdiction or any such action or
proceeding in such court or that such action or proceeding was brought
in an inconvenient forum and agrees not to plead or claim the same;

(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or
certified mail (or any substantially similar form of mail), postage
prepaid, to such party in its address as provided in Section 10.11
hereof;

(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by New York law; and

25
<PAGE>

(e) agrees that this Agreement has been entered into in the State
of New York and performed in part in the State of New York.

Section 10.13. COUNTERPARTS. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, and all of
which shall constitute one and the same instrument.

26
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and delivered as of the date and year first written above.

VIACOM INC.

By: ________________________________
Name:
Title:

VIACOM INTERNATIONAL INC.

By: ________________________________
Name:
Title:

BLOCKBUSTER INC.

By: ________________________________
Name:
Title:
<PAGE>

EXHIBIT A

Form of Release and Indemnification Agreement

[Filed as Exhibit 10.2 to the Registration Statement on Form S-1 of Blockbuster]
<PAGE>

EXHIBIT B

Form of Transition Services Agreement

[Filed as Exhibit 10.3 to the Registration Statement on Form S-1 of Blockbuster]
<PAGE>

EXHIBIT C

Form of Registration Rights Agreement

[Filed as Exhibit 10.4 to the Registration Statement on Form S-1 of Blockbuster]
<PAGE>

EXHIBIT D

Form of Tax Matters Agreement

[Filed as Exhibit 10.5 to the Registration Statement on Form S-1 of Blockbuster]
<PAGE>

TABLE OF CONTENTS

Page
----

ARTICLE I
DEFINITIONS

Section 1.01. Definitions.....................................................2

ARTICLE II
THE IPO AND THE SPLIT-OFF

Section 2.01. The IPO and Other Primary Offerings.............................7
Section 2.02. The Split-Off...................................................7
Section 2.03. Certain Stockholder Matters.....................................7
Section 2.04. Prior Relationship..............................................8
Section 2.05. Further Assurances Regarding the Split-Off......................8

ARTICLE III
EXPENSES

Section 3.01. General.........................................................9
Section 3.02. Certain Expenses Relating to the IPO and any Other
Primary Offerings by Blockbuster................................9
Section 3.03. Certain Expenses Relating to the Split-Off......................9

ARTICLE IV
ACCESS TO INFORMATION

Section 4.01. Restrictions on Disclosure of Information......................10
Section 4.02. Legally Required Disclosure of Confidential Information........10
Section 4.03. Access to Information..........................................11
Section 4.04. Record Retention...............................................11

ARTICLE V
COVENANTS

Section 5.01. Financial and Other Information................................12
Section 5.02. No Violations..................................................18
Section 5.03. Other Agreements...............................................18

ARTICLE VI
ASSIGNMENT AND ASSUMPTION
<PAGE>

Page
----

Section 6.01. Assignment of Obligations......................................18
Section 6.02. Assumption of Obligations......................................19

Section 6.03. Assignment of Employment Agreements............................19
Section 6.04. Assumption of Employment Agreements............................19

ARTICLE VII
OPTIONS

Section 7.01. Options........................................................19
Section 7.02. Notice.........................................................20
Section 7.03. Option Exercise and Payment....................................20
Section 7.04. Effect of Failure to Exercise..................................20
Section 7.05. IPO............................................................20
Section 7.06. Termination of Options.........................................21

ARTICLE VIII
INDEMNIFICATION

Section 8.01. Indemnification Procedures.....................................21

ARTICLE IX
CONDITION TO CONSUMMATION OF TRANSACTIONS; TERMINATION

Section 9.01. Condition......................................................22
Section 9.02. Termination....................................................22

ARTICLE X
MISCELLANEOUS

Section 10.01. Limitation of Liability........................................23
Section 10.02. Further Assurances.............................................23
Section 10.03. Waiver.........................................................23
Section 10.04. Remedies.......................................................23
Section 10.05. Performance....................................................23
Section 10.06. References; Construction.......................................23
Section 10.07. Amendments.....................................................24
Section 10.08. Successors and Assignment......................................24
Section 10.09. Severability...................................................24
Section 10.10. Entire Agreement...............................................24
Section 10.11. Notices........................................................24
Section 10.12. Governing Law..................................................25
Section 10.13. Counterparts...................................................26

EXHIBITS

Exhibit A Form of Release and Indemnification Agreement

ii
<PAGE>

Exhibit B Form of Transition Services Agreement
Exhibit C Form of Registration Rights Agreement
Exhibit D Form of Tax Matters Agreement

iii

<PAGE>

Exhibit 10.20

BLOCKBUSTER INC.

1999 LONG-TERM MANAGEMENT INCENTIVE PLAN

ARTICLE I

GENERAL

SECTION 1.1 PURPOSE.

The purpose of the Blockbuster Inc. 1999 Long-Term Management Incentive
Plan (the "Plan") is to benefit and advance the interests of Blockbuster Inc., a
Delaware corporation (the "Company"), and its subsidiaries by attracting and
retaining employees, Non-Employee Directors and Advisors (as defined below) of
the Company and its subsidiaries, rewarding them for their contributions to the
financial success of the Company and thereby motivating them to continue to make
such contributions in the future.

SECTION 1.2 DEFINITIONS.

As used in the Plan, the following terms shall have the following
meanings:

(a) "Advisor" shall mean any person performing advisory or consulting
services for the Company or any subsidiary, with or without compensation, to
whom the Company chooses to make a Grant in accordance with the Plan; PROVIDED
that (i) BONA FIDE services must be rendered by such person; and (ii) such
services shall not be rendered in connection with the offer or sale of
securities in a capital-raising transaction and do not directly or indirectly
promote or maintain a market for the Company's securities.

