<PAGE>   1

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


                                   FORM 10-K/A
                                 AMENDMENT NO. 2

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

     For the fiscal year ended January 31, 2000

                                       OR

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

     For the transition period from __________________ to __________________

                        COMMISSION FILE NUMBER: 000-24381

                          HASTINGS ENTERTAINMENT, INC.
             (Exact name of registrant as specified in its charter)

                  TEXAS                                          75-1386375
       (State or other jurisdiction of                         (IRS Employer
       incorporation or organization)                        Identification No.)

          3601 PLAINS BOULEVARD, AMARILLO, TEXAS                    79102
         (Address of principal executive offices)                 (Zip Code)

Registrant's telephone number, including area code: (806) 351-2300

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

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

 Common Stock, $.01 par value per share           Nasdaq National Market
           (Title of Class)               (Name of Exchange on which registered)

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

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $11,634,235 based upon the closing market price of
$2.188 per share of Common Stock on the Nasdaq National Market as of June 5,
2000.

Number of shares of $.01 par value Common Stock outstanding as of June 5, 2000:
11,642,644

                               (Cover page 1 of 1)


<PAGE>   2



                          HASTINGS ENTERTAINMENT, INC.
                        FORM 10-K/A AMENDED ANNUAL REPORT
                   FOR THE FISCAL YEAR ENDED JANUARY 31, 2000


This Form 10-K/A Amendment 2 is being filed to include expanded discussions of
(i) the Company's Accounting Restatement, under "Item 1. Business", "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. Financial Statements and Supplementary Data - Footnote
2", (ii) the Company's Returns Process under "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations", (iii) the
Company's lower of cost or market inventory adjustments under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. Financial Statements and Supplementary Data - Footnote
4", and to amend Schedule II - Valuation and Qualifying Accounts and Reserves
under "Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K."


                                      INDEX
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<S>         <C>                                                                                           <C>
PART I
Item 1.     Business.............................................................................            3
Item 2.     Properties...........................................................................           14
Item 3.     Legal Proceedings....................................................................           15
Item 4.     Submission of Matters to a Vote of Security Holders..................................           15

PART II
Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters................           16
Item 6.     Selected Financial Data..............................................................           17
Item 7.     Management's Discussion and Analysis of Financial Condition and
                        Results of Operations....................................................           19
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk...........................           28
Item 8.     Financial Statements and Supplementary Data..........................................           29
Item 9.     Changes in and Disagreements with Accountants on Accounting and
                        Financial Disclosure.....................................................           60

PART III
Item 10.    Directors and Executive Officers of the Registrant...................................           61
Item 11.    Executive Compensation...............................................................           64
Item 12.    Security Ownership of Certain Beneficial Owners and Management.......................           70
Item 13.    Certain Relationships and Related Transactions.......................................           71

PART IV
Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K......................           72
</TABLE>



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                                     PART I

    This Report contains certain forward-looking statements concerning the
intentions, hopes, beliefs, expectations, strategies, predictions or any other
variation thereof or comparable phraseology of the future activities or other
future events or conditions of Hastings Entertainment, Inc. (the "Company")
within the meaning of Section 27A of the Securities Act of 1993, as amended (the
"1933 Act"), and Section 21E of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), which are intended to be covered by the safe harbors created
thereby. Investors are cautioned that all forward-looking statements involve
risks and uncertainty, including, without limitation, variations in quarterly
results, volatility of stock price, development by competitors of superior
services or product offerings, the entry into the market by new competitors, the
sufficiency of the Company's working capital, the ability to retain management,
to implement our business strategy, to attract and retain customers, to increase
revenue, and to successfully defend our company in ongoing and future
litigation. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and, therefore, there can be no assurance that
the forward-looking statements included in this Report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the Company's objectives and plans will be achieved.

ITEM 1. BUSINESS

General

     The Company is a leading multimedia entertainment retailer that combines
the sale of books, music, software, periodicals, videocassettes and DVDs with
the rental of videocassettes, video games and DVDs in a superstore format. As of
May 31, 2000, the Company operated 143 superstores and one college store in
small to medium-sized markets located in 22 states, primarily in the Western and
Midwestern United States. The Company also operates a multimedia entertainment
e-commerce Web site offering a broad selection of books, music, software,
videocassettes, video games and DVDs. See note 16 to the consolidated financial
statements for more information regarding the Company's operating segments,
retail stores and Internet operations. References herein to fiscal years are to
the twelve-month periods, which end in January of each following calendar year.
For example, the twelve-month period ended January 31, 2000 is referred to as
fiscal 1999.

     Accounting Restatement (the "Restatement"). On March 7, 2000, the Company
announced that its fourth quarter and fiscal 1999 results (and the previous four
fiscal years' results) would be negatively impacted by certain accounting
adjustments. As described in "Item 3. Legal Proceedings", "Item 6. Selected
Financial Data", "Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition", and "Item 8. Financial Statements and
Supplementary Data" and the notes to the consolidated financial statements set
forth therein, the Company has made adjustments to restate its previously
reported consolidated financial statements for the first three quarters of
fiscal 1999 and the prior four fiscal years. The effects on the previously
reported net income for the first three quarters of fiscal 1999, fiscal 1998,
fiscal 1997, and the fiscal years prior to fiscal 1997 amounted to decreases of
$0.7 million, $4.8 million, $3.5 million, and $16.3 million, respectively.

     Prior to the March 7, 2000 announcement, the Company determined that
merchandise receipts for a portion of overall vendor deliveries had not been
properly entered into the inventory system. As a result, the Company's
accounting system did not completely capture certain merchandise cost of revenue
specifically relating to shrinkage, and merchandise cost of revenue had been
understated for the periods noted above.

     The Company uses accounts payable clearing accounts that, in part, are
based upon a process of matching vendor invoices to receipt transactions
generated when merchandise is physically received. Clearing accounts are
established by store to record inventory received until matched with vendor
invoices. Once an invoice is matched with a receipt, the invoice is transferred
from the accounts payable clearing account to trade accounts payable for
payment. Depending on the time of the year, over 100,000 invoices ($30 to $50
million) are processed through the individual store clearing accounts each month
and in any fiscal year referenced above, merchandise receipts totaled between
$250 million and $300 million. Greater than 95% of the receipts were processed
correctly; however,



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between 1% and 5% of total receipts per year, were not captured and accounted
for appropriately due to certain internal controls and procedures in place to
capture exceptions not functioning as intended.

     Although the Company believed that internal controls and procedures in
place during the periods referenced above provided accurate financial
statements, the Company determined during the fourth quarter of fiscal 1999 that
certain internal controls and procedures in place to capture the exceptions
noted above were not functioning as intended. The Company had, over time,
developed a proprietary accounting software system for the accounts payable
process as well as the inventory control system. The Company determined its
accounting systems, processes and internal control procedures did not capture
those exceptions where inventory receipts were not recorded or did not precisely
match vendor invoices nor provide the proper reconciliation of the Company's
accounts payable clearing accounts. As a result, inappropriate balances
accumulated over time in the accounts payable clearing accounts. As part of the
restatement, such balances were required to be written-off as a charge to cost
of revenue. Modifications to the accounting systems and management's review of
processes and internal control procedures during the fourth quarter of fiscal
1999 identified certain internal controls and procedures that were not
functioning as intended, and confirmed the magnitude of the impact on the
Company's consolidated financial statements. The Company has implemented changes
in both its accounts payable and inventory control systems relating to (i)
timely reconciliation, (ii) effective communication, (iii) management review,
(iv) training for both store level and corporate personnel, and (v) modification
of systems to correct the errors and to ensure that the Company's merchandise
cost of revenue is properly stated. Collectively, the accounts payable clearing
account adjustments relating to cost of revenues aggregated $24.1 million
pre-tax.

     In addition, on May 3, 2000, the Company announced that, as a result of its
work to determine the impact of the restatement of the accounts payable clearing
accounts, certain other accounting adjustments would also be required for the
first three quarters of fiscal 1999 and the previous four fiscal years. The
Company determined that certain internal controls and procedures in place
related to the merchandise returns process were not functioning as intended.
Accordingly, as part of the restatement, the Company recorded pre-tax charges
totaling $7.4 million, including $5.8 million related to the merchandise returns
process, including refused merchandise returns from vendors and the allowance
for cost of inventory returns. The Company has implemented changes in both its
estimation of the allowance for cost of inventory returns (reference is made to
"Item 7. Management's Discussion and Analysis of Financial Position and Results
of Operations - General"), and refused merchandise returns process to ensure
that the Company's returns expense is properly stated. The $7.4 million charge
also included charges of $0.7 million to correct an accrued benefit liability
and $0.9 million to adjust certain other liability and reserve accounts.

     Following the Company's initial announcement in March 2000 of the
requirement for the accounting restatements, six purported class action lawsuits
were filed in the United States District Court for the Northern District of
Texas against the Company and certain of the current and former officers of the
Company asserting various claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. Although four of the lawsuits were originally
filed in the Dallas Division of the Northern District of Texas, all of the
pending actions have been or will be transferred to the Amarillo Division of the
Northern District and the Company believes all of the actions will be
consolidated. One of the lawsuits filed in the Dallas Division was voluntarily
dismissed. On May 15, 2000, a lawsuit was filed in the United States District
Court for the Northern District of Texas against the Company, its current and
former directors and officers at the time of the Company's June 1998 initial
public offering and three underwriters, Salomon Smith Barney, A.G. Edwards &
Sons, Inc. and Furman Selz, LLC asserting various claims under Sections 11,
12(2) and 15 of the Securities Act of 1933.

     None of the six pending complaints specify the amount of damages sought.
Although it is not feasible to predict or determine the final outcome of the
proceedings or to estimate the potential range of loss with respect to these
matters, an adverse outcome with respect to such proceedings could have a
material adverse impact on the Company's financial position, results of
operations and cash flow.

     The Company's past business strategy has been to grow and increase its
profitability through the expansion of its superstore operations. In fiscal
1999, the Company opened 20 new superstores and closed two superstores,
increased selling square footage from approximately 2,385,000 square feet to
approximately 2,829,000 square feet and attained comparable-store revenue growth
of 4.0%. The Company intends to slow its growth in the future by



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opening fewer superstores in the next two fiscal years than the immediately
preceding two fiscal years while continuing its ongoing store expansion and
remodeling programs for its existing superstores. The Company anticipates
opening approximately eight superstores and closing four superstores over the
next two years.

     In addition to superstores, the Company operates an e-commerce Internet Web
site, www.gohastings.com. Customers have the ability to electronically access
more than 800,000 new and used entertainment products and unique, contemporary
gifts and toys. The site also features exceptional product and pricing offers,
including best-selling books at up to 50% off list price and digital downloading
of music selections. The Web site is a fully integrated multimedia entertainment
e-commerce Internet Web site offering a broad selection of entertainment
products to the electronic global marketplace at competitive Internet prices.

     The Company operates three wholly owned subsidiaries. Hastings Properties,
Inc. and Hastings Internet, Inc. were established in the first quarter of fiscal
1998. Hastings College Stores, Inc. was established in the second quarter of
fiscal 1998.

Business Strategy

     The Company's goal is to enhance its position as a leading multimedia
entertainment retailer by expanding existing stores, opening new stores in
selected markets and offering its products through the Internet. Each element of
the Company's business strategy is designed to build consumer awareness of the
Hastings concept and achieve high levels of customer loyalty and repeat
business. The key elements of this strategy are the following:

     Superior Multimedia Concept. The Company's superstores present a wide
variety of products tailored to local preferences in a dynamic and comfortable
store atmosphere with exceptional service. The Company's superstores average
approximately 21,500 square feet, with its new stores ranging in size from
12,000 to 35,000 square feet. The Company's superstores offer customers an
extensive product assortment consisting of approximately 20,000 to 40,000 book,
15,000 to 30,000 music, 1,000 to 2,000 software, 1,000 to 2,000 periodical,
5,000 to 10,000 videocassette, 1,000 to 2,000 complementary and accessory titles
for sale. The Company also offers approximately 3,000 to 12,000 used compact
disc, videocassette, DVD and video game titles for sale. In addition, customers
can select from 700 to 1,500 DVD titles for sale and rent and 12,000 to 20,000
videocassette and video game selections for rent. Although the superstores' core
product assortment tends to be similar, the merchandise mix of each of the
Company's superstores is tailored to accommodate the particular demographic
profile of the local market in which the superstore operates through the
utilization of the Company's proprietary purchasing and inventory management
systems. The Company believes that its multimedia format reduces its reliance on
and exposure to any particular entertainment segment and enables the Company to
promptly add exciting new entertainment categories to its product line.

     Small to Medium-Sized Market Superstore Focus. The Company targets small to
medium-sized markets with populations of 25,000 to 150,000 in which its
extensive product selection, low pricing strategy, efficient operations and
superior customer service enable it to become the market's destination
entertainment store. The Company believes that the small to medium-sized markets
where it operates the majority of its superstores present an opportunity to
profitably operate and expand the Company's unique entertainment superstore
format. These markets typically are underserved by existing book, music or video
stores, and competition generally is limited to locally owned specialty stores,
single-concept entertainment retailers and general merchandise retailers. The
Company bases its merchandising strategy for its superstores on an in-depth
understanding of its customers and its individual markets. The Company strives
to optimize each superstore's merchandise selection by using its proprietary
information systems to analyze the sales history, anticipated demand and
demographics of each superstore's market. In addition, the Company utilizes
flexible layouts that enable each superstore to arrange its products according
to local interests and to customize the layout in response to new customer
preferences and product lines.

     Customer-Oriented Superstore Format. The Company designs its superstores to
provide an easy-to-shop, open store atmosphere by offering major product
categories in a "store-within-a-store" format. Most of the Company's superstores
utilize product-category boutiques positioned around a wide racetrack aisle that
is designed to allow customers to view the entire superstore. This store
configuration produces significant cross-marketing opportunities among the
various entertainment departments, which the Company believes results in higher
transaction volumes



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and impulse purchases. To encourage browsing and the perception of Hastings as a
community gathering place, the Company has incorporated amenities in many
superstores, such as chairs for reading, complimentary gourmet coffees, music
auditioning stations, interactive information kiosks, telephones for free local
calls, children's play areas and in-store promotional events.

     Cost-Effective Operations. The Company is committed to controlling costs in
every aspect of its operations while maintaining its customer-oriented
philosophy. From 1993 to 1997, the Company spent $12.8 million to develop and
implement proprietary information, purchasing, distribution and inventory
control systems that position the Company to continue to grow profitably. These
systems enable the Company to respond actively to customers' changing desires
and to rapid shifts in local and national market conditions. The Company's
100,000 square-foot distribution center, which adjoins its corporate offices in
Amarillo, Texas, provides the Company with improved store in-stocks, efficient
product cross-docking and centralized returns processing.

     Low Pricing. The Company's pricing strategy at its superstores is to offer
value to its customers by maintaining prices that are competitive with or lower
than the lowest prices charged by other retailers in the market. The Company
determines its prices on a market-by-market basis, depending on the level of
competition and other market-specific considerations. The Company believes that
its low pricing structure results in part from (i) its ability to purchase
directly from publishers, studios and manufacturers as opposed to purchasing
from distributors, (ii) its proprietary information systems that enable
management to make more precise and targeted purchases for each superstore, and
(iii) its consistent focus on maintaining low occupancy and operating costs.

     Internet. In May 1999, the Company launched its new e-commerce Internet Web
site, www.gohastings.com. The Company's site enables customers to electronically
access more than 800,000 new and used entertainment products and unique,
contemporary gifts and toys. The site features exceptional product and pricing
offers, including best selling books at up to 50% off list price, and digital
downloading of music selections. The Web site is a fully integrated multimedia
entertainment e-commerce Internet Web site offering a broad selection of
entertainment products to the electronic global marketplace at competitive
Internet prices.

Expansion Strategy

     The Company plans to slow its growth rate over the next two years and focus
its efforts on expansion and remodeling of existing superstores and increasing
comparable store revenues. It plans to open approximately eight superstores and
close four superstores over the next two fiscal years in selected markets for a
total of approximately 147 superstores by the end of fiscal 2001. The Company
has identified numerous potential locations for future superstores in
under-served, small to medium-sized markets that meet its new-market criteria.
The Company believes that with its current information systems and distribution
capabilities, its infrastructure can support its anticipated rate of expansion
and growth for at least the next several years.

Merchandising

    The Company is a leading multimedia entertainment retailer that combines the
sale of books, music, software, periodicals, videocassettes and DVDs with the
rental of videocassettes, video games and DVDs in a superstore format. By
offering a broad array of products within several distinct but complementary
categories, the Company strives to appeal to a wide range of customers and
position its superstores as destination entertainment stores in its targeted
small to medium-sized markets.

    Superstore Product Selection. Although all Hastings superstores carry a
similar core product assortment, the merchandise mix of book, music, software,
videocassette and video game selections of each superstore is tailored
continually to accommodate the particular demographic profile and demand of the
local market in which the superstore operates. The Company accomplishes this
customization through its proprietary purchasing and inventory management
system. The purchasing system analyzes historic consumer purchasing patterns at
each individual superstore to forecast customer demand for new releases and
anticipate seasonal changes in demand. In addition, the Company's inventory
management process continually monitors product sales and videocassette rentals
to identify slow-moving books, music, software and sale videocassettes for
return to vendors and rental videocassettes for sale or transfer to other
superstores.




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    The Company's superstores offer an extensive selection of items in each of
its entertainment categories. The typical Hastings superstore offers for sale
approximately 20,000 to 40,000 book, 15,000 to 30,000 music, 1,000 to 2,000
software, 1,000 to 2,000 periodical, 5,000 to 10,000 videocassette and 1,000 to
2,000 complementary and accessory titles for sale. The Company also offers
approximately 3,000 to 12,000 used compact disc, videocassette, DVD and video
game titles for sale. In addition, customers can select from 700 to 1,500 DVD
titles for sale and rent and 12,000 to 20,000 videocassette and video game
selections for rent. New releases and special offerings in each entertainment
product category are prominently displayed and arranged by product category.

    In addition to its primary product lines, the Company continually adds new
product offerings to better serve its customers. Products for sale in these
categories include promotional t-shirts, licensed plush toys, greeting cards,
used compact discs, audio books and consumables, including soft drinks, chips,
popcorn and candy. Accessory items for sale include blank videocassettes, video
cleaning equipment and audiocassette and compact disc carrying cases. Many of
these products generate impulse purchases and produce higher margins. The rental
of videocassette, video game and DVD players is provided as a service to
Hastings customers.

Marketing

    Low Pricing. The Company's pricing strategy at its superstores is to offer
value to its customers by maintaining prices that are competitive with or lower
than the lowest prices charged by other retailers in the market. The Company
determines its prices on a market-by-market basis, depending on the level of
competition and other market-specific considerations. The Company believes that
its low pricing structure results in part from (i) its ability to purchase
directly from publishers, studios and manufacturers as opposed to purchasing
from distributors, (ii) its proprietary information systems that enable
management to make more precise and targeted purchases for each superstore, and
(iii) its consistent focus on maintaining low occupancy and operating costs.

    Customer Service. The Company is committed to providing the highest level of
customer service to increase customer loyalty. The Company devotes significant
resources to associate training and measuring customer satisfaction. All
Hastings superstore associates undergo training when hired and are required to
participate in frequent training programs. The Company's ongoing customer
service program, "Quality Service Everytime," empowers every superstore
associate to utilize the Company's flexible return and refund policies to
resolve any customer problem. The Company believes that these programs, together
with the Company's low pricing strategy and superstore amenities, such as
reading chairs, complimentary coffees, and free local telephone calls to permit
customers to confirm their entertainment selections with family and friends, are
important components of the customer service the Company provides.

    Advertising/Promotion. The Company participates in cooperative advertising
programs and merchandise display allowance programs offered by its vendors. The
Company's advertising programs are market-focused and emphasize the price
competitiveness, extensive product assortment and comfortable atmosphere of the
Company's superstores. The Company benefits from market display allowances
provided by vendors because of its superstores' high traffic volume and its
effective display implementation. The Company utilizes radio, television,
newspaper and direct-mail advertising and in-store point-of-sale promotional
materials.

Information System

    The Company's information system is built upon a multi-tiered, distributed
processing architecture and was designed using client/server technology. All
locations are connected using a wide-area network that allows interchange of
current information. The primary components of the information system are as
follows:

    New Release Allocation. The Company's buyers use the new release allocation
system to purchase new release products for the superstores. Its buyers have the
ability within the system to utilize up to 15 different methods of forecasting
demand. By using store-specific sales history, factoring in specific market
traits, applying sales curves for similar titles or groups of products and
minimizing subjectivity and human emotion for a transaction, the system
customizes purchases for each individual superstore to satisfy customer demand.
The process provides the flexibility to allow store management to anticipate
customer needs, including tracking missed sales and factoring in


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regional influences. The Company believes that the new release allocation system
enables the Company to increase revenues by having the optimum levels and
selection of products available in each superstore at the appropriate time to
satisfy customers' entertainment needs.

    Rental Video Asset Purchasing System. The Company's rental video asset
purchasing system uses store-specific performance on individual rental
videocassette titles to anticipate customer demand for new release rental
videocassettes. The system analyzes the first eight weeks' performance of a
similar title and factors in the effect of such influences as seasonal trends,
box office draw and prominence of the movie's cast to customize an optimum
inventory for each individual superstore. The system also allows for the
customized purchasing of other catalog rental video assets on an individual
store basis and additional copy depth requirements under revenue-sharing
agreements. The Company believes that its rental video asset purchasing system
allows the Company to efficiently plan and stock each superstore's rental video
asset inventory, thereby improving performance and reducing exposure from excess
inventory.

     Store Replenishment. Store replenishment covers three main areas for
controlling a superstore's inventory.

          Selection Management. Selection management constantly analyzes
     store-specific sales, traits and seasonal trends to determine title
     selection and inventory levels for each individual superstore. By
     forecasting annual sales of products and consolidating recommendations from
     store management, the system enables the Company to identify overstocked or
     understocked items to prompt required store actions and optimize inventory
     levels. The system tailors each store's individual inventory to the market
     utilizing over 2,000 product categories.

          Model Stock Calculation/Ordering. Model stock calculation uses
     store-specific sales, seasonal trends and sophisticated curve fitting to
     forecast orders. It also accounts for turnaround time from a vendor or the
     Company's distribution center and tracks historical missed sales to adjust
     orders to adequately fulfill sales potential. Orders are currently
     calculated on a weekly basis and transmitted by all superstores to the
     corporate office to establish a source vendor for the product.

          Inventory Management. Inventory management systems interface with
     other store systems and accommodate electronic receiving and returns to
     maintain perpetual inventory information. Cycle counting procedures allow
     the Company to perform all physical inventory functions, with the Company
     counting each superstore's inventory up to four times per year. The system
     provides feedback to assist in researching variance.

     Store Systems. Each superstore has a dedicated server within the store for
processing information connected through a wide area network. This connectivity
provides consolidation of individual transactions and allows store management
and corporate office associates easy access to the information needed to make
informed decisions. Transactions at the store are summarized and used to assist
in staff scheduling, loss prevention and inventory control. All point of sale
transactions utilize scanning technology allowing for maximum customer
efficiency at checkout. The Company also utilizes an automated system for
scheduling store management and sales associates. This system was developed to
assist in controlling personnel costs while maintaining desired levels of
customer service by preventing over-scheduling or under-scheduling sales,
stocking and customer service associates.

     Accounting. The Company's financial accounting software has a flexible,
open-systems architecture. The Company prepares a variety of daily management
reports covering store and corporate performance. Detailed financial information
for each superstore, as well as for the distribution center and the corporate
office, are generated on a monthly basis. The Company's payroll, accounts
payable, cash control, financial planning and state and local tax functions are
performed in-house.

     Warehouse Management. The Company's warehouse management systems provide
support for high-volume retail transactions, including shipments, receipts and
returns to vendors. Software to perform these functions was customized through a
joint effort of the Company's purchasing, distribution and information systems
departments. The warehouse system incorporates exact cube sizes of product
containers, utilizing flow-through racks and technologically advanced conveyor
systems.



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Distribution and Suppliers

     The Company's distribution center is located in a 100,000 square foot
facility adjacent to its corporate headquarters in Amarillo, Texas. This central
location and the local labor pool enable the Company to realize relatively low
transportation and labor costs. The distribution center is utilized primarily
for receiving, storing and distributing approximately 15,000 products offered in
substantially every superstore. The distribution center also is used in
distributing large purchases, including forward buys, closeouts and other bulk
purchases. In addition, the distribution facility is used to receive, process
and ship items to be returned to manufacturers and distributors, as well as to
transfer and redistribute videocassettes among the Company's superstores. This
facility currently provides inventory to all Hastings superstores and is
designed to support its anticipated rate of expansion and growth for at least
the next several years. The Company ships products weekly to each Hastings
superstore, facilitating quick and responsive inventory replenishment.
Approximately 15% of the Company's total product, based on store receipts, is
distributed through the distribution center. Approximately 85% of the Company's
total product is shipped directly from the vendors to the superstores. The
Company outsources all product transportation from its distribution center to
various freight companies.

     The Company's information systems and corporate infrastructure facilitate
the Company's ability to purchase products directly from manufacturers, which
contributes to its low pricing structure. In fiscal 1999, the Company purchased
the majority of its products directly from manufacturers, rather than through
distributors. The Company's top three suppliers accounted for approximately 20%
of the Company's total products purchased during fiscal 1999. While selections
from a particular artist or author generally are produced by a single
manufacturer, the Company strives to maintain supplier relationships that can
provide alternate sources of supply. In general, the Company's products are
returnable to the supplying vendor.

Store Operations

     Each Hastings superstore employs one store manager and one or more
assistant store managers. Store managers and assistant store managers are
responsible for the execution of all operational, merchandising and marketing
strategies for the superstore in which they work. Superstores also generally
have department managers, who are individually responsible for their respective
book, music, software, video, customer service and stocking departments within
each superstore. Hastings superstores are generally open daily from 10:00 a.m.
to 11:00 p.m. However, several superstores are open 9:00 a.m. to 11:00 p.m. or
10:00 a.m. to 10:00 p.m. The only days the Company's superstores are closed are
Thanksgiving and Christmas.

Competition

     The entertainment retail industry is highly competitive. The Company
competes with a wide variety of book retailers, music retailers, software
retailers, Internet retailers and retailers that rent or sell videocassettes,
including independent single store operations, local multi-store operators,
regional and national chains, as well as supermarkets, pharmacies, convenience
stores, bookstores, mass merchants, mail order operations, warehouse clubs,
record clubs, other retailers and various non-commercial sources such as
libraries. With regard to its videocassette sales and rental video products in
particular, the Company competes with cable, satellite and pay-per-view cable
television systems. In addition, continuing technological advances that enhance
the ability of consumers to shop at home or access, produce and print written
works or record music digitally by home computer through the Internet or
telephonic transmission could provide competition to the Company in the future.

     The Company competes in most of its markets with either national
entertainment retailers or significant retailers of general merchandise or both.
The Company competes in its sale of books with retailers such as Barnes & Noble,
Inc., Borders Group, Inc., Walden Books and B. Dalton Bookseller. The Company
competes in its sale of music with music retailers, such as The Wherehouse,
Inc., Camelot Music, Inc., Transworld Entertainment and Musicland Stores
Corporation, and consumer electronics stores, including Best Buy and Circuit
City. The Company's principal competitors in the sale and rental of
videocassettes are Blockbuster Video and Hollywood Entertainment Corp. In
addition, the Company competes in the sale of books, music and videocassettes
and the rental of videocassettes and video games with local entertainment
retailers and significant retailers of general merchandise, such as Wal-Mart.
Over the past 30 months, retailers such as Amazon.com, Inc., Barnes & Noble,
Inc., CDNOW, Inc. and Hollywood Entertainment, Inc., have increased their retail
sales of entertainment products, such as books and music, via the Internet, and
the Company anticipates that additional traditional competitors of the Company
will compete soon via



                                       9
<PAGE>   10

the Internet as well. The Company competes with other entertainment retailers on
the basis of title selection, the number of copies of popular selections
available, store location, visibility and pricing.

Trademarks and Servicemarks

     The Company believes its trademarks and servicemarks, including the
servicemarks "Hastings Books Music Video," "Hastings, Your Entertainment
Superstore" and "Hastings Entertainment," have significant value and are
important to its marketing efforts. The Company has registered "Hastings Books
Music Video" as a servicemark with the United States Patent and Trademark Office
and is in the process of registering "Hastings, Your Entertainment Superstore"
and "Hastings Entertainment". The Company maintains a policy of pursuing
registration of its principal marks and opposing any infringement of its marks.

Associates

    The Company refers to its employees as associates because of the critical
role they play in the success of each Hastings superstore and the Company as a
whole. As of January 31, 2000, the Company employed approximately 6,640
associates; of which 2,278 are full-time and 4,362 are part-time associates. Of
this number, approximately 6,237 were employed at retail superstores, 117 were
employed at the Company's distribution center and 286 were employed at the
Company's corporate offices. None of the Company's associates are represented by
a labor union or are subject to a collective bargaining agreement. The Company
believes that its relations with its associates are good.



                                       10
<PAGE>   11




                                  RISK FACTORS

     YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE MAKING AN
INVESTMENT DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THE COMPANY'S
BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE HURT, THE PRICE
OF THE COMPANY'S SECURITIES COULD DECLINE, THE COMPANY MAY NOT BE ABLE TO REPAY
ITS DEBT OBLIGATIONS AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. YOU SHOULD
ALSO REFER TO THE OTHER INFORMATION CONTAINED IN THIS REPORT AND INCORPORATED IN
THIS REPORT BY REFERENCE, INCLUDING THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES.

     Volatility of stock price. Factors such as fluctuations in the Company's
operating results, a downturn in the retail industry, failure to meet stock
market analysts' earnings estimates, changes in analysts' recommendations
regarding the Company, other retail companies or the retail industry in general,
and general market and economic conditions may have a material adverse effect on
the market price of the Common Stock. The Company's Common Stock has declined
substantially since June 1998 as a result of several of the foregoing factors
and the accounting restatements described elsewhere in this Report, and there
can be no assurance that the market price for the Common Stock will increase in
the future. In addition, the stock market has recently experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. Future broad market fluctuations also may adversely affect
the market price of the Company's Common Stock.

     The Company is involved in litigation resulting from the accounting
restatements. Following the Company's initial announcement on March 7, 2000 of
the requirement for the accounting restatements, six purported class action
lawsuits were filed in the United States District Court for the Northern
District of Texas against the Company and certain of the current and former
directors and officers of the Company asserting various claims under Sections
10(b) and 20(a) of the Securities Exchange Act of 1934. Although four of the
lawsuits were originally filed in the Dallas Division of the Northern District
of Texas, all of the five pending actions have been or will be transferred to
the Amarillo Division of the Northern District and should be consolidated. One
of the Section 10(b) and 20(a) lawsuits filed in the Dallas Division was
voluntarily dismissed. On May 15, 2000, a lawsuit was filed in the United States
District Court for the Northern District of Texas against the Company, its
current and former directors and officers at the time of the Company's June 1998
initial public offering and three underwriters, Salomon Smith Barney, A.G.
Edwards & Sons, Inc. and Furman Selz, LLC asserting various claims under
Sections 11, 12(2) and 15 of the Securities Act of 1933.

     None of the six pending complaints specify the amount of damages sought.
Although it is not feasible to predict or determine the final outcome of the
proceedings or to estimate the potential range of loss with respect to these
matters, an adverse outcome with respect to such proceedings could have a
material adverse impact on the Company's consolidated financial position,
results of operations and cash flows.