(b) "Agreement" shall mean the written agreement governing a Grant
under the Plan, in a form approved by the Committee, which shall contain terms
and conditions not inconsistent with the Plan and which shall incorporate the
Plan by reference.

(c) "Appreciation Value" shall mean the excess, if any, of the Value
of a Phantom Share on the applicable Valuation Date or date of termination of
service or of the Participant's death or Permanent Disability (as described in
Section 5.5(a) hereof), as the case may be, over the Initial Value of such
Phantom Share.

(d) "Board" shall mean the Board of Directors of the Company.

(e) "Code" shall mean the Internal Revenue Code of 1986, as amended,
including any successor law thereto.

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<PAGE>

(f) "Committee" shall mean the committee(s) appointed or designated by
the Board to administer the Plan in accordance with Section 1.3 of the Plan.

(g) "Common Stock" shall mean shares of Class A Common Stock, par
value $0.01 per share, of the Company.

(h) "Date of Grant" shall mean the effective date of the Grant of the
Stock Options, Stock Appreciation Rights, Restricted Shares, Restricted Share
Units and/or Phantom Shares as set forth in the applicable Agreement.

(i) "Effective Date" shall have the meaning set forth in Article X.

(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, including any successor law thereto.

(k) "Fair Market Value" of a share of Common Stock on a given date
shall be the closing price of a share of Common Stock on the New York Stock
Exchange or such other national securities exchange as may be designated by the
Committee, or, in the event that the Common Stock is not listed for trading on a
national securities exchange but is quoted on an automated quotation system, the
average closing bid per share of the Common Stock on such automated quotation
system or, in the event that the Common Stock is not quoted on any such system,
the average of the closing bid prices per share of the Common Stock as furnished
by a professional marketmaker making a market in the Common Stock designated by
the Committee. Notwithstanding the foregoing, with respect to any option granted
in connection with the Company's initial public offering, the Fair Market Value
of a share of Class A Common Stock shall mean the initial public offering price.

(l) "Grant" shall mean a grant under the Plan which may consist of a
grant of Stock Options, Stock Appreciation Rights, Restricted Shares, Restricted
Share Units or Phantom Shares or a combination of any of the above.

(m) "Initial Value" shall mean the value of a Phantom Share as
specified by the Committee as of the Date of Grant or the Value of a Phantom
Share calculated as of the Date of Grant or such earlier date as the Committee
may determine.

(n) "Non-Employee Director" shall mean a member of the Board of
Directors of the Company or any subsidiary who is not an employee of the
Company, the parent thereof or any subsidiary.

(o) "Outstanding Phantom Share" shall mean a Phantom Share granted to
a Participant for which the Valuation Date has not yet occurred.

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<PAGE>

(p) "Outstanding Stock Option" shall mean a Stock Option granted to a
Participant which has not yet been exercised and which has not yet expired or
been terminated in accordance with its terms.

(q) "Participant" shall mean any employee, Non-Employee Director or
Advisor who has met the eligibility requirements set forth in Section 1.4 hereof
and to whom an outstanding Grant has been made under the Plan.

(r) "Permanent Disability" shall have the same meaning as such term or
a similar term has in the long-term disability policy maintained by the Company,
the parent thereof or a subsidiary thereof for the Participant and that is in
effect on the date of the onset of the Participant's Permanent Disability,
unless the Committee determines otherwise, in its discretion, and sets forth an
alternative definition in the applicable Agreement; PROVIDED, HOWEVER, with
respect to grants of Incentive Stock Options, permanent disability shall have
the meaning given it under the rules governing Incentive Stock Options under the
Code. With respect to any Grant other than an Incentive Stock Option, to the
extent that a Participant's employment agreement differs from the Plan with
respect to the meaning of disability, if such employment agreement has been
approved by the Committee which granted the Stock Options, the definition
included in such employment agreement shall govern. Anything in the Plan to the
contrary notwithstanding, "Permanent Disability" is a term that shall apply only
to Participants who are employees of the Company.

(s) "Phantom Share" shall mean a contractual right granted to a
Participant pursuant to Article V to receive an amount equal to the Appreciation
Value at such time, and subject to such terms and conditions, as are set forth
in the Plan and the applicable Agreement.

(t) "Restricted Share" shall mean a share of Common Stock granted to a
Participant pursuant to Article III, which is subject to the restrictions set
forth in Section 3.3 hereof and to such other terms, conditions and restrictions
as are set forth in the Plan and the applicable Agreement.

(u) "Restricted Share Unit" shall mean a contractual right granted to
a Participant pursuant to Article IV to receive either Common Stock, a cash
payment equal to the Fair Market Value of such Common Stock or a combination of
Common Stock and cash, subject to the terms and conditions as are set forth in
the Plan and in the applicable Agreement.

(v) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Exchange
Act, as amended from time to time, or any successor provision.

(w) "Section 162(m)" shall mean Section 162(m) of the Code and the
regulations promulgated thereunder from time to time.

(x) "Section 162(m) Exception" shall mean the exception under Section
162(m) for "qualified performance-based compensation."

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<PAGE>

(y) "Stock Appreciation Right" shall mean a contractual right granted
to a Participant pursuant to Article II to receive an amount determined in
accordance with Section 2.5 of the Plan.

(z) "Stock Option" shall mean a contractual right granted to a
Participant pursuant to Article II to purchase shares of Common Stock at such
time and price, and subject to such other terms and conditions, as are set forth
in the Plan and the applicable Agreement. Stock Options may be "Incentive Stock
Options" within the meaning of Section 422 of the Code or "Non-Qualified Stock
Options" which do not meet the requirements of such Code section.