     The Company's expansion into electronic commerce is subject to the success
of Internet retailing and may require expansion of the Company's infrastructure.
The Company began operation of its e-commerce web site, www.gohastings.com, in
May 1999. The retail market over the Internet is rapidly evolving and depends
upon market acceptance of novel methods for distributing products, which
involves a high degree of uncertainty. There can be no assurance that the
Company's expansion into electronic commerce will be profitable. The success of
this expansion strategy depends upon the adoption of the Internet by consumers
as a widely used medium for commerce in general, as well as the availability and
functionality of the Hastings Web site in particular. Any failure of the
Internet infrastructure to support increased demands placed on it by continued
growth or system interruptions that result in the unavailability of the
Company's e-commerce Web site or reduced performance in the fulfillment of
orders could reduce the volume of goods sold and the attractiveness of the
Company's electronic commerce service to customers. Increases in the number and
frequency of orders placed on the Hastings Web site may require the Company to
expand its operating infrastructure, including information systems. There can be
no assurance that Hastings will be able to expand its technology at a rate that
will accommodate the need for such increases. The success of Internet retailing
is dependent upon other factors beyond the control of the Company, including
electronic commerce security risks and the impact of technological advances. If
the Internet does not become a



                                       11
<PAGE>   12

viable commercial marketplace or if critical issues concerning the commercial
use of the Internet are not favorably resolved, the Company could be materially
adversely affected.

     A decline in consumer spending or unforeseen changes in consumer demand may
adversely affect future results. The Company's success depends in part on its
ability to anticipate and respond to changing merchandise trends and consumer
demand in a timely manner. Accordingly, any failure by the Company to identify
and respond to emerging trends could adversely affect consumer acceptance of the
merchandise in the Company's stores, which in turn could have a material adverse
effect on the Company. The sale of books, music, software and periodicals and
the sale and rental of videocassettes historically have been dependent upon
discretionary consumer spending, which may be affected by general economic
conditions, consumer confidence and other factors beyond the control of the
Company. In addition, spending on these items is affected significantly by the
timing, pricing and success of new releases, which are not within the Company's
control. A lack of popular new book, music, software, periodical, videocassette
or video game selections could have a material adverse effect on the Company.
Also, a decline in consumer spending on books, music or videocassettes or other
entertainment-related products could have a material adverse effect on the
Company.

     A change in the Company's ability to purchase directly from manufacturers
or in its supplier relationships could adversely affect the Company. The Company
purchases much of its merchandise directly from manufacturers rather than
purchasing from distributors. The inability of the Company to purchase products
directly from a manufacturer would require the Company to purchase those
products from a distributor, in all likelihood at higher prices. There can be no
assurance that the Company will be able to continue to acquire merchandise
directly from manufacturers at competitive prices or on competitive terms in the
future. The Company's top three suppliers accounted for approximately 20% of the
Company's inventory purchased during fiscal 1999. There can be no assurance that
in the event of the inability of the Company to purchase merchandise from one of
these suppliers the Company would be able to purchase the same or similar
products from another supplier at competitive prices or on competitive terms.
The inability to locate an alternate supplier with competitive prices could have
a material adverse effect on the Company. In addition, the Company's inability
to return merchandise to suppliers could have a material adverse effect on the
Company.

     Intense competition in the entertainment retail industry and changes in
entertainment technology could adversely affect the Company's results of
operations. The entertainment retail industry is highly competitive. The Company
competes with a wide variety of book, music, software and videocassette
retailers, including online retailers, independent single store operators, local
multi-store operators, regional and national chains, as well as supermarkets,
pharmacies, convenience stores, bookstores, mass merchants, mail order
operations, warehouse clubs, record clubs, other retailers and various
noncommercial sources such as libraries. Many of the Company's competitors have
been expanding in both store size and number of outlets while others have
announced their intentions to expand. Increased competition may reduce the
Company's revenues, raise store rents and operating expenses and decrease profit
margins and profits. Some of the Company's competitors have significantly
greater financial and marketing resources, market share and name recognition
than the Company. There can be no assurance that the Company will be able to
continue to compete successfully with its existing competitors or with new
competitors. The Company historically has operated in small to medium-sized
markets, and there can be no assurance that competition in these markets will
not intensify significantly.

     The Company also competes with cable, satellite and pay-per-view cable
television systems. Digital compression technology, combined with fiber optics
and other developing technologies, is expected eventually to permit cable
companies, direct broadcast satellite companies, telephone companies and other
businesses to transmit a greater number of movies to homes at more frequently
scheduled intervals throughout the day or on demand and potentially at a lower
cost than presently offered. Technological advances or changes in the marketing
of movies could make these technologies more attractive and economical to
consumers, which could have a material adverse effect on the Company. In
addition, continuing technological advances may enhance the ability of consumers
to shop at home or access, produce and print written works or record music
digitally. Such advances could have a material adverse effect on the Company.
Some of the Company's traditional competitors have recently started to compete
through the Internet, and the Company anticipates that certain of the Company's
other traditional competitors will compete with the Company soon through the
Internet as well. In addition, several of the Company's competitors on the
Internet have been operating retail Web sites longer than the Company and may
have



                                       12
<PAGE>   13

a greater level of technological expertise, financial and marketing resources
and name recognition. There can be no assurance that the Company will be able to
compete successfully, technologically or otherwise, with other Internet
retailers or with its existing competitors on a cost-effective and timely basis
in electronic commerce.

     The Company's operations depend on its executives. The Company's success is
substantially dependent upon the efforts of its senior management and other key
personnel, including in particular John H. Marmaduke, who has served as the
President and Chief Executive Officer of the Company since 1976. The loss of Mr.
Marmaduke's services or the services of one or more of the other members of
senior management could have a material adverse effect on the Company. With the
exception of a $10 million policy on the life of Mr. Marmaduke, the Company
currently does not maintain key-man insurance on any of its executive officers.
The success of the Company depends, in part on its ability to retain its key
management and attract other personnel to satisfy the Company's current and
future needs. The inability to retain key management personnel or to attract
additional personnel could have a material adverse effect on the Company.

     Certain provisions in the Company's articles and bylaws may deter takeover
attempts. Certain provisions of the Third Restated Articles of Incorporation
(the "Articles of Incorporation") and the Amended and Restated Bylaws (the
"Bylaws") of the Company may be deemed to have an anti-takeover effect and may
delay, discourage or prevent a tender offer or takeover attempt, including
attempts that might result in a premium being paid over the market price for the
shares held by shareholders. The Articles of Incorporation of the Company
provide for the Board of Directors to be divided into three classes of directors
serving staggered three-year terms. As a result, approximately one-third of the
Board of Directors are elected each year. The Company's Articles of
Incorporation or Bylaws also include advance notice requirements for shareholder
proposals and nominations, prohibit the taking of shareholder action by written
consent without a meeting and provide that special meetings of shareholders of
the Company be called only by the Chairman of the Board of Directors, the Board
of Directors, the Company's President or holders of not less than 25% of the
Company's outstanding stock entitled to vote at the proposed meeting. In
addition, the Bylaws may be amended or repealed only by the Board. These
provisions may not be amended in the Company's Articles of Incorporation or
Bylaws without the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock.

     The Board of Directors of the Company is authorized (without any further
action by the shareholders) to issue Preferred Stock in one or more series and
to fix the voting rights and designations, preferences, limitations and relative
rights and qualifications, limitations or restrictions and certain other rights
and preferences, of the Preferred Stock. Under certain circumstances, the
issuance of Preferred Stock may render more difficult or tend to discourage a
merger, tender offer or proxy contest, the assumption of control by a holder of
a large block of the Company's securities or the removal of incumbent
management. The Board of Directors of the Company, without shareholder approval,
may issue Preferred Stock with voting, dividend and conversion rights that could
adversely affect the holders of Common Stock. As of the date of this Report, no
shares of Preferred Stock are outstanding and the Company has no present
intention to issue any shares of Preferred Stock.

     The Company does not expect to pay dividends in the foreseeable future. The
Company intends to continue to retain any earnings to support operations and
finance its growth and does not intend to pay cash dividends on the Common Stock
for the foreseeable future. The payment of cash dividends in the future will be
at the discretion of the Board of Directors and subject to certain limitations
under the Texas Business Corporation Act and will depend upon factors such as
earnings levels, capital requirements, the Company's financial condition and
other factors deemed relevant by the Board of Directors. The Company's amended
revolving credit facility and the amended and restated Note Purchase Agreement
relating to the Company's Series A Senior Notes due 2003 restrict the payment of
dividends.

     Liquidity. The Company believes that, based on current and anticipated
financial performance, cash flows from operating activities and borrowings under
the amended Facility will be adequate to meet anticipated requirements for
capital expenditures, working capital and required principal and interest
payments under the amended Senior Notes and the amended Facility. The ability of
the Company to satisfy its capital requirements will be dependent upon future
financial performance of the Company, which in turn is subject to general
economic conditions and to financial issues and other factors, including factors
beyond the Company's control. The Company believes it will be able to comply
with the financial covenants relating to both the amended revolving credit
facility and the amended senior notes; however, there can be no assurance of
such compliance. The breach of any of the covenants contained in the amended
revolving credit facility or the amended senior notes could result in a default
under the amended revolving credit facility and the



                                       13
<PAGE>   14

amended senior notes which could result in further advances under the revolving
credit facility no longer being available from the lender and could enable the
respective lenders to require immediate repayment of the borrowings including
accrued interest under the agreements. If the lenders were to accelerate the
repayment of borrowings, including accrued interest, the Company cannot be
certain that its assets would be sufficient to repay such obligations.


     ITEM 2. PROPERTIES

     As of January 31, 2000, the Company operated 147 superstores in 22 states
located as indicated in the following table:

<TABLE>
<CAPTION>

              NAME OF STATE                                                             NUMBER OF SUPERSTORES
              -------------                                                             ---------------------
<S>                                                                                     <C>
              Alabama................................................................            1
              Arkansas...............................................................            8
              Arizona................................................................            7
              Colorado...............................................................            3
              Georgia................................................................            1
              Idaho..................................................................            8
              Illinois...............................................................            4
              Indiana................................................................            2
              Iowa...................................................................            2
              Kansas.................................................................            8
              Kentucky...............................................................            2
              Missouri...............................................................            8
              Montana................................................................            5
              Nebraska...............................................................            5
              New Mexico.............................................................           13
              North Carolina.........................................................            1
              Oklahoma...............................................................           13
              Tennessee..............................................................            4
              Texas..................................................................           39
              Utah...................................................................            3
              Washington.............................................................            7
              Wyoming................................................................            3
                                                                                             -----
              Total..................................................................          147
</TABLE>

     The Company leases sites for all of its superstores. These sites typically
are located in pre-existing, stand-alone buildings or strip shopping centers.
The Company's primary market areas are small and medium-sized communities with
populations typically ranging from 25,000 to 150,000. The Company has developed
a systematic approach using its site selection criteria to evaluate and identify
potential sites for new superstores. Key demographic criteria for Company
superstores include community population, community and regional retail sales,
personal and household disposable income levels, education levels, median age,
and proximity of colleges or universities. Other site selection factors include
current competition in the community, visibility, available parking, ease of
access and other neighbor tenants. To maintain its low occupancy costs, the
Company typically concentrates on leasing existing locations that have been
operated previously by other retailers.

     The Company actively manages its existing stores and from time to time
closes under-performing stores. During the fourth quarter of fiscal 1999 the
Company closed two superstores and an additional four superstores and one
college bookstore in the first quarter of fiscal 2000.

     The terms of the Company's superstore leases vary considerably. The Company
strives to maintain maximum location flexibility by entering into leases with
short initial terms and multiple short-term extension options. The


                                       14
<PAGE>   15

Company has been able to enter into leases with these terms in part because it
generally bears a substantial portion of the cost of preparing the site for a
superstore. The following table sets forth as of January 31, 2000 (including the
superstores closed in the first quarter of fiscal 2000) the number of
superstores that have current lease terms that will expire during each of the
following fiscal years and the associated number of superstores for which the
Company has options to extend the lease term:

<TABLE>
<CAPTION>

                                                                       NUMBER OF SUPERSTORES     OPTIONS
                                                                       ---------------------     -------
<S>                                                                    <C>                       <C>
         Fiscal Year 2000.........................................             9                   6
         Fiscal Year 2001.........................................             5                   4
         Fiscal Year 2002.........................................            14                  12
         Fiscal Year 2003.........................................            26                  26
         Fiscal Year 2004.........................................            20                  18
         Thereafter...............................................            73                  73
                                                                            ----                ----
         Total....................................................           147                 139
</TABLE>

     The Company has not experienced any significant difficulty renewing or
extending leases on a satisfactory basis.

     The Company's headquarters and distribution center are located in Amarillo,
Texas in a leased facility consisting of approximately 67,850 square feet for
office space and 100,000 square feet for the distribution center. The leases for
this property terminate in September 2003, and the Company has the option to
renew these leases through March 2015.

ITEM 3. LEGAL PROCEEDINGS

     As described in "Item 6. Selected Financial Data", "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition", and
"Item 8. Financial Statements and Supplementary Data" and the notes to the
consolidated financial statements set forth therein, the Company has made
adjustments to restate its previously reported consolidated financial statements
for the first three quarters of fiscal 1999 and the prior four fiscal years.

     Following the Company's initial announcement on March 7, 2000 of the
requirement for the accounting restatements, six purported class action lawsuits
were filed in the United States District Court for the Northern District of
Texas against the Company and certain of the current and former directors and
officers of the Company asserting various claims under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934. Although four of the lawsuits were
originally filed in the Dallas Division of the Northern District of Texas, all
of the five pending actions have been or will be transferred to the Amarillo
Division of the Northern District and should be consolidated. One of the Section
10(b) and 20(a) lawsuits filed in the Dallas Division was voluntarily dismissed.
On May 15, 2000, a lawsuit was filed in the United States District Court for the
Northern District of Texas against the Company, its current and former directors
and officers at the time of the Company's June 1998 initial public offering and
three underwriters, Salomon Smith Barney, A.G. Edwards & Sons, Inc. and Furman
Selz, LLC asserting various claims under Sections 11, 12(2) and 15 of the
Securities Act of 1933.

     None of the six pending complaints specify the amount of damages sought.
Although it is not feasible to predict or determine the final outcome of the
proceedings or to estimate the potential range of loss with respect to these
matters, an adverse outcome with respect to such proceedings could have a
material adverse impact on the Company's consolidated financial position,
results of operations and cash flows.

     The Company is also involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or cash
flows.


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

     No matters were submitted to a vote of the security holders during the
fourth quarter of fiscal 1999.



                                       15
<PAGE>   16




                                     PART II

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

     The Company's Common Stock began trading on The Nasdaq National Market
(Nasdaq) on June 12, 1998 under the symbol "HAST." On May 18, 2000, the Company
was notified by Nasdaq that its Common Stock would be delisted on May 30, 2000
unless the Company's fiscal 1999 Form 10-K, the filing of which was delayed
pending completion of the accounting restatements described herein, was filed
with the Securities and Exchange Commission by May 25, 2000. As part of this
process, on May 22, 2000 the Company's ticker symbol was changed from "HAST" to
"HASTE". Under Nasdaq rules, the Company requested, and was subsequently
granted, an oral hearing with the appropriate Nasdaq panel. The hearing is
scheduled for June 22, 2000. The scheduling of this hearing automatically stays
the delisting of the Company's Common Stock until the hearing panel makes a
ruling. The Company believes the filing of the Company's fiscal 1999 Form 10-K
will result in cancellation of the scheduled Nasdaq hearing and withdrawal of
the delisting notice.

     The following table sets forth for the fiscal periods indicated the high
and low closing market prices of the Company's Common Stock as reported on
Nasdaq:

<TABLE>
<CAPTION>

                                                         HIGH              LOW
                                                     ------------      ------------
<S>                                                  <C>               <C>
2000:
First Quarter                                        $      4.188      $      2.438
Second Quarter (May 1 through June 5, 2000)          $      2.688      $      1.250

1999:
First Quarter                                        $     15.313      $      8.625
Second Quarter                                       $     16.438      $      9.875
Third Quarter                                        $     11.125      $      4.625
Fourth Quarter                                       $      6.813      $      4.000

1998:
Second Quarter (June 12, 1998 to July 31, 1998)      $     14.000      $     11.000
Third Quarter                                        $     12.000      $      8.000
Fourth Quarter                                       $     19.125      $     10.250
</TABLE>

     As of June 5, 2000, there were approximately 3,814 holders of the Company's
Common Stock, including 233 shareholders of record, and 11,642,644 shares of
Common Stock outstanding.

     The payment of dividends is within the discretion of the Company's Board of
Directors and will depend on the earnings, capital requirements, and the
operating and financial condition of the Company, among other factors. The
Company's amended revolving credit facility and the amended and restated Note
Purchase Agreement restrict the payment of dividends. In view of such
restrictions, it is unlikely that the Company will pay a dividend in the
foreseeable future.




                                       16
<PAGE>   17




ITEM 6. SELECTED FINANCIAL DATA

     The selected consolidated financial and operating data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Company's consolidated
financial statements and the notes thereto that appear elsewhere in this report.

<TABLE>
<CAPTION>

                                                                                Fiscal Year
                                                 ---------------------------------------------------------------------------
 (In thousands, except per share data)              1999            1998            1997             1996            1995
                                                 -----------     -----------     -----------     -----------     -----------
                                                                     As              As              As              As
                                                                 Restated(1)     Restated(1)     Restated(1)     Restated(1)
<S>                                              <C>             <C>             <C>             <C>             <C>
INCOME STATEMENT DATA:
Merchandise revenue                              $   364,041     $   320,162     $   283,026     $   251,439     $   232,463
Rental video revenue                                  83,114          79,001          74,739          72,357          66,449
                                                 -----------     -----------     -----------     -----------     -----------
Total revenues                                       447,155         399,163         357,765         323,796         298,912
Merchandise cost of revenue(2)                       256,028         222,155         199,190         178,288         174,405
Rental video cost of revenue(3)                       32,184          49,069          25,904          24,645          25,322
                                                 -----------     -----------     -----------     -----------     -----------
Total cost of revenues                               288,212         271,224         225,094         202,933         199,727
Gross profit                                         158,943         127,939         132,671         120,863          99,185
Selling, general and administrative  expenses(4)     157,283         130,378         120,794         107,626          89,820
Development expenses                                      --              --              --           2,421           2,791
Pre-opening expenses                                   1,681           1,474           1,071             404             165
                                                 -----------     -----------     -----------     -----------     -----------
Operating income (loss)                                  (21)         (3,913)         10,806          10,412           6,409
Interest expense, net                                 (3,708)         (3,727)         (4,228)         (3,585)         (2,588)
Gain (loss) on sale of mall stores(5)                     --             454           1,734          (2,500)             --
Other, net                                               205             232             139             187             221
                                                 -----------     -----------     -----------     -----------     -----------
Income (loss) before income taxes                     (3,524)         (6,954)          8,451           4,514           4,042
Income tax expense (benefit)(6)                       (1,359)         (2,649)          3,347           1,736           5,514
                                                 -----------     -----------     -----------     -----------     -----------
Net income (loss)                                $    (2,165)    $    (4,305)    $     5,104     $     2,778     $    (1,472)
                                                 ===========     ===========     ===========     ===========     ===========
Basic income (loss) per share                    $     (0.19)    $     (0.41)    $      0.60     $      0.32     $     (0.17)
                                                 ===========     ===========     ===========     ===========     ===========
Diluted income (loss) per share                  $     (0.19)    $     (0.41)    $      0.58     $      0.32     $     (0.17)
                                                 ===========     ===========     ===========     ===========     ===========

Weighted-average common shares outstanding -          11,621          10,436           8,520           8,552           8,529
basic

Weighted-average common shares outstanding -          11,621          10,436           8,736           8,757           8,529
diluted

OTHER DATA:
Depreciation and amortization(3)(7)              $    32,923     $    55,331     $    33,606     $    28,535     $    26,998
Capital expenditures(8)                          $    47,310     $    42,568     $    55,753     $    40,510     $    48,358

STORE DATA:
Total selling square footage at end of period      2,829,269       2,385,432       2,078,264       1,828,649       1,716,859
Comparable-store revenues increase(9)                    4.0%            5.5%            7.0%            5.9%            4.1%
</TABLE>


<TABLE>
<CAPTION>

                                                                       January 31,
                                          -------------------------------------------------------------------
                                             2000         1999           1998          1997           1996
                                          -----------   -----------   -----------   -----------   -----------
                                                            As            As            As             As
                                                        Restated(1)   Restated(1)   Restated(1)   Restated(1)
<S>                                       <C>           <C>           <C>           <C>           <C>
BALANCE SHEET DATA:
Working capital                           $    67,295   $    64,866   $    29,500   $    41,455   $    23,690
Total assets                                  247,933       233,479       217,948       183,019       165,189
Total long-term debt, including current        54,260        44,979        51,612        51,873        38,916
maturities
Total shareholders' equity                     90,091        91,869        51,971        46,816        41,871
</TABLE>



                                       17
<PAGE>   18





(1)  The Company has made adjustments to restate its previously reported results
     of operations for the first three quarters of fiscal 1999 and the prior
     four fiscal years. See "Item 8. Financial Statements and Supplementary
     Data" and the notes to the consolidated financial statements set forth
     therein.

(2)  The Company recorded a pre-tax charge of approximately $3.5 million in the
     fourth quarter of fiscal year 1999 for the write down of inventory to the
     lower of cost or market. As a result of this charge, fiscal year 1999 net
     loss and diluted loss per share were increased by $2.2 million and $0.19
     per share, respectively.

(3)  The Company adopted a new, accelerated method of amortizing its rental
     video assets in the fourth quarter of fiscal 1998. The adoption of the new
     amortization method was accounted for as a change in accounting estimate
     effected by a change in accounting principle and, accordingly, the Company
     recorded a non-cash, non-recurring, pre-tax charge of $18.5 million in
     rental video cost of revenues in the fourth quarter of fiscal 1998,
     increasing net loss and diluted loss per share for fiscal 1998 by $11.5
     million and $1.10 per share, respectively.

(4)  The Company recorded a pre-tax charge of approximately $5.1 million in the
     fourth quarter of fiscal year 1999 related to the closing of two of its
     superstores in the fourth quarter of fiscal 1999 and five of its stores
     during the first quarter of fiscal year 2000. This charge includes the net
     present value of future minimum lease payments, write-off of property and
     equipment, and other costs associated with the closing of these locations.
     As a result of this charge, fiscal year 1999 net loss and diluted loss per
     share were increased by $3.1 million and $0.27 per share, respectively.

(5)  In fiscal 1996, the Company established a reserve of $2.5 million ($1.6
     million after-tax charge) to cover potential losses related to certain mall
     store leases that were sold prior to fiscal 1995 to Camelot Music, Inc.,
     which filed for bankruptcy protection in August 1996. In fiscal 1997, the
     reserve was reduced to $0.5 million, and $1.7 million was included in Gain
     on sale of mall stores. In fiscal 1998, the Company was released from any
     contingent liability on the remaining leases by order of a bankruptcy
     court. Accordingly, the Company reduced the remaining $0.5 million reserve
     to zero as of January 31, 1999, thereby decreasing net loss and diluted
     loss per share for fiscal 1998 by $0.3 million and $.03 per share,
     respectively.

(6)  Fiscal year 1998, 1997 and 1996 reflect adjustments recorded to current
     income tax expense (benefit) resulting from the accounting restatements for
     which the Company expects it will recover previously paid income taxes upon
     filing amended income tax returns. Fiscal 1995 does not reflect the tax
     benefits for the accounting restatements as the statute of limitations has
     expired.

(7)  Includes amounts associated with the Company's rental video cost
     allocation.

(8)  Includes procurement of rental video assets.

(9)  Stores open a minimum of 60 weeks.




                                       18
<PAGE>   19




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

     The following discussion should be read in conjunction with the Company's
consolidated financial statements and the related notes thereto and "Item 6.
Selected Financial Data" appearing elsewhere in this Annual Report.

General

     The Company is a leading multimedia entertainment retailer that combines
the sale of books, music, software, periodicals, videocassettes, video games and
DVDs with the rental of videocassettes, video games and DVDs in a superstore and
Internet Web site format. As of January 31, 2000, the Company operated 147
superstores averaging 21,500 square feet in small to medium-sized markets
located in 22 states, primarily in the Western and Midwestern United States. The
Company also operated two college bookstores. Each of the superstores and the
college bookstores is wholly owned by the Company and operates under the name of
Hastings. The Company's e-commerce Web site, www.gohastings.com, became
operational in May 1999.

     The Company's operating strategy is to enhance its position as a multimedia
entertainment retailer by expanding existing superstores, opening new
superstores in selected markets, and expanding its offering of products through
its Internet Web site. References herein to fiscal years are to the twelve-month
periods that end in January of the following calendar year. For example, the
twelve-month period ended January 31, 2000 is referred to fiscal 1999.

     Accounting Restatement (the "Restatement"). On March 7, 2000, the Company
announced that its fourth quarter and fiscal 1999 results (and the previous four
fiscal years' results) would be negatively impacted by certain accounting
adjustments. As described in "Item 1. Business", "Item 3. Legal Proceedings",
"Item 6. Selected Financial Data", and "Item 8. Financial Statements and
Supplementary Data" and the notes to the consolidated financial statements set
forth therein, the Company has made adjustments to restate its previously
reported consolidated financial statements for the first three quarters of
fiscal 1999 and the prior four fiscal years. The effects on the previously
reported net income for the first three quarters of fiscal 1999, fiscal 1998,
fiscal 1997, and the fiscal years prior to fiscal 1997 amounted to decreases of
$0.7 million, $4.8 million, $3.5 million, and $16.3 million, respectively.

     Prior to the March 7, 2000 announcement, the Company determined that
merchandise receipts for a portion of overall vendor deliveries had not been
properly entered into the inventory system. As a result, the Company's
accounting system did not completely capture certain merchandise cost of
revenues specifically relating to shrinkage, and merchandise cost of revenue had
been understated for the periods noted above.

     The Company uses accounts payable clearing accounts that, in part, are
based upon a process of matching vendor invoices to receipt transactions
generated when merchandise is physically received. Clearing accounts are
established by store to record inventory received until matched with vendor
invoices. Once an invoice is matched with a receipt, the invoice is transferred
from the accounts payable clearing account to trade accounts payable for
payment. Depending on the time of the year, over 100,000 invoices ($30 to $50
million) are processed through the individual store clearing accounts each month
and in any fiscal year referenced above, merchandise receipts totaled between
$250 million and $300 million. Greater than 95% of the receipts were processed
correctly; however, between 1% and 5% of total receipts per year, were not
captured and accounted for appropriately due to certain internal controls and
procedures in place to capture exceptions not functioning as intended.

     Although the Company believed that internal controls and procedures in
place during the periods referenced above provided accurate financial
statements, the Company determined during the fourth quarter of fiscal 1999 that
certain internal controls and procedures in place to capture the exceptions
noted above were not functioning as intended. The Company had, over time,
developed a proprietary accounting software system for the accounts payable
process as well as the inventory control system. The Company determined its
accounting systems, processes and internal control procedures did not capture
those exceptions where inventory receipts were not recorded or did not precisely
match vendor invoices nor provide the proper reconciliation of the Company's
accounts payable clearing accounts. As a result, inappropriate balances
accumulated over time in the accounts



                                       19
<PAGE>   20

payable clearing accounts. As part of the restatement, such balances were
required to be written-off as a charge to cost of revenue. Modifications to the
accounting systems and management's review of processes and internal control
procedures during the fourth quarter of fiscal 1999 identified certain internal
controls and procedures that were not functioning as intended, and confirmed the
magnitude of the impact on the Company's consolidated financial statements. The
Company has implemented changes in both its accounts payable and inventory
control systems relating to (i) timely reconciliation, (ii) effective
communication, (iii) management review, (iv) training for both store level and
corporate personnel, and (v) modification of systems to correct the errors and
to ensure that the Company's merchandise cost of revenue is properly stated.
Collectively, the accounts payable clearing account adjustments relating to cost
of revenues aggregated $24.1 million pre-tax.

     In addition, on May 3, 2000, the Company announced that, as a result of its
work to determine the impact of the restatement of the accounts payable clearing
accounts, certain other accounting adjustments would also be required for the
first three quarters of fiscal 1999 and the previous four fiscal years. The
Company determined that certain internal controls and procedures in place
related to the merchandise returns process were not functioning as intended.
Accordingly, as part of the restatement, the Company recorded pre-tax charges
totaling $7.4 million, including $5.8 million related to the merchandise returns
process, including refused merchandise returns from vendors and the allowance
for cost of inventory returns. The Company has implemented changes in both its
estimation of the allowance for cost of inventory returns (see "Returns Process"
below), and refused merchandise returns process to ensure that the Company's
returns expense is properly stated. The $7.4 million charge also included
charges of $0.7 million to correct an accrued benefit liability and $0.9 million
to adjust certain other liability and reserve accounts.

     Following the Company's initial announcement in March 2000 of the
requirement for the accounting restatements, six purported class action lawsuits
were filed in the United States District Court for the Northern District of
Texas against the Company and certain of the current and former officers of the
Company asserting various claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. Although four of the lawsuits were originally
filed in the Dallas Division of the Northern District of Texas, all of the
pending actions have been or will be transferred to the Amarillo Division of the
Northern District and the Company believes all of the actions will be
consolidated. One of the lawsuits filed in the Dallas Division was voluntarily
dismissed. On May 15, 2000, a lawsuit was filed in the United States District
Court for the Northern District of Texas against the Company, its current and
former directors and officers at the time of the Company's June 1998 initial
public offering and three underwriters, Salomon Smith Barney, A.G. Edwards &
Sons, Inc. and Furman Selz, LLC asserting various claims under Sections 11,
12(2) and 15 of the Securities Act of 1933.

     None of the six pending complaints specify the amount of damages sought.
Although it is not feasible to predict or determine the final outcome of the
proceedings or to estimate the potential range of loss with respect to these
matters, an adverse outcome with respect to such proceedings could have a
material adverse impact on the Company's financial position, results of
operations and cash flow.

     Returns Process. In general, merchandise inventory owned by the Company is
returnable based upon return agreements with the Company's merchandise vendors.
The Company continually returns merchandise to vendors based on, among other
factors, current and projected sales trends, overstock situations, authorized
return timelines or change in product offerings. At the end of any reporting
period, there is inventory that has been returned to vendors or in the process
of being returned to vendors for which the Company will be charged a fee. In
order to appropriately match the expense associated with the return of
merchandise with the process of returning the product, the Company utilizes an
allowance for cost of inventory returns (the "Allowance"). To accrue for such
fees charged by its vendors and estimate the Allowance, the Company utilizes
historical experience adjusted for significant fee modifications by its vendors.
The time of year and the product mix of inventory to be returned can have a
significant effect on the ultimate cost to return the products; however, the
Company evaluates and adjusts the Allowance on a quarterly basis.




                                       20
<PAGE>   21
Rental Video Cost Allocation

     The Company adopted a new method of amortizing its rental video assets in
the fourth quarter of fiscal 1998. In late fiscal 1998, the Company completed a
series of direct revenue-sharing agreements with major studios under which the
Company acquired approximately 51% of its rental video assets during fiscal
1999. The Company anticipates that its involvement in revenue-sharing agreements
will continue to increase moderately in the future. Revenue sharing allows the
Company to acquire rental video assets at a lower up-front capital cost than
traditional buying arrangements. The Company then shares with studios a
percentage of the actual net rental revenues generated over a contractually
determined period of time. The increased access to additional copies of new
releases under revenue-sharing agreements will allow customer demand for new
releases to be satisfied over a shorter period of time at a time when the new
releases are most popular. Since this new business model results in a greater
proportion of rental revenue to be received over a reduced rental period because
there is more product available when product demand is greater, the Company
changed its method of amortizing rental video assets in order to better match
expenses with revenues.