(aa) "Termination for Cause" for Participants who are employees of the
Company and for Advisors, shall mean a termination of service with the Company
or any of its subsidiaries which, as determined by the Committee, is by reason
of (i) "cause" as such term or a similar term is defined in any employment or
consulting agreement applicable to the Participant, or (ii) if there is no such
employment or consulting agreement or if such employment or consulting agreement
contains no such term, (x) dishonesty, conviction of a felony, or willful
unauthorized disclosure of confidential information, (y) failure, neglect of or
refusal by a Participant to substantially perform the duties of such
Participant's service, or (z) any other act or omission which is materially
injurious to the financial condition or business reputation of the Company or
any subsidiary thereof.

"Termination for Cause" for Participants who are Non-Employee
Directors shall mean removal from the Board for "cause" in accordance with the
certificate of incorporation or by-laws of the Company, as amended from time to
time.

(bb) "Valuation Date" shall mean the date on which the Appreciation
Value of a Phantom Share shall be measured and fixed in accordance with Section
5.2(a) hereof.

(cc) The "Value" of a Phantom Share shall be determined by reference to
the "average Fair Market Value" of a share of Common Stock. The "average Fair
Market Value" on a given date of a share of Common Stock shall be determined
over the 30-day period ending on such date or such other period as the Committee
may decide shall be applicable to a Grant of Phantom Shares, determined by
dividing (i) by (ii), where (i) shall equal the sum of the Fair Market Values on
each day that the Common Stock was traded and a closing price was reported on
such national securities exchange or on such automated quotation system or by
such marketmaker, as the case may be, during such period, and (ii) shall equal
the number of days, as determined by the Committee for the purposes of
determining the average Fair Market Value for such Phantom Shares, on which the
Common Stock was traded and a closing price was reported on such national
securities exchange or on such automated quotation system or by such
marketmaker, as the case may be, during such period.

(dd) To "vest" a Stock Option, Stock Appreciation Right, Restricted
Share, Restricted Share Unit or Phantom Share held by a Participant shall mean,
with respect to a Stock Option or Stock Appreciation Right, to render such Stock
Option or Stock Appreciation Right exercisable, subject to the terms of the Plan
or the Agreement, and, in the case of a Restricted Share, Restricted

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<PAGE>

Share Unit or Phantom Share, to render such Restricted Share, Restricted Share
Unit or Phantom Share nonforfeitable.

SECTION 1.3 ADMINISTRATION OF THE PLAN.

The Plan shall be administered by the Board or by a Committee appointed
by the Board, consisting of at least two members of the Board; PROVIDED that (i)
with respect to any Grant that is intended to satisfy the requirements of Rule
16b-3, such Committee shall consist of at least such number of directors as is
required from time to time by Rule 16b-3, and each such Committee member shall
satisfy the qualification requirements of such rule; and (ii) with respect to
any Grant that is also intended to satisfy the requirements of the Section
162(m) Exception, such Committee shall consist of at least such number of
directors as is required from time to time to satisfy the Section 162(m)
Exception, and each such Committee member shall satisfy the qualification
requirements of such exception. The Committee shall adopt such rules as it may
deem appropriate in order to carry out the purpose of the Plan. All questions of
interpretation, administration and application of the Plan shall be determined
by a majority of the members of the Committee then in office, except that the
Committee may authorize any one or more of its members, or any officer of the
Company, to execute and deliver documents on behalf of the Committee. The
determination of such majority shall be final and binding as to all matters
relating to the Plan. The Committee shall have authority to select Participants
from among the class of eligible persons specified in Section 1.4 below and to
determine the number of Stock Options, Stock Appreciation Rights, Restricted
Shares, Restricted Share Units or Phantom Shares (or combination thereof) to be
granted to each Participant; PROVIDED, HOWEVER, no member of the Committee shall
participate in such decisions contemplated by this Section 1.3 if it relates to
a Grant made on his or her behalf. The Committee shall also have the authority
to amend the terms of any outstanding Grant or waive any conditions or
restrictions applicable to any Grant; PROVIDED, HOWEVER, that no amendment shall
impair the rights of the holder thereof. With respect to any restrictions in the
Plan or in any Agreement that are based on the requirements of Rule 16b-3,
Section 422 of the Code, the Section 162(m) Exception, the rules of any exchange
upon which the Company's securities are listed, or any other applicable law,
rule or restriction to the extent that any such restrictions are no longer
required, the Committee shall have the sole discretion and authority to make
Grants that are not subject to such restrictions and/or to waive any such
restrictions with respect to outstanding Grants.

SECTION 1.4 ELIGIBLE PERSONS.

Grants may be awarded to any employee, Non-Employee Director or Advisor
of the Company or any of its subsidiaries selected by the Committee, PROVIDED
that only employees shall be eligible to receive Incentive Stock Options.

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<PAGE>

SECTION 1.5 COMMON STOCK SUBJECT TO THE PLAN.

The total aggregate number of shares of Common Stock that may be
distributed under the Plan (whether reserved for issuance upon grant of Stock
Options or Stock Appreciation Rights or granted as Restricted Shares or
Restricted Share Units) shall be 25,000,000, subject to adjustment pursuant to
Article VI hereof. The shares of Common Stock shall be made available from
authorized but unissued Common Stock or from Common Stock issued and held in the
treasury of the Company. The delivery of shares of Common Stock upon exercise of
a Stock Option or Stock Appreciation Right in any manner and the vesting of
Restricted Shares or Restricted Share Units shall result in a decrease in the
number of shares which thereafter may be issued for purposes of this Section
1.5, by the number of shares as to which the Stock Option or Stock Appreciation
Right is exercised or by the number of Restricted Shares or Restricted Share
Units which vest. To the extent permitted by law or the rules and regulations of
any stock exchange on which the Common Stock is listed, shares of Common Stock
with respect to which Stock Options and Stock Appreciation Rights expire, are
canceled without being exercised or are otherwise terminated or, in the case of
Stock Appreciation Rights or Restricted Share Units, are exercised for cash, may
be regranted under the Plan. Restricted Shares or Restricted Share Units that
are forfeited for any reason shall not be deemed granted for purposes of this
Section 1.5 and may thereafter be regranted under the Plan.

SECTION 1.6 LIMIT ON GRANTS TO PARTICIPANTS.

The maximum aggregate number of (i) shares of Common Stock that may be
granted under the Plan (whether reserved for issuance upon grant of Stock
Options or Stock Appreciation Rights or granted as Restricted Shares or
Restricted Share Units) and (ii) Phantom Shares or Restricted Share Units that
may be granted under the Plan to any Participant during the five-year period
starting on the Effective Date of the Plan is 5,000,000.

SECTION 1.7 AGREEMENTS.

Each Agreement (i) shall state the Date of Grant and the name of
the Participant, (ii) shall specify the terms of the Grant, (iii) shall be
signed by the Participant and a person designated by the Committee, (iv)
shall incorporate the Plan by reference and (v) shall be delivered to the
Participant. The Agreement shall contain such other terms and conditions as
are required by the Plan and, in addition, such other terms not inconsistent
with the Plan as the Committee may deem advisable. The Committee shall have
the authority to require that any Agreement relating to a Grant in a
jurisdiction outside of the United States contain such terms as are required
by local law in order to constitute a valid grant under the laws of such
jurisdiction. Such authority shall be notwithstanding the fact that the
requirements of the local jurisdiction may be more restrictive than the terms
set forth in the plan.

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<PAGE>

ARTICLE II

PROVISIONS APPLICABLE TO STOCK OPTIONS

SECTION 2.1 GRANTS OF STOCK OPTIONS.

The Committee may from time to time grant Stock Options on the terms
and conditions set forth in the Plan and on such other terms and conditions as
are not inconsistent with the purposes and provisions of the Plan, as the
Committee, in its discretion, may from time to time determine, and subject to
satisfaction of any performance goal requirements established by the Committee.
Each Agreement covering a Grant of Stock Options shall specify the number of
Stock Options granted, the Date of Grant, the exercise price of such Stock
Options, whether such Stock Options are Incentive Stock Options or Non-Qualified
Stock Options, the period during which such Stock Options may be exercised and
any vesting schedule, including any applicable performance goal requirements.
Any Stock Option intended to qualify as an Incentive Stock Option that fails to
so qualify will be deemed a Non-Qualified Stock Option.

SECTION 2.2 EXERCISE PRICE.

The Committee shall establish the per share exercise price at the time
any Stock Option is granted at such amount as the Committee shall determine;
PROVIDED that, with respect to any Incentive Stock Option or any Stock Option
intended to qualify for the Section 162(m) Exception, such exercise price shall
not be less than 100% of the Fair Market Value of a share of Common Stock on the
Date of Grant; and PROVIDED FURTHER that, with respect to any Incentive Stock
Option that is granted to a person holding more than 10% of the combined voting
power of all the classes of common stock of the Company (or its parent or any
subsidiaries within the meaning of the Code), such exercise price shall not be
less than 110% of the Fair Market Value of a share of Common Stock on the Date
of Grant. The exercise price will be subject to adjustment in accordance with
the provisions of Article VI of the Plan.

SECTION 2.3 EXERCISE OF STOCK OPTIONS.

(a) EXERCISABILITY. Stock Options shall be exercisable only to the
extent the Participant is vested therein, subject to any restrictions that the
Committee shall determine and specify in the applicable Agreement (or any
employment or consulting agreement applicable to the Participant). A Participant
shall vest in Stock Options over such time and in such increments as the
Committee shall determine and specify in a vesting schedule set forth in the
applicable Agreement (or any employment or consulting agreement applicable to
the Participant). The Committee may, however, in its sole discretion, accelerate
the time at which a Participant vests in his Stock Options.

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(b) OPTION PERIOD. For each Stock Option granted, the Committee shall
specify the period during which the Stock Option may be exercised; PROVIDED,
HOWEVER, that anything in the Plan or in the applicable Agreement to the
contrary notwithstanding:

(i) LATEST EXERCISE DATE. No Stock Option granted under the
Plan shall be exercisable after the tenth anniversary of the Date of
Grant thereof.

(ii) REGISTRATION RESTRICTIONS. A Stock Option shall not be
exercisable, no transfer of shares of Common Stock shall be made to any
Participant, and any attempt to exercise a Stock Option or to transfer
any such shares shall be void and of no effect, unless and until (A) a
registration statement under the Securities Act of 1933, as amended,
has been duly filed and declared effective pertaining to the shares of
Common Stock subject to such Stock Option, and the shares of Common
Stock subject to such Stock Option have been duly qualified under
applicable Federal or state securities or blue sky laws or (B) the
Committee, in its sole discretion, determines, or the Participant, upon
the request of the Committee, provides an opinion of counsel
satisfactory to the Committee, that such registration or qualification
is not required as a result of the availability of an exemption from
registration or qualification under such laws. Without limiting the
foregoing, if at any time the Committee shall determine, in its sole
discretion, that the listing, registration or qualification of the
shares of Common Stock subject to such Stock Option is required under
any federal or state law or on any securities exchange or the consent
or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, delivery or
purchase of such shares pursuant to the exercise of a Stock Option,
such Stock Option shall not be exercised in whole or in part unless and
until such listing, registration, qualification, consent or approval
shall have been effected or obtained free of any conditions not
acceptable to the Committee.