     Under the new amortization method, the Company continues to expense
revenue-sharing payments as revenues are recognized under the terms of the
specific contracts with supplying studios. The capitalized cost of all rental
video assets acquired for a fixed price is being amortized on an accelerated
basis over six months to a salvage value of $4 per unit, except for rental video
assets purchased for the initial stock of a new store, which are being amortized
on a straight line basis over 36 months to a salvage value of $4. Under the old
amortization method, the capitalized cost of base rental video assets (typically
copies one through four of a title for each store) was amortized on a straight
line basis over 36 months to a salvage value of $5. The capitalized cost of
non-base units (typically copies five and above for each store) was amortized on
a straight-line basis over 6 months to a salvage value of $5.

     The adoption of the accelerated amortization method was accounted for as a
change in accounting estimate effected by a change in accounting principle and,
accordingly, the Company recorded a non-cash, non-recurring, pre-tax charge of
$18.5 million in the fourth quarter of fiscal 1998, increasing net loss and
diluted loss per share for fiscal 1998 by $11.5 million and $1.10 per share,
respectively.



                                       21
<PAGE>   22




Results of Operations

     The following tables present the Company's statement of operations data,
expressed as a percentage of revenue, and the number of superstores open at the
end of period for the three most recent fiscal years.

<TABLE>
<CAPTION>

                                                                Fiscal Year
                                                 ------------------------------------------
                                                    1999           1998             1997
                                                 ----------     -----------     -----------
                                                                As Restated     As Restated
<S>                                              <C>             <C>             <C>
Merchandise revenue                                    81.4%           80.2%           79.1%
Rental video revenue                                   18.6            19.8            20.9
                                                 ----------      ----------      ----------
     Total revenues                                   100.0           100.0           100.0
Merchandise cost of revenue                            70.3            69.4            70.4
Rental video cost of revenue                           38.7            62.1            34.7
                                                 ----------      ----------      ----------
     Total cost of revenues                            64.4            67.9            62.9
     Gross profit                                      35.6            32.1            37.1
Selling, general and administrative expenses           35.2            32.7            33.8
Pre-opening expenses                                    0.4             0.4             0.3
                                                 ----------      ----------      ----------
                                                       35.6            33.1            34.1
                                                 ----------      ----------      ----------
Operating income (loss)                                (0.0)           (1.0)            3.0
Other income (expense):
   Interest expense                                    (0.8)           (0.9)           (1.2)
   Gain on sale of mall stores                           --             0.1             0.5
   Other, net                                           0.0             0.1             0.0
                                                 ----------      ----------      ----------
                                                       (0.8)           (0.7)           (0.7)
                                                 ----------      ----------      ----------
     Income (loss) before income taxes                 (0.8)           (1.7)            2.3
Income tax expense (benefit)                           (0.3)           (0.7)            0.9
                                                 ----------      ----------      ----------
     Net income (loss)                                 (0.5)%          (1.0)%           1.4%
                                                 ==========      ==========      ==========
</TABLE>

<TABLE>
<CAPTION>

                                              Fiscal Year
                               -----------------------------------------
                                  1999            1998           1997
                               ----------      ----------     ----------
<S>                            <C>             <C>            <C>
Hastings Superstores:
Beginning number of stores            129             117            111
Openings                               20              12              8
Closings *                             (2)             --             (2)
                               ----------      ----------     ----------
Ending number of stores               147             129            117
                               ==========      ==========     ==========
</TABLE>

     * Four additional superstores were closed in the first quarter of fiscal
2000.



                                       22
<PAGE>   23
Fiscal 1999 Compared to Fiscal 1998

     Revenues. Total revenues for fiscal 1999 totaled $447.2 million, an
increase of $48.0 million or 12.0% over fiscal 1998 revenue of $399.2 million.
The revenue growth consisted of a 13.7% increase in merchandise sales and a 5.2%
increase in rental video revenue. The increase in revenue was primarily due to
comparable store revenue growth of 4.0% and the opening of 20 Hastings
superstores during fiscal 1999. The Company closed two superstores at the end of
fiscal 1999, which had an insignificant effect on total revenue. Each
significant revenue category exhibited growth, with video games providing the
largest gains on a percentage basis.

     Gross Profit. Total gross profit as a percent of total revenue decreased in
fiscal 1999 to 35.6% compared to 36.7% for 1998 excluding the non-cash,
non-recurring, pre-tax charge of $18.5 million discussed above, under - "Rental
Video Cost Allocation." This decline was primarily the result of a $3.5 million
pre-tax charge in the fourth quarter of fiscal 1999 for the write-down of
certain merchandise inventory to the lower of cost or market. Lower than
anticipated sales volume in the fourth quarter of fiscal 1999 resulted in
management's decision to increase promotional discounts on certain products to
stimulate sales and to increase inventory turnover and enhance cash flows. Such
discounts resulted in lower of cost or market inventory adjustments. The
remainder of the gross profit change from fiscal 1998 resulted from the increase
in merchandise revenues from 80.2% to 81.4% of total revenues. Excluding the
write-down, merchandise gross profit as a percentage of merchandise revenue
remained constant at 30.6%. Gross profit as a percentage of revenue for rental
video remained constant at 61.3% for fiscal 1999 compared to fiscal 1998,
excluding the charge described above.

     Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses increased to 35.2% of total revenues in fiscal
1999 from 32.7% in fiscal 1998. One factor contributing to this increase was the
$5.1 million pre-tax charge for the costs associated with the closing of six
superstores and one college bookstore. This charge includes the net present
value of future minimum lease payments, write-off of property and equipment, and
other related costs. Two of these superstores were closed as of the end of
fiscal 1999, while the remainders were closed during the first quarter of fiscal
2000. Total returns expense (comprised of the cost of operating the Company's
return center and cost associated with the return of merchandise inventory) for
fiscal year 1999 was $9.1 million compared to $10.6 million for fiscal 1998.
The decrease was primarily due to a decline in costs associated with returns
settlements with vendors, resulting from an improvement in the Company's vendor
settlement process.

     Other factors contributing to the increase in SG&A were an increase of
approximately $1.4 million in costs associated with the operation of the
Company's Internet segment and increased costs related to the Company's
superstore advertising program.

     Pre-opening Expenses. Pre-opening expenses remained constant at 0.4% of
revenues for fiscal 1999 compared to fiscal 1998. Pre-opening expenses include
human resource costs, travel, rent, advertising, supplies and certain other
costs incurred prior to a superstore's opening. The Company opened 20 new
superstores in fiscal 1999, compared to 12 new superstores in fiscal 1998.

     Interest Expense. Interest expense remained constant at $3.7 million for
fiscal 1999 compared to 1998.

     Gain (Loss) on Sale of Mall Stores. As a result of the sale of its 42 mall
stores to Camelot Music, Inc., the Company recorded a total pre-tax gain of $7.9
million (after-tax gain of $4.9 million) in fiscal 1993 and fiscal 1994. Camelot
Music, Inc. filed for bankruptcy in August 1996, and the Company established a
reserve of $2.5 million in fiscal 1996 to cover potential losses related to
certain mall store leases. As of January 31, 1998, expenses totaling $0.3
million had been charged against the reserve. In the fourth quarter of fiscal
1997, the reserve was reduced to $0.5 million, resulting in an increase to
pre-tax income of $1.7 million. By the end of the fourth quarter of fiscal 1998,
all potential liabilities related to the Camelot Music, Inc. bankruptcy were
settled, and the Company reduced the remaining reserve to zero resulting in a
decrease in pre-tax loss in the fourth quarter of fiscal 1998 of $0.5 million.

     Net Income (Loss). The Company reported a net loss of $2.2 million or $0.19
per diluted share in fiscal 1999 compared to a net loss of $4.3 million or $0.41
per diluted share in fiscal 1998. Excluding the $5.1 million pre-tax



                                       23
<PAGE>   24

charge for the closing of stores and the $3.5 million pre-tax charge for the
write-down of merchandise inventory in fiscal 1999, the Company's net income and
diluted income per share would have been $3.1 million and $0.27 per diluted
share, respectively. Excluding the non-cash, non-recurring, pre-tax charge of
$18.5 million discussed above under - "Rental Video Cost Allocation," and the
$0.5 million reversal of the reserve related to the Camelot Music, Inc.
bankruptcy in fiscal 1998, the Company's fiscal 1998 net income and diluted
income per share would have been $6.8 million and $0.66 per share, respectively.

     Fiscal 1998 Compared to Fiscal 1997

     Revenues. Total revenues for fiscal 1998 totaled $399.2 million, an
increase of $41.4 million or 11.6% over fiscal 1997 revenue of $357.8 million.
The revenue growth consisted of a 13.1% increase in merchandise sales and a 5.7%
increase in rental video revenue. Each significant merchandise category
exhibited growth, with sale video games providing the largest gain on a
percentage basis. The increase in rental video revenue was the result of a new
successful rental marketing program introduced in the third quarter of fiscal
1997 and the transition to revenue-sharing copy-depth programs. Overall
comparable-store revenues increased 5.5% during the 12 months ended January 31,
1999. The Company added 12 new superstores during fiscal 1998 and did not close
any stores.

     Gross Profit. Gross profit as a percentage of revenues was 32.1% in fiscal
1998 compared to 37.1% for fiscal 1997. Excluding the non-cash, non-recurring,
pre-tax charge of $18.5 million discussed above, under - "Rental Video Cost
Allocation," in fiscal 1998 gross profit was 36.7% of total revenues. Gross
profit as a percentage of revenues for merchandise in fiscal 1998 increased to
30.6% from 29.6% in fiscal 1997. This increase was primarily due to lower
inventory shrinkage. Rental video gross profit as a percentage of revenues
decreased from 65.3% in fiscal 1997 to 37.9% in fiscal 1998. Excluding the
rental video charge, rental video gross profit as a percentage of revenues
decreased from 65.3% in fiscal 1997 to 61.3% in fiscal 1998 as a result of
higher depreciation related to increased purchases and higher cost of leased
videos related to revenue-sharing agreements.

     Selling, General and Administrative Expenses. SG&A expenses decreased to
32.7% of total revenues in fiscal 1998 from 33.8% in fiscal 1997. The primary
factors contributing to this decrease as a percentage of revenues were lower
corporate human resources costs related to deferred compensation, reduced
overall advertising and lower costs associated with the return of merchandise
inventory. During the second quarter of fiscal 1997, the Company re-priced
certain stock options granted to its Chief Executive Officer in fiscal 1992. The
Company recognized a one-time pre-tax charge of $1.0 million as deferred
compensation expense as a result of this event. Excluding this one-time charge
would reduce fiscal 1997 selling, general and administrative expenses to 33.5%
of fiscal 1997 revenue. Total returns expense (comprised of the cost of
operating the Company's return center and cost associated with the return of
merchandise inventory) for fiscal year 1998 was $10.6 million compared to $8.0
million for fiscal 1997. The increase was primarily due to an increase in the
volume of merchandise returns and the costs associated with returns settlements
with vendors, along with an increase in the cost of operating the Company's
return center during fiscal year 1998.

     Pre-opening Expenses. Pre-opening expenses increased to 0.4% of revenues
for fiscal 1998 from 0.3% of revenues for fiscal 1997. Pre-opening expenses
include human resource costs, travel, rent, advertising, supplies and certain
other costs incurred prior to a superstore's opening. The Company opened 12 new
superstores in fiscal 1998, compared to eight new superstores in fiscal 1997.

     Interest Expense. Interest expense decreased to $3.7 million for fiscal
1998 from $4.2 million for fiscal 1997 due to lower average borrowing balances.

     Gain (Loss) on Sale of Mall Stores. As a result of the sale of its 42 mall
stores to Camelot Music, Inc., the Company recorded a total pre-tax gain of $7.9
million (after-tax gain of $4.9 million) in fiscal 1993 and fiscal 1994. Camelot
Music, Inc. filed for bankruptcy in August 1996, and the Company established a
reserve of $2.5 million in fiscal 1996 to cover potential losses related to
certain mall store leases. As of January 31, 1998, expenses totaling $0.3
million had been charged against the reserve. In the fourth quarter of fiscal
1997, the reserve was reduced to $0.5 million, resulting in an increase to
pre-tax income of $1.7 million. By the end of the fourth quarter of fiscal 1998,
all potential liabilities related to the Camelot Music, Inc. bankruptcy were
settled, and the Company reduced the remaining reserve to zero resulting in a
decrease to pre-tax loss in the fourth quarter of fiscal 1998 of $0.5 million.



                                       24
<PAGE>   25

     Net Income. The Company reported a net loss of $4.3 million or $0.41 per
diluted share for fiscal 1998 compared to net income of $5.1 million and $.0.58
per diluted share, respectively for fiscal 1997. Excluding the non-cash,
non-recurring, pre-tax charge of $18.5 million discussed above, under - "Rental
Video Cost Allocation," and the $0.5 million reversal of the reserve related to
the Camelot Music, Inc. bankruptcy, the Company's net income and diluted income
per share would have been $6.8 million and $0.66 per share, respectively, in
fiscal 1998. Excluding the $1.7 million reversal of the reserve related to the
Camelot Music, Inc. bankruptcy, net income and diluted income per share would
have been $4.1 million and $0.46 per diluted share, respectively, in fiscal
1997.

Liquidity and Capital Resources

     The Company's principal capital requirements arise from purchasing,
warehousing and merchandising inventory and rental videos, opening new
superstores, expanding existing superstores, and funding the expansion of its
Internet operations. The Company's primary sources of working capital are cash
flow from operating activities, trade credit from vendors, borrowings from its
Revolving Credit Facility (the "Facility") and, for fiscal year 1996 and 1998,
proceeds from the issuance of the Company's unsecured Series A Senior Notes due
June 13, 2003 in the aggregate principal amount of $25.0 million (the "Senior
Notes") and Common Stock from the Company's June 1998 initial public offering,
respectively. Cash flow from operations was $39.3 million, $14.6 million and
$56.2 million for fiscal 1999, 1998 and 1997, respectively. Capital
expenditures, including purchase of rental video assets, were $47.3 million,
$42.6 million and $55.8 million for fiscal 1999, 1998 and 1997, respectively.
Cash flows from financing activities in fiscal 1999 primarily resulted from
borrowings made under the Facility and in fiscal 1998, net proceeds of
approximately $35.9 million from the issuance of the Common Stock in the
Company's June 1998 initial public offering. Net activity under the Facility
resulted in net borrowings of $14.6 million, net payments of $6.4 million and
net borrowings of $0.1 million in fiscal 1999, 1998 and 1997, respectively.

     At January 31, 2000 and 1999, the Company had borrowings outstanding of
$32.3 million and $17.7 million, respectively, under the Facility. The Facility
accrued interest at variable rates based on the lender's base rate or LIBOR. The
average rate of interest being charged under the Facility at January 31, 2000
and 1999 was 6.9% and 7.3%, respectively.

     Also, at January 31, 2000, the Company had outstanding $20 million
aggregate principal amount of Senior Notes with a financial institution. The
Company began making required $5.0 million annual principal payments on June 13,
1999, and the final payment is due June 13, 2003. The Senior Notes had a stated
interest rate of 7.75% at January 31, 2000.

     As a result of the accounting restatements discussed in note 2 to the
consolidated financial statements (Item 8), at January 31, 2000 and at various
prior quarters the Company was not in compliance with certain financial
covenants under its Facility and the Senior Notes. The Company obtained a series
of waivers on its breach of the covenant requirements to January 31, 2000 and
through June 12, 2000.

     Effective as of June 12, 2000, the Company entered into an amendment of the
Facility and an amendment and restatement of the Note Purchase Agreement for the
Senior Notes. As part of the amendments to the Facility and the Senior Notes,
the combined borrowings are jointly collateralized on a pari passu basis by
substantially all of the assets of the Company and its subsidiaries.