(i) TERMINATION OF SERVICE OTHER THAN A TERMINATION FOR
CAUSE OR DUE TO DEATH OR PERMANENT DISABILITY. In the event that (A)
such Participant's service with the Company or any of its subsidiaries
ends by reason of a voluntary termination by the Participant or due to
termination by the Company or any of its subsidiaries other than due to
a Termination for Cause, the Participant's Outstanding Stock Options
may be exercised, to the extent then exercisable, for a period of six
months after the date of termination or such longer period, not in
excess of twelve months following the date of termination, as
determined by the Committee, (B) such Participant dies during a period
during which his Stock Options could have been exercised by him, his
Outstanding Stock Options may be exercised, to the extent exercisable,
at the date of death by the person who acquired the right to exercise
such Stock Options by will or the laws of descent and distribution or
permitted transfer for a period of twelve months following the date of
death or such longer period as may be determined by the Committee, in
its discretion, prior to the expiration of such twelve-month period),
or (C)

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the Permanent Disability of such Participant occurs, his Outstanding
Stock Options may be exercised, to the extent exercisable, upon the
date of the onset of such Permanent Disability for a period of twelve
months following such date or such longer period, not in excess of
twenty-four months following the date of the Permanent Disability, as
may be determined by the Committee, in its discretion. Upon the
occurrence of an event described in clause (A), (B) or (C) of this
Section 2.3(c)(i), all rights with respect to Stock Options that are
not vested as of such event will be relinquished.

(ii) TERMINATION FOR CAUSE. If such Participant's service
with the Company or any of its subsidiaries ends due to a Termination
for Cause then, unless the Committee in its discretion determines
otherwise, all Outstanding Stock Options, whether or not then vested,
shall terminate effective as of the date of such termination.

(iii) MAXIMUM EXERCISE PERIOD. Anything in this Section 2.3(c)
to the contrary notwithstanding, no Stock Option shall be exercisable
after the earlier to occur of (A) the expiration of the option period
set forth in the applicable Agreement or (B) the tenth anniversary of
the Date of Grant thereof.

(iv) MINIMUM EXERCISE PERIOD. With respect to a termination
described in Section 2.3(c)(i)(A) only, the Committee may establish a
shorter exercise period for Incentive Stock Options of not less than
three months following the date of termination.

(d) EXERCISE IN THE EVENT OF TERMINATION OF SERVICE FOR NON-EMPLOYEE
DIRECTORS.

(i) TERMINATION OF SERVICE FOR ANY REASON OTHER THAN A
TERMINATION FOR CAUSE. In the event that a Non-Employee Director ceases
to be a member of the Board for any reason other than due to a
Termination for Cause, the Non-Employee Director may exercise any
Outstanding Stock Options for a period of twelve months following the
date of such termination, but only to the extent such Outstanding
Options were vested on the date of such termination. The Non-Employee
Director shall relinquish all rights with respect to Stock Options that
are not vested as of the date of such termination of service.

(ii) TERMINATION FOR CAUSE. In the event that a Non-Employee
Director ceases to be a member of the Board due to a Termination for
Cause then, unless the Committee, in its discretion, determines
otherwise, all Outstanding Stock Options, whether or not then vested,
shall terminate effective as of the date of such termination.

(iii) MAXIMUM EXERCISE PERIOD. Anything in this Section 2.3(d)
to the contrary notwithstanding, no Stock Option shall be exercisable
after the earlier to occur of (A) the expiration of the option period
set forth in the applicable Agreement or (B) the tenth anniversary of
the Date of Grant thereof.

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SECTION 2.4 PAYMENT OF PURCHASE PRICE UPON EXERCISE.

Every share purchased through the exercise of a Stock Option shall be
paid for in full at the time of exercise in cash or, in the discretion of the
Committee, in shares of Common Stock (PROVIDED that such shares of Common Stock
have been held for at least six months by the Participant) or other securities
of the Company designated by the Committee, in a combination of cash, shares or
such other securities or in any other form of valid consideration that is
acceptable to the Committee in its sole discretion.

SECTION 2.5 STOCK APPRECIATION RIGHTS.

The Committee may grant Stock Appreciation Rights only in tandem with a
Stock Option, either at the time of Grant or by amendment at any time prior to
the exercise, expiration or termination of such Stock Option. Each Stock
Appreciation Right shall be subject to the same terms and conditions as the
related Stock Option and shall be exercisable only at such times and to such
extent as the related Stock Option is exercisable. A Stock Appreciation Right
shall entitle the holder to surrender to the Company the related Stock Option
unexercised and receive from the Company in exchange therefor an amount equal to
the excess of the Fair Market Value of the shares of Common Stock subject to
such Stock Option, determined as of the day preceding the surrender of such
Stock Option, over the Stock Option aggregate exercise price. Such amount shall
be paid in cash or, in the discretion of the Committee, in shares of Common
Stock or other securities of the Company designated by the Committee or in a
combination of cash, shares or such other securities.

ARTICLE III

PROVISIONS APPLICABLE TO RESTRICTED SHARES

SECTION 3.1 GRANTS OF RESTRICTED SHARES.