     The Facility, as amended, allows for maximum borrowings of up to $50
million. The aggregate amount outstanding under the Facility and the Senior
Notes is limited to a borrowing base predicated on eligible inventory, as
defined, and rental video assets, net. The Facility bears interest based on the
lender's base rate plus 1.0% (base rate plus 1.75% on the amount in excess of
the normal amount in the over-advance period) or LIBOR plus 2.50% (LIBOR plus
3.25% on the amount in excess of the normal advance rate amount in the
over-advance period), at the Company's option. In addition the Company is
required to pay a quarterly commitment fee of 0.50% on the unused Facility.
Borrowings under the Facility are limited to an advance rate of 55% of eligible
inventory (eligible inventory is defined as 61.22% of inventory, net) and 50% of
rental video assets net of accumulated amortization, less the outstanding
borrowings under the Senior Notes and any required rental reserve. The Facility
provides for an increase in the advance rate to cover additional working capital
requirements through the Christmas selling





                                       25
<PAGE>   26

season (the seasonal over-advance). The advance rate increases to 65% of
eligible inventory from August 1 through September 30 and to 70% of eligible
inventory from October 1 through December 31, 2000 and December 16, 2001,
respectively (the seasonal over-advance periods). The Facility includes revised
covenants requiring the maintenance of specific financial ratios and minimum
tangible net worth requirements. In addition, a covenant was added to the
Facility requiring the Company's income before interest, taxes, depreciation and
amortization (EBITDA) to be at least equal to specified levels for future
periods. Further, the Facility imposes certain restrictions with respect to
indebtedness, dividend payments, investment and capital expenditures. The
Facility expires on December 16, 2001.

     The Senior Notes, as amended, have a stated interest rate of 10.25%. The
amended and restated Note Purchase Agreement evidencing the amended Senior Notes
has financial covenants that are the same as those contained in the amended
Facility including financial ratios, minimum adjusted net worth requirements and
restrictions on indebtedness, investment, capital expenditures, and the payment
of dividends.

     The Company believes it will be able to comply with the financial covenants
relating to both the amended Facility and the amended Senior Notes for the next
twelve months; however, there can be no assurance of such compliance. The breach
of any of the covenants contained in the amended Facility or the amended Senior
Notes could result in a default under the amended Facility and the amended
Senior Notes which could result in further advances under the revolving credit
facility no longer being available from the lender and could enable the
respective lenders to require immediate repayment of the borrowings including
accrued interest under the agreements. If the lenders were to accelerate the
repayment of borrowings, including accrued interest, the Company cannot be
certain that its assets would be sufficient to repay such obligations. The
amended Facility and the amended Senior Notes are guaranteed by each of the
Company's three consolidated subsidiaries, and are in part secured by first
priority liens on all of the capital stock and substantially all of the assets
of each subsidiary.

     The Company's primary sources of liquidity are currently, cash flows from
operating activities and borrowings under the Facility. As of June 7, 2000,
$19.4 million was borrowed under the Facility. The Company believes that, based
on current and anticipated financial performance, cash flows from operating
activities and borrowings under the amended Facility will be adequate to meet
anticipated requirements for capital expenditures, working capital and required
principal and interest payments under the amended Senior Notes and the amended
Facility. The ability of the Company to satisfy its capital requirements will be
dependent upon future financial performance of the Company, which in turn is
subject to general economic conditions and to financial issues and other
factors, including factors beyond the Company's control. (See - "Risk Factors")

     As described above under "Item 1. Business", the Company plans to slow its
growth rate from that previously described and focus on the expansion and
remodeling of its existing superstores. The Company invests generally between $1
million and $2 million in a new superstore, with the largest components of that
amount being merchandise, videos, fixtures and leasehold improvements. The
Company expanded seven superstores in fiscal 1999 and plans to expand
approximately four superstores in fiscal 2000. The Company generally invests
between $0.5 million to $1.0 million to expand a superstore.

     At January 31, 2000, the Company had one other debt obligation totaling
$0.5 million. The principal on this obligation is payable quarterly until
maturity in May 2002. In addition, the Company maintains two capitalized lease
obligations with initial terms of 15 years. The total amount of these
obligations was $1.5 million at January 31, 2000.

Seasonality and Inflation

     As is the case with many retailers, a significant portion of the Company's
revenues, and an even greater portion of its operating profit, is generated in
the fourth fiscal quarter, which includes the Christmas selling season. As a
result, a substantial portion of the Company's annual earnings has been, and
will continue to be, dependent on the results of this quarter. The Company
experiences reduced rentals of video activity in the spring because customers
spend more time outdoors. Major world or sporting events, such as the Super
Bowl, the Olympic Games or the World Series, also have a temporary adverse
effect on revenues. Future operating results may be affected by many factors,
including variations in the number and timing of store openings, the number and
popularity of new book,



                                       26
<PAGE>   27

music and videocassette titles, the cost of the new release or "best renter"
titles, changes in comparable-store revenues, competition, marketing programs,
increases in the minimum wage, weather, special or unusual events, and other
factors that may affect retailers in general and the Company in particular.

     The Company does not believe that inflation has materially impacted net
income during the past three years. Substantial increases in costs and expenses
could have a significant impact on the Company's operating results to the extent
such increases are not passed along to customers.

Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" that impacts the Company's
accounting treatment and/or its disclosure obligations. The statement
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The statement, as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 is
not expected to have a material impact on the Company.

     In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of APB
Opinion No. 25" ("FIN 44"). Among other issues, this interpretation clarifies
the definition of employee for purposes of applying APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), the criteria for
determining whether a plan qualifies as a non-compensatory plan, the accounting
consequence of various modifications to the terms of previously fixed stock
options or awards, and the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1, 2000,
but certain conclusions in this Interpretation cover specific events that
occurred after either December 15, 1998, or January 12, 2000. Management
believes that FIN 44 will not have a material effect on the financial position
or the results of operations of the Company upon adoption.



                                       27
<PAGE>   28




     ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     In the ordinary course of its business, the Company is exposed to certain
market risks, primarily changes in interest rates. The Company's exposure to
interest rate risk consists of variable rate debt based on the lenders base rate
or LIBOR plus a specified percentage at the Company's option. The annual impact
on the Company's results of operations of a 100 basis point interest rate change
on the January 31, 2000 outstanding balance of the variable rate debt would be
approximately $0.3 million. After an assessment of these risks to the Company's
operations, the Company believes that its primary market risk exposures (within
the meaning of Regulation S-K Item 305) are not material and are not expected to
have any material adverse impact on the Company's financial position, results of
operations or cash flows for the next fiscal year. The Company is not party to
any derivative contracts. See notes 1(j) and (7) to the accompanying
consolidated financial statements.



                                       28
<PAGE>   29




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          HASTINGS ENTERTAINMENT, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>

                                                                                                               PAGE

<S>                                                                                                            <C>
Independent Auditors' Report                                                                                    30

Consolidated Balance Sheets as of January 31, 2000 and 1999                                                     31

Consolidated Statements of Operations
      for the years ended January 31, 2000, 1999 and 1998                                                       32

Consolidated Statements of Shareholders' Equity
      for the years ended January 31, 2000, 1999 and 1998                                                       33

Consolidated Statements of Cash Flows
      for years ended January 31, 2000, 1999 and 1998                                                           34

Notes to Consolidated Financial Statements                                                                      35
</TABLE>


SCHEDULE

Financial Statement Schedule - The Financial Statement Schedule filed as part of
this report is listed under Part IV, Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K.



                                       29
<PAGE>   30




                          INDEPENDENT AUDITORS' REPORT



The Board of Directors and Shareholders
Hastings Entertainment, Inc.:



We have audited the consolidated financial statements of Hastings Entertainment,
Inc. and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
related financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hastings
Entertainment, Inc. and subsidiaries as of January 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 31, 2000, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

As discussed in Note 2, the accompanying consolidated balance sheet as of
January 31, 1999 and the consolidated statements of operations, shareholders'
equity and cash flows for the years ended January 31, 1999 and 1998 have been
restated.

As discussed in Note 3, the Company changed its method of amortization for
rental videos in 1998.


/S/ KPMG LLP

Dallas, Texas
June 13, 2000



                                       30
<PAGE>   31





                  HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                            January 31, 2000 and 1999
                    (Dollars in thousands, except par value)

<TABLE>
<CAPTION>

                                                                                            FISCAL
                                                                                 ------------------------------
                                                                                     1999              1998
                                                                                 ------------      ------------
                                                                                                    As Restated
                                                                                                     (note 2)
<S>                                                                              <C>               <C>
                                   ASSETS
Current assets:
   Cash                                                                          $      7,026      $      5,394
   Merchandise inventories, net                                                       152,065           149,601
   Income taxes receivable                                                              6,272             6,515
   Deferred income taxes                                                                  656                --
   Other current assets                                                                 4,968             4,506
                                                                                 ------------      ------------
         Total current assets                                                         170,987           166,016
Property and equipment, net                                                            73,242            64,781
Deferred income taxes                                                                   3,026             2,523
Other assets                                                                              678               159
                                                                                 ------------      ------------
                                                                                 $    247,933      $    233,479
                                                                                 ============      ============
                    LIABILITIES AND SHAREHOLDERS' EQUITY


Current liabilities:
   Current maturities on long-term debt                                          $      5,372      $      5,345
   Trade accounts payable                                                              66,568            66,278
   Accrued expenses and other current liabilities                                      31,752            28,145
   Deferred income taxes                                                                   --             1,382
                                                                                 ------------      ------------
          Total current liabilities                                                   103,692           101,150
Long-term debt, excluding current maturities                                           48,888            39,634
Other liabilities                                                                       5,262               826
Shareholder' equity:
   Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued               --                --
   Common stock, $.01 par value; 75,000,000 shares authorized;
      11,736,923 shares issued;
      11,628,973 shares in 1999 and 11,553,168 shares in 1998 outstanding                 117               117
   Additional paid-in capital                                                          37,402            37,783
   Retained earnings                                                                   53,951            56,116
   Treasury stock, at cost                                                             (1,379)           (2,147)
                                                                                 ------------      ------------
                                                                                       90,091            91,869
Commitments and contingencies                                                              --                --
                                                                                 ------------      ------------
                                                                                 $    247,933      $    233,479
                                                                                 ============      ============
</TABLE>



          See accompanying notes to consolidated financial statements.


                                       31
<PAGE>   32
                  HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
                      Consolidated Statements of Operations
                   Years Ended January 31, 2000, 1999 and 1998
                      (In thousands, except per share data)

<TABLE>
<CAPTION>

                                                                           FISCAL YEAR
                                                         ------------------------------------------------
                                                             1999              1998              1997
                                                         ------------      ------------      ------------
                                                                           As Restated       As Restated
                                                                            (note 2)           (note 2)

<S>                                                      <C>               <C>               <C>
Merchandise revenue                                      $    364,041      $    320,162      $    283,026
Rental video revenue                                           83,114            79,001            74,739
                                                         ------------      ------------      ------------
         Total revenues                                       447,155           399,163           357,765

Merchandise cost of revenue                                   256,028           222,155           199,190
Rental video cost of revenue                                   32,184            49,069            25,904
                                                         ------------      ------------      ------------
         Total cost of revenues                               288,212           271,224           225,094
                                                         ------------      ------------      ------------

         Gross profit                                         158,943           127,939           132,671

Selling, general and administrative expenses                  157,283           130,378           120,794
Pre-opening expenses                                            1,681             1,474             1,071
                                                         ------------      ------------      ------------


         Operating income (loss)                                  (21)           (3,913)           10,806

Other income (expense):
   Interest expense                                            (3,708)           (3,727)           (4,228)
   Gain on sale of mall stores                                     --               454             1,734
   Other, net                                                     205               232               139
                                                         ------------      ------------      ------------

         Income (loss) before income taxes                     (3,524)           (6,954)            8,451


Income tax expense (benefit)                                   (1,359)           (2,649)            3,347
                                                         ------------      ------------      ------------

         Net income (loss)                               $     (2,165)     $     (4,305)     $      5,104
                                                         ============      ============      ============

Basic income (loss) per share                            $      (0.19)     $      (0.41)     $       0.60
                                                         ============      ============      ============
Diluted income (loss) per share                          $      (0.19)     $      (0.41)     $       0.58
                                                         ============      ============      ============

Weighted-average common shares outstanding - basic             11,621            10,436             8,520
Dilutive effect of stock options                                   --                --               216
                                                         ------------      ------------      ------------
Weighted-average common shares outstanding - diluted           11,621            10,436             8,736
                                                         ============      ============      ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       32
<PAGE>   33





                  HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
                 Consolidated Statements of Shareholders' Equity
                   Years ended January 31, 2000, 1999 and 1998
                        (In thousands, except share data)


<TABLE>
<CAPTION>


                                                                                                            REDEMPTION
                                                                                                             VALUE OF
                                                                                                           COMMON STOCK
                                                                                                             HELD BY       TOTAL
                                       COMMON STOCK      ADDITIONAL                   TREASURY STOCK        ESTATE OF      SHARE-
                                   --------------------   PAID-IN      RETAINED    ----------------------   COMPANY'S     HOLDERS'
                                     SHARES     AMOUNT    CAPITAL      EARNINGS      SHARES      AMOUNT      FOUNDER       EQUITY
                                   ----------  --------  ----------   ----------   ----------   ---------  ------------ ------------
<S>                                 <C>        <C>       <C>          <C>          <C>          <C>        <C>          <C>
 Balances at January 31, 1997
   as previously reported           8,652,923  $     87  $    1,584   $   71,721       95,478   $    (823)  $   (9,500)  $   63,069
Restatement adjustments (note 2)           --        --          --      (16,253)          --          --           --      (16,253)
                                   ----------  --------  ----------   ----------   ----------   ---------   ----------   ----------
Balances at January 31, 1997 as
   restated (note 2)                8,652,923        87       1,584       55,468       95,478        (823)      (9,500)      46,816
Purchase of treasury stock                 --        --          --           --       11,035        (182)          --         (182)
Sale of treasury stock                     --        --           2           --      (10,544)         13           --           15
Exercise of stock options                  --        --           5           --       (6,612)        160           --          165
Shares transferred to fund ASOP            --        --          63           --      (10,092)        120           --          183
Redemption of Common Stock
   held by estate of Company's
   founder                                 --        --          --           --      108,460      (1,479)       1,500           21
Dividends ($.018 per share)                --        --          --         (151)          --          --           --         (151)
Net income                                 --        --          --        5,104           --          --           --        5,104
                                   ----------  --------  ----------   ----------   ----------   ---------   ----------   ----------

Balances at January 31, 1998 as
  restated (note 2)                 8,652,923        87       1,654       60,421      187,725      (2,191)      (8,000)      51,971
Issuance of Common Stock            3,084,000        30      36,135           --           --          --           --       36,165
Issuance of treasury stock                 --        --          --           --       (2,695)         31           --           31
Receipt of treasury shares
   upon exercise of stock options          --        --          --           --       12,453        (148)          --         (148)
Exercise of stock options                  --        --          (6)          --      (13,728)        161           --          155
Termination of Common Stock
   redemption agreement                    --        --          --           --           --          --        8,000        8,000
Net loss                                   --        --          --       (4,305)          --          --           --       (4,305)
                                   ----------  --------  ----------   ----------   ----------   ---------   ----------   ----------

Balances at January 31, 1999 as
   restated (note 2)               11,736,923       117      37,783       56,116      183,755      (2,147)          --       91,869
Issuance of treasury stock                 --        --         (18)          --       (3,893)         53           --           35
Receipt of treasury shares
  upon exercise of stock options           --        --          --           --       65,454        (996)          --         (996)

Exercise of stock options,
   including tax benefits
   of $0.3 million                         --        --        (363)          --     (137,366)      1,711           --        1,348
Net loss                                   --        --          --       (2,165)          --          --           --       (2,165)
                                   ----------  --------  ----------   ----------   ----------   ---------   ----------   ----------

Balances at January 31, 2000       11,736,923  $    117  $   37,402   $   53,951      107,950   $  (1,379)  $       --   $   90,091
                                   ==========  ========  ==========   ==========   ==========   =========   ==========   ==========
</TABLE>


          See accompanying notes to consolidated financial statements.




                                       33
<PAGE>   34


                  HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                   Years ended January 31, 2000, 1999 and 1998
                             (Dollars in thousands)

<TABLE>
<CAPTION>

                                                                                             FISCAL YEAR
                                                                          --------------------------------------------------
                                                                              1999               1998               1997
                                                                          ------------       ------------       ------------
                                                                                              As Restated       As Restated
                                                                                               (note 2)           (note 2)
<S>                                                                       <C>                <C>                <C>
Cash flows from operating activities:
     Net income (loss)                                                    $     (2,165)      $     (4,305)      $      5,104
     Adjustments to reconcile net income (loss) to net cash provided
        by operating activities:
           Depreciation and amortization                                        32,923             55,331             33,606
           Gain on sale of mall stores, net                                         --               (454)            (1,734)
           Loss on rental videos lost, stolen and defective                      2,938              3,459              1,651
           Loss on disposal of non-rental video assets                           3,023                297                733
           Deferred income tax                                                  (2,541)            (3,354)              (674)
           Deferred compensation                                                    --                 --              1,040
           Changes in operating assets and liabilities:
              Merchandise inventories                                           (2,464)           (21,090)           (17,503)
              Other current assets                                                (462)              (692)              (418)
              Trade accounts payable and accrued expenses                        3,897             (8,804)            32,141
              Income taxes receivable                                              243             (7,064)             2,085
              Other assets and liabilities, net                                  3,917              1,260                157
                                                                          ------------       ------------       ------------
                 Net cash provided by operating activities                      39,309             14,584             56,188
                                                                          ------------       ------------       ------------

Cash flows from investing activities:
     Purchases of property and equipment                                       (47,310)           (42,568)           (55,753)
                                                                          ------------       ------------       ------------
                 Net cash used in investing activities                         (47,310)           (42,568)           (55,753)
                                                                          ------------       ------------       ------------

Cash flows from financing activities:
     Borrowings under revolving credit facility                                331,850            283,600             22,100
     Repayments under revolving credit facility                               (317,250)          (289,950)           (22,000)
     Payments under long-term debt and capital lease obligations                (5,319)              (283)              (218)
     Payment of dividends                                                           --                 --               (151)
     Purchase of treasury stock                                                     --                 --             (1,661)
     Proceeds from sale of treasury stock                                           --                 --                198
     Proceeds from exercise of stock options                                       352                  6                165
     Proceeds from issuance of stock                                                --             36,165                 --
                                                                          ------------       ------------       ------------
                 Net cash provided by (used in) financing activities             9,633             29,538             (1,567)
                                                                          ------------       ------------       ------------

Net increase (decrease) in cash and cash equivalents                             1,632              1,554             (1,132)
Cash at beginning of year                                                        5,394              3,840              4,972
                                                                          ------------       ------------       ------------
Cash at end of year                                                       $      7,026       $      5,394       $      3,840
                                                                          ============       ============       ============
</TABLE>

          See accompanying notes to consolidated financial statements.






                                       34
<PAGE>   35
 (1)   OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       (a)    GENERAL

              Hastings Entertainment, Inc. and subsidiaries (the Company)
              operates a chain of retail stores in 22 states, primarily in the
              Western and Midwestern United States, with revenues originating
              from the sale of music, books, software, periodicals,
              videocassette, video game and DVD products and the rental of
              videocassettes, video games and DVDs.

       (b)    BASIS OF CONSOLIDATION

              The consolidated financial statements present the results of
              Hastings Entertainment, Inc. and its subsidiaries. All significant
              intercompany transactions and balances have been eliminated in
              consolidation.

              The Company's fiscal years ended January 31, 2000, 1999 and 1998
              are referred to as fiscal 1999, 1998 and 1997, respectively.

       (c)    BASIS OF PRESENTATION

              Certain prior year amounts have been reclassified to conform with
              fiscal 1999 presentation.

       (d)    REVENUE RECOGNITION

              Merchandise and rental video revenue are presented net of returns
              and exclude all taxes. An allowance has been established to
              provide for projected merchandise returns.

       (e)    CASH AND CASH EQUIVALENTS

              The Company considers all short-term investments with original
              maturities of three months or less (primarily money market mutual
              funds) to be cash equivalents.

       (f)    MERCHANDISE INVENTORIES

              Merchandise inventories are recorded at the lower of standard cost
              (which approximates the first-in, first-out (FIFO method)) or
              market.

       (g)    PROPERTY AND EQUIPMENT

              Property and equipment, excluding rental video assets (see note
              3), are recorded at cost and depreciated using the straight-line
              method. Furniture, fixtures and equipment are depreciated over
              their estimated useful lives of 3 to 5 years. Leasehold
              improvements are amortized over the shorter of the related lease
              term or their estimated useful lives.

              Property recorded pursuant to capital lease obligations is stated
              at the present value of the minimum lease payments at the
              inception of each lease, not in excess of fair value, and
              amortized on a straight-line basis over related lease term.

              The Company reviews long-lived assets for impairment whenever
              events or changes in circumstances indicate that the carrying
              amount of an asset may not be recoverable. Recoverability of
              assets to be held and used is measured by a comparison of the
              carrying amount of the asset to future net cash flows expected to
              be generated by the asset. If such assets are considered to be
              impaired, the impairment to be recognized is measured by the
              amount by which the carrying amount of the assets exceeds the fair
              value of the assets. Assets to be disposed of are reported at the
              lower of the carrying amount or fair value less costs to sell.




                                       35
<PAGE>   36

       (h)    INCOME TAXES

              Income taxes are accounted for under the asset and liability
              method. Deferred tax assets and liabilities are recognized for the
              future tax consequences attributable to differences between the
              financial statement carrying amounts of existing assets and
              liabilities and their respective tax bases and operating loss and
              tax credit carryforwards. Deferred tax assets and liabilities are
              measured using enacted tax rates expected to apply to taxable
              income in the years in which those temporary differences are
              expected to be recovered or settled. The effect on deferred tax
              assets and liabilities of a change in tax rates is recognized in
              income in the period that includes the enactment date.

       (i)    FINANCIAL INSTRUMENTS

              The carrying amount of long-term debt approximates fair value as
              of January 31, 2000 and 1999 due to the instruments bearing
              interest at market rates. The carrying amount of accounts payable
              approximates fair value because of its short maturity period.

       (j)    DERIVATIVE FINANCIAL INSTRUMENTS

              During fiscal year 1998 and 1997, the Company's only derivative
              position was a non-leveraged off-balance-sheet interest rate swap.
              The interest rate swap was accounted for by recording the net
              interest received or paid as an adjustment to interest expense on
              a current basis. The swap expired in June 1998.

       (k)    STOCK OPTION PLANS

              The Company accounts for its stock option plans in accordance with
              the provisions of Accounting Principles Board Opinion No. 25 (APB
              25), Accounting for Stock Issued to Employees, and related
              interpretations. Compensation expense is recorded on the date of
              grant only if the market price of the underlying stock exceeds the
              exercise price. Under Statement of Financial Accounting Standards
              No. 123 (SFAS 123), Accounting for Stock-based Compensation, the
              Company may elect to recognize expense for stock-based
              compensation based on the fair value of the awards, or continue to
              account for stock-based compensation under APB 25 and disclose in
              the financial statements the effects of SFAS 123 as if the
              recognition provisions were adopted. The Company has elected to
              continue to apply the provisions of APB 25 and provide the pro
              forma disclosure provisions of SFAS 123.

       (l)    ADVERTISING COSTS

              Advertising costs for newspaper, television and other media are
              expensed as incurred. Net advertising expenses for the fiscal
              years 1999, 1998, and 1997 were $3.7 million, $1.3 million and
              $2.1 million, respectively.

       (m)    PRE-OPENING COSTS

              Pre-opening expenses include human resource costs, travel, rent,
              advertising, supplies and certain other costs incurred prior to a
              superstore's opening and are expensed as incurred.

       (n)    INCOME (LOSS) PER SHARE

              Basic income (loss) per share is computed by dividing net income
              (loss) by the weighted-average number of common shares outstanding
              during the period. Diluted income per share includes additional
              shares that would have resulted from potentially dilutive
              securities. Prior to the Company's Common Stock being publicly
              traded, for purposes of computing dilution of securities under the
              treasury stock method, the price of the Company's stock was based
              upon annual appraisals of the value of the Company.



                                       36
<PAGE>   37





              Options to purchase 1,813,965 shares of Common Stock at exercise
              prices ranging from $5.25 per share to $15.00 per share
              outstanding at January 31, 2000, 425,600 shares of Common Stock at
              exercise prices ranging from $13.00 per share to $15.00 per share
              outstanding at January 31, 1999, 688,656 shares of Common Stock at
              exercise prices ranging from $13.64 per share to $19.29 per share
              outstanding at January 31, 1998 were not included in the
              computation of diluted EPS because their inclusion would have been
              antidilutive.

       (o)    USE OF MANAGEMENT ESTIMATES

              The preparation of the 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 differ from those estimates.

       (p)    COMPREHENSIVE INCOME

              Comprehensive income (loss) is equal to net income (loss) for all
              periods presented.




                                       37
<PAGE>   38




(2)    FINANCIAL STATEMENT RESTATEMENTS

       On March 7, 2000, the Company announced that its fourth quarter and
       fiscal 1999 results (and the previous four fiscal years' results) would
       be negatively impacted by certain accounting adjustments. The effects on
       the previously reported net income for the first three quarters of fiscal
       1999, fiscal 1998, fiscal 1997, and the fiscal years prior to fiscal 1997
       amounted to decreases of $0.7 million, $4.8 million, $3.5 million and
       $16.3 million, respectively. Prior to the March 7 announcement, the
       Company determined that merchandise receipts for a portion of overall
       vendor deliveries had not been properly entered into the inventory
       control system. As a result, the Company's accounting system did not
       completely capture the merchandise cost of revenue specifically relating
       to shrinkage, and merchandise cost of revenue had been understated for
       the periods noted above.

       The Company uses accounts payable clearing accounts that, in part, are
       based upon a process of matching vendor invoices to receipt transactions
       generated when merchandise is physically received. Clearing accounts are
       established by store to record inventory received until matched with
       vendor invoices. Once an invoice is matched with a receipt, the invoice
       is transferred from the accounts payable clearing account to trade
       accounts payable for payment.

       Although the Company believed that internal controls and procedures in
       place during the periods referenced above provided accurate financial
       statements, the Company determined during the fourth quarter of fiscal
       1999 that certain internal controls and procedures in place to capture
       the exceptions noted above were not functioning as intended. The Company
       had, over time, developed a proprietary accounting software system for
       the accounts payable process as well as the inventory control system. The
       Company determined its accounting systems, processes and internal control
       procedures did not capture those exceptions where inventory receipts were
       not recorded or did not precisely match vendor invoices nor provide the
       reconciliation of the Company's accounts payable clearing accounts. As a
       result, inappropriate balances accumulated over time in the accounts
       payable clearing accounts. As part of the restatement, such balances were
       required to be written-off as a charge to cost of revenue. Collectively,
       the accounts payable clearing account adjustments relating to cost of
       revenues aggregated $24.1 million pre-tax.

       In addition, on May 3, 2000, the Company announced that as a result of
       its work to determine the impact of the restatement of the accounts
       payable clearing accounts, certain other accounting adjustments would
       also be required for the first three quarters of fiscal 1999 and the
       previous four fiscal years. The Company determined that certain internal
       controls and procedures in place related to the merchandise returns
       process were not functioning as intended. Accordingly, as part of the
       restatement, the Company recorded pre-tax charges totaling $7.4 million
       including: (i) $5.8 million related to the merchandise returns process,
       including refused merchandise returns from vendors and the allowance for
       cost of inventory returns; (ii) $0.7 million to correct an accrued
       benefit liability; and (iii) $0.9 to adjust certain other liability and
       reserve accounts.

       The accounting adjustments that were required to restate the Company's
       consolidated financial statements for fiscal 1998 and 1997, and retained
       earnings as of January 31, 1997 are as follows:

       The restatement adjustments for 1998 decreased previously reported net
       income by $4.8 million and consist of the following adjustments: an
       increase to total revenues of $0.5 million related to the recognition of
       gift certificate revenue; an increase in cost of revenues of $2.6 million
       for additional product shrinkage expense; a decrease in cost of revenues
       of $0.1 million for inventory costing; an increase to selling, general
       and administrative expense of $4.8 million for additional merchandise
       returns expense; a reduction in the gain on sale of mall stores of $1.0
       million in 1998; and a reduction of income tax expense of $3.0 million
       related to these adjustments.

       The restatement adjustments for 1997 decreased previously reported net
       income by $3.5 million, consisting of the following adjustments: an
       increase in the cost of revenues of $4.3 million for additional product
       shrinkage expense; a decrease in cost of revenues of $0.1 million for
       inventory costing; an increase to selling, general and administrative
       expense of $2.2 million for additional merchandise returns expense; an
       increase in the gain


                                       38
<PAGE>   39

       on sale of mall stores of $1.0 million; and a reduction of income tax
       expense of $1.9 million related to these adjustments.

       The restatement adjustments at January 31, 1997 decreased previously
       reported retained earnings by $16.3 million and consist of the following
       adjustments to results of operations for years prior to fiscal 1997: a
       decrease to revenues of $0.5 million related to the recognition of gift
       certificate revenue; increases to cost of revenues of $11.2 million and
       $0.4 million for additional product shrinkage expense and inventory
       costing, respectively; an increase in selling, general and administrative
       expense of $5.1 million for additional merchandise returns expense; and a
       reduction in income tax expense of $0.9 million related to these
       adjustments.

       The Company's January 31, 1999 balance sheet includes a reclassification
       of its allowance for cost of inventory returns from "Merchandise
       inventories, net" to "Accrued expenses and other current liabilities."