The Committee may from time to time grant Restricted Shares on the
terms and conditions set forth in the Plan and on such other terms and
conditions as are not inconsistent with the purposes and provisions of the Plan,
as the Committee, in its discretion, may from time to time determine. Each
Agreement covering a Grant of Restricted Shares shall specify the number of
Restricted Shares granted, the Date of Grant, the price, if any, to be paid by
the Participant for such Restricted Shares and the vesting schedule (as provided
for in Section 3.2 hereof) for such Restricted Shares, including any applicable
performance goal requirements.

SECTION 3.2 VESTING.

The Committee shall establish the vesting schedule applicable to
Restricted Shares granted hereunder, which vesting schedule shall specify the
period of time, the increments in which a

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Participant shall vest in the Grant of Restricted Shares and any applicable
performance goal requirements, subject to any restrictions that the Committee
shall determine and specify in the applicable Agreement.

SECTION 3.3 RIGHTS AND RESTRICTIONS GOVERNING RESTRICTED SHARES.

As of the Date of Grant of Restricted Shares, one or more certificates
representing the appropriate number of shares of Common Stock granted to a
Participant shall be registered in his name but shall be held by the Company for
the account of the Participant. The Participant shall have all rights of a
holder as to such shares of Common Stock (including, to the extent applicable,
the right to receive dividends and to vote), subject to the following
restrictions: (a) the Participant shall not be entitled to delivery of
certificates representing such shares of Common Stock until such shares have
vested; (b) none of the Restricted Shares may be sold, transferred, assigned,
pledged or otherwise encumbered or disposed of until such shares have vested;
and (c) except as otherwise provided in Section 3.6 below, all unvested
Restricted Shares shall be immediately forfeited upon a Participant's
termination of service with the Company or any subsidiary for any reason.

SECTION 3.4 ADJUSTMENT WITH RESPECT TO RESTRICTED SHARES.

Any other provision of the Plan to the contrary notwithstanding, the
Committee may, in its discretion, at any time accelerate the date or dates on
which Restricted Shares vest. The Committee may, in its sole discretion, remove
any and all restrictions on such Restricted Shares whenever it may determine
that, by reason of changes in applicable law, the rules of any stock exchange on
which the Common Stock is listed or other changes in circumstances arising after
the Date of Grant, such action is appropriate.

SECTION 3.5 DELIVERY OF RESTRICTED SHARES.

On the date on which Restricted Shares vest, all restrictions contained
in the Agreement covering such Restricted Shares and in the Plan shall lapse as
to such Restricted Shares. One or more stock certificates for the appropriate
number of shares of Common Stock, free of the restrictions set forth in the Plan
and applicable Agreement, shall be delivered to the Participant or such shares
shall be credited to a brokerage account if the Participant so directs;
PROVIDED, HOWEVER, that such certificates shall bear such legends as the
Committee, in its sole discretion, may determine to be necessary or advisable in
order to comply with applicable federal or state securities laws.

SECTION 3.6 TERMINATION OF SERVICE.

In the event that the Participant's service with the Company or any of
its subsidiaries ends for any reason prior to the date or dates on which
Restricted Shares vest, the Participant shall forfeit all unvested Restricted
Shares as of the date of such event, unless, other than due to a Termination for
Cause, the Committee determines that the circumstances in the particular case so
warrant and provides that some or all of such Participant's unvested Restricted
Shares shall vest as of the date of

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such event, in which case certificates representing such shares shall be
delivered, in accordance with Section 3.5 above, to the Participant or in the
case of the Participant's death, to the person or persons who acquired the right
to receive such certificates by will or the laws of descent and distribution.

ARTICLE IV

PROVISIONS APPLICABLE TO RESTRICTED SHARE UNITS

SECTION 4.1 GRANTS OF RESTRICTED SHARE UNITS.

The Committee may from time to time grant Restricted Share Units on the
terms and conditions set forth in the Plan and on such other terms and
conditions as are not inconsistent with the purposes and provisions of the Plan
as the Committee, in its discretion, may from time to time determine. Each
Restricted Share Unit awarded to a Participant shall correspond to one share of
Common Stock. Each Agreement covering a Grant of Restricted Share Units shall
specify the number of Restricted Share Units granted and the vesting schedule
(as provided for in Section 4.2 hereof) for such Restricted Share Units,
including any applicable performance goal requirements.

SECTION 4.2 VESTING.

The Committee shall establish the vesting schedule applicable to
Restricted Share Units granted hereunder, which vesting schedule shall specify
the period of time, the increments in which a Participant shall vest in the
Grant of Restricted Share Units and any applicable performance goal
requirements, subject to any restrictions that the Committee shall determine and
specify in the applicable Agreement.

SECTION 4.3 ADJUSTMENT WITH RESPECT TO RESTRICTED SHARE UNITS.

Any other provision of the Plan to the contrary notwithstanding, the
Committee may, in its discretion, at any time accelerate the date or dates on
which Restricted Share Units vest.

SECTION 4.4 SETTLEMENT OF RESTRICTED SHARE UNITS.

On the date on which Restricted Share Units vest, all restrictions
contained in the Agreement covering such Restricted Share Units and in the Plan
shall lapse as to such Restricted Share Units and the Restricted Stock Units
will be payable, at the discretion of the Committee, in Common Stock, in cash
equal to the Fair Market Value of the shares subject to such Restricted Share
Units or in a combination of Common Stock and cash. In the event the Restricted
Share Units are paid in Common Stock, one or more stock certificates for the
appropriate number of shares of Common Stock, free of the restrictions set forth
in the Plan and applicable Agreement, shall be delivered to the Participant or
such shares shall be credited to a brokerage account if the Participant so
directs;

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PROVIDED, HOWEVER, that such certificates shall bear such legends as the
Committee, in its sole discretion, may determine to be necessary or advisable in
order to comply with applicable federal or state securities laws.

SECTION 4.5 TERMINATION OF SERVICE.

In the event that the Participant's service with the Company or any of
its subsidiaries ends for any reason prior to the date or dates on which
Restricted Share Units vest, the Participant shall forfeit all unvested
Restricted Share Units as of the date of such event, unless, other than due to a
Termination for Cause, the Committee determines that the circumstances in the
particular case so warrant and provides that some or all of such Participant's
unvested Restricted Share Units shall vest as of the date of such event, in
which case, in the discretion of the Committee, either certificates representing
shares of Common Stock or a cash payment equal to the Fair Market Value of the
shares of Common Stock, shall be delivered in accordance with Section 4.4 above,
to the Participant or in the case of the Participant's death, to the person or
persons who acquired the right to receive such certificates by will or the laws
of descent and distribution.

ARTICLE V

PROVISIONS APPLICABLE TO PHANTOM SHARES

SECTION 5.1 GRANTS OF PHANTOM SHARES.

The Committee may from time to time grant Phantom Shares, the value of
which is determined by reference to a share of Common Stock, on the terms and
conditions set forth in the Plan and on such other terms and conditions as are
not inconsistent with the purposes and provisions of the Plan as the Committee,
in its discretion, may from time to time determine. Each Agreement covering a
Grant of Phantom Shares shall specify the number of Phantom Shares granted, the
Initial Value of such Phantom Shares, the Valuation Dates, the number of Phantom
Shares whose Appreciation Value shall be determined on each such Valuation Date,
any applicable vesting schedule (as provided for in Section 5.3 hereof) for such
Phantom Shares, and any applicable limitation on payment (as provided for in
Section 5.4 hereof) for such Phantom Shares.

SECTION 5.2 APPRECIATION VALUE.

(a) VALUATION DATES; MEASUREMENT OF APPRECIATION VALUE. The Committee
shall provide in the Agreement for one or more Valuation Dates on which the
Appreciation Value of the Phantom Shares granted pursuant to the Agreement shall
be measured and fixed, and shall designate in the Agreement the number of such
Phantom Shares whose Appreciation Value is to be calculated on each such
Valuation Date.

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(b) PAYMENT OF APPRECIATION VALUE. Except as otherwise provided in
Section 5.5 hereof, and subject to the limitation contained in Section 5.4
hereof, the Appreciation Value of a Phantom Share shall be paid to a Participant
in cash in a lump sum as soon as practicable following the Valuation Date
applicable to such Phantom Share.

SECTION 5.3 VESTING.

The Committee may, in its discretion, provide in the Agreement that
Phantom Shares granted thereunder shall vest (subject to such terms and
conditions as the Committee may provide in the Agreement) over such period of
time, from the Date of Grant, as may be specified in a vesting schedule
contained therein.

SECTION 5.4 LIMITATION ON PAYMENT.

The Committee may, in its discretion, establish and set forth in the
Agreement a maximum dollar amount payable under the Plan for each Phantom Share
granted pursuant to such Agreement.

SECTION 5.5 TERMINATION OF SERVICE, DEATH OR PERMANENT DISABILITY.

(a) TERMINATION OF SERVICE OTHER THAN A TERMINATION FOR CAUSE, OR DUE
TO DEATH OR PERMANENT DISABILITY. If, before the occurrence of one or more
Valuation Dates applicable to the Participant's Outstanding Phantom Shares, the
Participant's service with the Company or any of its subsidiaries ends by reason
of (i) a voluntary termination by the Participant or a termination by the
Company or any of its subsidiaries other than due to a Termination for Cause or
(ii) the Participant's death or, in the case of a Participant who is an
employee, Permanent Disability, then, unless the Committee, in its discretion,
determines otherwise, the Appreciation Value of each Outstanding Phantom Share
as to which the Participant's rights are vested as of the date of such event
shall be the lesser of (x) the Appreciation Value of such Phantom Share
calculated as of the date of such event or (y) the Appreciation Value of such
Phantom Share calculated as of the originally scheduled Valuation Date
applicable thereto. Unless the Committee, in its discretion determines
otherwise, the Appreciation Value so determined for each such vested Outstanding
Phantom Share shall then be payable to the Participant or the Participant's
estate following the originally scheduled Valuation Date applicable thereto in
accordance with Section 5.2(b) hereof. Upon the occurrence of an event described
in this Section 5.5(a), all rights with respect to Phantom Shares that are not
vested as of such date will be relinquished.

(b) TERMINATION FOR CAUSE. If a Participant's service with the Company
or any of its subsidiaries ends due to a Termination for Cause, then, unless the
Committee, in its discretion, determines otherwise, all Outstanding Phantom
Shares, whether or not vested, and any and all rights to the payment of
Appreciation Value with respect to such Outstanding Phantom Shares shall be
forfeited effective as of the date of such termination.

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ARTICLE VI

EFFECT OF CERTAIN CORPORATE CHANGES

In the event of a merger, consolidation, stock-split, dividend,
distribution, combination, reclassification or recapitalization that changes the
character or amount of the Common Stock, the Committee shall make such
adjustments to (i) the number and kind of shares of Common Stock subject to any
Stock Options or Stock Appreciation Rights or the number and kind of Restricted
Shares, Restricted Share Units or Phantom Shares granted to each Participant,
(ii) the exercise price of any Outstanding Stock Options or Stock Appreciation
Rights or the Initial Value of any Outstanding Phantom Shares, and (iii) the
maximum number of shares of Common Stock referred to in Section 1.5 and Section
1.6 of the Plan, in each case, as it deems appropriate. Such determinations
shall be conclusive and binding for all purposes.

ARTICLE VII

MISCELLANEOUS

SECTION 7.1 NO RIGHTS TO GRANTS OR CONTINUED SERVICE.

Neither the adoption of this Plan nor any action of the Board or the
Committee shall be deemed to give any person any right to a Grant or any other
rights except as may be evidenced by an Agreement, or any amendment thereto,
duly authorized by the Committee and executed on behalf of the Company, and then
only to the extent and upon the terms and conditions expressly set forth
therein. Neither the Plan nor any action taken hereunder shall be construed as
giving any employee, Non-Employee Director or Advisor, any right to be retained
by the Company or any of its subsidiaries nor the right to be nominated,
reelected or retained as a member of the Board for any period of time or at any
particular rate of compensation.

SECTION 7.2 RESTRICTION ON TRANSFER.

The rights of a Participant with respect to Stock Options, Stock
Appreciation Rights, Restricted Shares, Restricted Share Units or Phantom Shares
shall not be transferable by the Participant to whom such Stock Options, Stock
Appreciation Rights, Restricted Shares, Restricted Share Units or Phantom Shares
are granted, except by will or the laws of descent and distribution.

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SECTION 7.3 TAXES.

The Company or a subsidiary thereof, as appropriate, shall have the
right to deduct from all payments made under the Plan to a Participant or to a
Participant's estate any federal, state, local or other taxes required by law to
be withheld with respect to such payments. The Committee, in its discretion, may
require, as a condition to the exercise of any Stock Option or Stock
Appreciation Right or delivery of any certificate(s) for shares of Common Stock,
that an additional amount be paid in cash equal to the amount of any federal,
state, local or other taxes owed as a result of such exercise. Any Participant
who makes an election under Section 83(b) of the Code to have his or her receipt
of shares of Restricted Stock taxed in accordance with such election must give
notice to the Company of such election immediately upon making a valid election
in accordance with the rules and regulations of the Code. Any such election must
be made in accordance with the rules and regulations of the Code.

SECTION 7.4 STOCKHOLDER RIGHTS.

No Grant under the Plan shall entitle a Participant or a Participant's
estate or permitted transferee to any rights of a holder of shares of common
stock of the Company, except as provided in Article III with respect to
Restricted Shares or when and until share certificates are delivered upon
exercise of a Stock Option or when and until share certificates are delivered in
settlement of a Stock Appreciation Right or a Restricted Share Unit.

SECTION 7.5 NO RESTRICTION ON RIGHT OF COMPANY TO EFFECT CORPORATE CHANGES.

The Plan shall not affect in any way the right or power of the Company
or its stockholders to make or authorize any or all adjustments,
recapitalization, reorganization or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of stock or of options, warrants or rights to purchase stock or of bonds,
debentures, preferred or prior preference stock whose rights are superior to or
affect the Common Stock or the rights thereof or which are convertible into or
exchangeable for Common Stock, or the dissolution or liquidation of the Company,
or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar character or otherwise.

SECTION 7.6 SOURCE OF PAYMENTS.

The general funds of the Company shall be the sole source of cash
settlements of Stock Appreciation Rights or Restricted Share Units under the
Plan and payments of Appreciation Value and the Company shall not have any
obligation to establish any separate fund or trust or other segregation of
assets to provide for payments under the Plan. Nothing contained in this Plan,
and no action taken pursuant to its provisions, shall create or be construed to
create a trust of any kind, or a fiduciary relationship, between the Company and
a Participant or any other person. To the extent a person acquires any rights to
receive payments hereunder from the Company, such rights shall be no greater
than those of an unsecured creditor.

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ARTICLE VIII

AMENDMENT AND TERMINATION

The Plan may be terminated and may be altered, amended, suspended or
terminated at any time, in whole or in part, by the Board; PROVIDED, HOWEVER,
that no alteration or amendment will be effective without stockholder approval
if such approval is required by law or under the rules of the New York Stock
Exchange, the NASDAQ Stock Market or any stock exchange on which the Common
Stock is listed. No termination or amendment of the Plan may, without the
consent of the Participant to whom a grant has been made, adversely affect the
rights of such Participant in the Stock Options, Stock Appreciation Rights,
Restricted Shares, Restricted Share Units or Phantom Shares covered by such
Grant. Unless previously terminated pursuant to this Article VIII, the Plan
shall terminate on the fifth anniversary of the Effective Date (as defined
below), and no further Grants may be awarded hereunder after such date.

ARTICLE IX

INTERPRETATION

SECTION 9.1 GOVERNMENTAL REGULATIONS.

The Plan, and all Grants hereunder, shall be subject to all applicable
rules and regulations of governmental or other authorities.

SECTION 9.2 HEADINGS.

The headings of articles and sections herein are included solely for
convenience of reference and shall not affect the meaning of any of the
provisions of the Plan.

SECTION 9.3 GOVERNING LAW.

The Plan and all rights hereunder shall be construed in accordance with
and governed by the laws of the State of Delaware.

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ARTICLE X

EFFECTIVE DATE AND STOCKHOLDER APPROVAL

The Plan became effective upon its adoption by the Board and its
approval by the stockholder of the Company on July 15, 1999.

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EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated May 4, 1999, except as to the fourth paragraph of Note 1 which is
as of August 3, 1999, relating to the consolidated financial statements of
Blockbuster Inc., which appears in such Registration Statement. We also consent
to the reference to us under the heading "Experts" in such Registration
Statement.

PricewaterhouseCoopers LLP

Dallas, Texas
August 3, 1999