                                       39
<PAGE>   40




(2)    FINANCIAL STATEMENT RESTATEMENTS (CONTINUED)

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
                                                 CONSOLIDATED BALANCE SHEET
     (Dollars in thousands)                       AS OF JANUARY 31, 1999
--------------------------------------------------------------------------------

                                                As
                                             Previously             As
                                              Reported           Restated
                                             ------------       ------------
<S>                                          <C>                <C>
                 ASSETS
Current assets:
   Cash                                      $      5,394       $      5,394
   Merchandise inventories, net                   145,432            149,601
   Income taxes receivable                            807              6,515
   Deferred income taxes                            1,636                 --
   Other current assets                             4,599              4,506
                                             ------------       ------------
         Total current assets                     157,868            166,016
Property and equipment, net                        64,124             64,781
Deferred income taxes                                  --              2,523
Other assets                                          159                159
                                             ------------       ------------
                                             $    222,151       $    233,479
                                             ============       ============
  LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Current maturities on long-term debt      $      5,345       $      5,345
   Trade accounts payable                          42,406             66,278
   Accrued expenses and other current
      liabilities                                  17,937             28,145
   Deferred income taxes                               --              1,382
                                             ------------       ------------
          Total current liabilities                65,688            101,150
Long-term debt, excluding current
   maturities                                      39,634             39,634
Other liabilities                                      --                826
Deferred income taxes                                 696                 --
Shareholder' equity:
   Common stock                              $        117       $        117
   Additional paid-in capital                      37,530             37,783
   Retained earnings                               80,633             56,116
   Treasury stock, at cost                         (2,147)            (2,147)
                                             ------------       ------------
                                                  116,133             91,869
                                             ------------       ------------
                                                  222,151            233,479
                                             ============       ============
</TABLE>




                                       40
<PAGE>   41





(2)      FINANCIAL STATEMENT RESTATEMENTS (CONTINUED)

<TABLE>
<CAPTION>

  ------------------------------------------------ ----------------------------------------------------------------
                                                                    CONSOLIDATED STATEMENTS OF OPERATIONS
  (In thousands, except per share data)                                           FISCAL YEAR
-------------------------------------------------- ----------------------------------------------------------------
                                                           1998            1998           1997             1997
                                                       ------------    ------------    ------------    ------------
                                                             As                             As
                                                         Previously        As            Previously         As
                                                          Reported       Restated        Reported         Restated
                                                       ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>
Merchandise revenue                                    $    319,667    $    320,162    $    283,026    $    283,026
Rental video revenue                                         79,001          79,001          74,739          74,739
                                                       ------------    ------------    ------------    ------------
         Total revenues                                     398,668         399,163         357,765         357,765


Merchandise cost of revenue                                 219,546         222,155         194,359         199,190
Rental video cost of revenue                                 49,139          49,069          26,546          25,904
                                                       ------------    ------------    ------------    ------------
        Total cost of revenues                              268,685         271,224         220,905         225,094
                                                       ------------    ------------    ------------    ------------

        Gross profit                                        129,983         127,939         136,860         132,671

Selling, general and administrative expenses                125,611         130,378         118,566         120,794
Pre-opening expenses                                          1,474           1,474           1,071           1,071
                                                       ------------    ------------    ------------    ------------
                                                            127,085         131,852         119,637         121,865
                                                       ------------    ------------    ------------    ------------

         Operating income (loss)                              2,898          (3,913)         17,223          10,806

Other income (expenses):
   Interest expense                                          (3,727)         (3,727)         (4,228)         (4,228)

   Gain  on sale of mall stores                               1,454             454             734           1,734
   Other, net                                                   232             232             139             139
                                                       ------------    ------------    ------------    ------------
                                                             (2,041)         (3,041)         (3,355)         (2,355)
                                                       ------------    ------------    ------------    ------------
         Income (loss) before income taxes                      857          (6,954)         13,868           8,451

Income tax expense (benefit)                                    392          (2,649)          5,270          (3,347)
                                                       ------------    ------------    ------------    ------------

         Net income (loss)                             $        465    $     (4,305)   $      8,598    $      5,104
                                                       ============    ============    ============    ============

Basic income (loss) per share                          $       0.04    $      (0.41)   $       1.01    $       0.60
                                                       ============    ============    ============    ============
Diluted income (loss) per share                        $       0.04    $      (0.41)   $       0.98    $       0.58
                                                       ============    ============    ============    ============

Weighted-average common shares outstanding - basic           10,436          10,436           8,520           8,520
Dilutive effect of stock options                                156              --             216             216
                                                       ------------    ------------    ------------    ------------

Weighted-average common shares outstanding - diluted         10,592          10,436           8,736           8,736
                                                       ============    ============    ============    ============
</TABLE>





                                       41
<PAGE>   42



(3)    CHANGE IN ACCOUNTING METHOD

       The Company adopted a new, accelerated method of amortizing its rental
       video assets in the fourth quarter of fiscal 1998. The Company adopted
       the new method upon implementation of a new business model, which
       includes revenue-sharing agreements with major studios. Revenue sharing
       increases the number of videos in the stores and satisfies customer
       demand over a shorter period of time. Revenue sharing allows the Company
       to acquire videos at a lower initial cost than traditional buying
       arrangements. The Company then shares with studios a percentage of the
       actual net rental revenues generated over a contractually determined
       period of time. Revenue sharing results in a greater proportion of rental
       revenue received over a reduced rental period and, accordingly, the
       Company has changed its method of amortizing rental videos in order to
       better match expenses with revenues.

       Under the new amortization method, revenue-sharing payments are expensed
       as revenues are earned under the terms of the specific contracts with
       supplying studios. The capitalized cost of all videos is being amortized
       on an accelerated basis over six months to a salvage value of $4 per
       unit, except for videos purchased for the initial stock of a new store,
       which are being amortized on a straight-line basis over 36 months to a
       salvage value of $4 per unit.

       The adoption of the new amortization method was 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 $18.5
       million, which is included in rental video cost of revenues in the fourth
       quarter of fiscal 1998, increasing net loss and diluted loss per share
       for fiscal 1998 by $11.5 million and $1.10 per share, respectively.

       The calculation of the change in operating expense attributable to videos
       for prior periods would not be meaningful because the new business model
       involving revenue-sharing arrangements had not been implemented.

       During fiscal 1998, prior to adopting the new method of amortization in
       the fourth quarter, the capitalized cost of base unit rental video assets
       (copies one through four of a title for each store) was amortized on a
       straight-line basis over 36 months to a salvage value of $5. The
       capitalized cost of non-base unit rental video assets (copies five and
       above of a title for each store) was amortized on a straight-line basis
       over six months to a salvage value of $5.

       During fiscal 1997, the Company amortized the cost of rental video assets
       on a straight-line method over an 18-month period to a salvage value of
       $5. The Company also recorded markdowns for under-performing rental video
       assets. The amortization and markdown policies combined to provide an
       average cost allocation period of 8-13 months.

       The Company believes its results of operations in fiscal 1997 would not
       have been materially different had the Company used the amortization
       method that was used in fiscal 1998 prior to the fourth quarter change in
       method.



                                       42
<PAGE>   43




(4)    MERCHANDISE INVENTORIES

       Merchandise inventories consisted of the following (dollars in
       thousands):

<TABLE>
<CAPTION>

                                                    1999               1998
                                                 ------------      ------------
<S>                                              <C>               <C>
Merchandise inventories:
    Music                                        $     51,921      $     52,991
    Books                                              59,069            55,510
    Videos                                             24,525            21,218
    Other                                              19,094            22,028
                                                 ------------      ------------
                                                      154,609           151,747
     Less allowance for inventory shrinkage
       and obsolescence                                 2,544             2,146
                                                 ------------      ------------
                                                 $    152,065      $    149,601
                                                 ============      ============
</TABLE>

       During fiscal 1999 and 1998, the Company purchased approximately 20% and
       22%, respectively, of all products (defined herein as merchandise
       inventories and rental videos) from three suppliers.

       The Company recorded a $3.5 million pre-tax charge at January 31, 2000
       related to valuing inventory at the lower of cost or market. Lower than
       anticipated sales volume in the fourth quarter of fiscal 1999 resulted in
       management's decision to increase promotional discounts on certain
       products to stimulate sales and to increase inventory turnover and
       enhance cash flows. Such discounts resulted in lower of cost or market
       inventory adjustments.

(5)    PROPERTY AND EQUIPMENT

       Property and equipment consist of the following (dollars in thousands):

<TABLE>
<CAPTION>

                                                   1999              1998
                                               ------------      ------------
<S>                                            <C>               <C>
Rental videos                                  $     58,452      $     68,886
Furniture and equipment                              78,984            67,947
Leasehold improvements                               46,410            39,958
Property under capital leases                         2,126             1,982
                                               ------------      ------------

                                                    185,972           178,773
        Less accumulated depreciation and
          amortization (note 3)                     112,730           113,992
                                               ------------      ------------

                                               $     73,242      $     64,781
                                               ============      ============
</TABLE>

       Accumulated depreciation and amortization of property and equipment
       includes $1.1 million and $.9 million of accumulated amortization of
       equipment under capital leases at January 31, 2000 and 1999,
       respectively.





                                       43
<PAGE>   44




(6)    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

       Accrued expenses and other current liabilities consisted of the following
       (dollars in thousands):


<TABLE>
<CAPTION>

                                                 1999               1998
                                             ------------      ------------
<S>                                          <C>               <C>
Allowance for cost of inventory returns      $      9,463      $     11,418
   Deferred gift card revenue                       5,726             2,614
Salaries, vacation, and bonus                       3,748             3,206
Other                                              12,815            10,907
                                             ------------      ------------
   Total                                     $     31,752      $     28,145
                                             ============      ============
</TABLE>

       Merchandise inventories that are not sold can normally be returned to the
       suppliers. The allowance for cost of inventory returns represents
       estimated costs related to merchandise returned or to be returned to
       suppliers for which credit is pending. Because the amount of credit to be
       received requires estimates, it is reasonably possible that the Company's
       estimate of the ultimate settlement with its suppliers may change in the
       near term.





                                       44
<PAGE>   45





 (7)   LONG-TERM DEBT

       Long-term debt and capitalized lease obligations consisted of the
       following (dollars in thousands):

<TABLE>
<CAPTION>

                                                      1999             1998
                                                  ------------      ------------

<S>                                               <C>               <C>
Revolving credit facility                         $     32,250      $     17,650
Series A senior notes                                   20,000            25,000
Capitalized lease obligations (note 5 and 8)             1,492             1,583
Other                                                      518               746
                                                  ------------      ------------

                                                        54,260            44,979
        Less current maturities                          5,372             5,345
                                                  ------------      ------------

                                                  $     48,888      $     39,634
                                                  ============      ============
</TABLE>

         At January 31, 2000 and 1999, the Company had borrowings outstanding of
         $32.3 million and $17.7 million, respectively, under a revolving credit
         facility (the "Facility"). The Facility accrued interest at variable
         rates based on the lender's base rate or LIBOR. The average rate of
         interest being charged under the Facility at January 31, 2000 and 1999
         was 6.9% and 7.3%, respectively.

         Also, at January 31, 2000 and 1999, the Company had outstanding with a
         financial institution $20 million and $25 million, respectively,
         aggregate principal amount of unsecured Series A Senior Notes due June
         13, 2003 (the "Senior Notes"). The Company began making required $5.0
         million annual principal payments on June 13, 1999. The Senior Notes
         had a stated interest rate of 7.75% at January 31, 2000.

         As a result of the restatement adjustments discussed in note 2, at
         January 31, 2000 and at various prior quarters, the Company was not in
         compliance with certain financial covenants under its Facility and the
         Senior Notes. The Company obtained a series of waivers on its breach of
         the covenant requirements to January 31, 2000 and through June 12,
         2000.

         Effective as of June 12, 2000, the Company entered into an amendment of
         the Facility and an amendment and restatement of the Note Purchase
         Agreement for the Senior Notes. As part of the amendments to the
         Facility and the Senior Notes, the combined borrowings are jointly
         collateralized on a pari passu basis by substantially all of the assets
         of the Company and its subsidiaries.

         The Facility, as amended, allows for maximum borrowings of up to $50
         million. The aggregate amount outstanding under the Facility and the
         Senior Notes is limited to a borrowing base predicated on eligible
         inventory, as defined, and rental video assets, net. The Facility bears
         interest based on the lender's base rate plus 1.0% (base rate plus
         1.75% on the amount in excess of the normal amount in the over-advance
         period) or LIBOR plus 2.50% (LIBOR plus 3.25% on the amount in excess
         of the normal advance rate amount in the over-advance period), at the
         Company's option. In addition the Company is required to pay a
         quarterly commitment fee of 0.50% on the unused Facility. Borrowings
         under the Facility are limited to an advance rate of 55% of eligible
         inventory (eligible inventory is defined as 61.22% of inventory, net)
         and 50% of rental video assets net of accumulated amortization, less
         the outstanding borrowings under the Senior Notes and any required
         rental reserve. The Facility provides for an increase in the advance
         rate to cover additional working capital requirements through the
         Christmas selling season (the seasonal over-advance). The advance rate
         increases to 65% of eligible inventory from August 1 through September
         30 and to 70% of eligible inventory from October 1 through December 31,
         2000 and December 16, 2001, respectively (the seasonal over-advance
         periods). The Facility includes revised covenants requiring the
         maintenance of specific financial ratios and minimum tangible net worth
         requirements. In addition, a covenant was added to the Facility
         requiring the Company's income before interest, taxes, depreciation and
         amortization (EBITDA) be at least equal to specified levels for future
         periods. Further, the Facility imposes certain restrictions with
         respect to indebtedness, dividend payments, investment and capital
         expenditures. The Facility expires on December 16, 2001.




                                       45
<PAGE>   46

         The Senior Notes, as amended, have a stated interest rate of 10.25%.
         The amended and restated Note Purchase Agreement evidencing the amended
         Senior Notes has financial covenants that are the same as those
         contained in the amended Facility including financial ratios, minimum
         adjusted net worth requirements and restrictions on indebtedness,
         investment, capital expenditures, and the payment of dividends.

         The Company believes it will be able to comply with the financial
         covenants relating to both the amended Facility and the amended Senior
         Notes for the next twelve months; however, there can be no assurance of
         such compliance. The breach of any of the covenants contained in the
         amended Facility or the amended Senior Notes could result in a default
         under the amended Facility and the amended Senior Notes which could
         result in further advances under the Facility no longer being available
         from the lender and could enable the respective lenders to require
         immediate repayment of the borrowings including accrued interest under
         the agreements. If the lenders were to accelerate the repayment of
         borrowings including accrued interest, the Company cannot be certain
         that its assets would be sufficient to repay such obligations. In
         addition, the ability of the Company to satisfy its capital
         requirements will be dependent upon the future financial performance of
         the Company, which in turn is subject to general economic conditions
         and to financial issues and other factors, including factors beyond the
         Company's control. The amended Facility and the amended Senior Notes
         are guaranteed by each of the Company's three consolidated
         subsidiaries, and are in part secured by first priority liens on all of
         the capital stock and substantially all of the assets of each
         subsidiary.

         The capitalized lease obligations represent two leases on certain
         retail space with initial terms of 15 years.

         The aggregate maturities of long-term debt and capitalized lease
         obligations for years subsequent to fiscal 1999 are as follows (dollars
         in thousands):


<TABLE>
<S>             <C>
      2000      $      5,372
      2001            37,632
      2002             5,230
      2003             5,193
      2004               224
Thereafter               609
                ------------

                $     54,260
                ============
</TABLE>

(8)    LEASES

       The Company leases retail space under operating leases with terms ranging
       from three to fifteen years, with certain leases containing renewal
       options. Lease agreements generally provide for minimum rentals. Some
       leases also include additional contingent rental amounts based upon
       specified percentages of sales above predetermined levels. Rental expense
       for operating leases consists of the following (dollars in thousands):

<TABLE>
<CAPTION>

                               1999               1998              1997
                            ------------      ------------      ------------
<S>                         <C>               <C>               <C>
Minimum rentals             $     15,444      $     13,280      $     11,555
Contingent rentals                 1,728             1,769             1,710
Less sublease income                 279               138               151
                            ------------      ------------      ------------
        Rental expense      $     16,893      $     14,911      $     13,114
                            ============      ============      ============
</TABLE>

       Future minimum lease payments under non-cancelable operating leases,
       excluding certain leases assumed by another party (see note15), and the
       present value of future minimum capital lease payments as of January 31,
       2000 are (dollars in thousands):




                                       46
<PAGE>   47
<TABLE>
<CAPTION>

                                                                       CAPITAL           OPERATING
                                                                       LEASES             LEASES
                                                                    ------------      ------------
<S>                                                                 <C>               <C>
                  2000                                              $        254      $     16,628
                  2001                                                       257            16,097
                  2002                                                       259            14,742
                  2003                                                       268            13,147
                  2004                                                       280            11,005
            Thereafter                                                       688            32,470
                                                                    ------------      ------------

                    Total minimum lease payments                           2,006           104,089
            Less net present value of sublease income                                          889
                                                                                      ------------

                    Net minimum lease payments under
                      operating leases                                                $    103,200
                                                                                      ============

            Less amount representing imputed interest                        514
                                                                    ------------

                    Total obligations under capital leases                 1,492
            Less current principal maturities of capital lease
                Obligations                                                  139
                                                                    ------------

                    Obligations under capital leases,
                      excluding current maturities                  $      1,353
                                                                    ============
</TABLE>

       Included in accrued expenses and other current liabilities and other
       liabilities at January 31, 2000 and 1999 is $4.0 million and $1.6
       million, respectively, for the net present value of future minimum lease
       payments attributable to closed or relocated stores, net of estimated
       sublease income. The $4.0 million at January 31, 2000 includes $2.5
       million related to the closing of five underperforming stores that
       management had approved for closure in the fourth quarter of fiscal 1999
       and which were closed in the first quarter of 2000. Future minimum lease
       payments due on these operating leases are included in the table above.
       As a result of the decision to close these stores, the Company also wrote
       off impaired property and equipment of $2.3 million and accrued other
       related costs of $0.3 million.

       A director and executive officer of the Company is a limited partner in
       various limited partnerships that lease land and improvements to the
       Company under certain lease agreements. During fiscal 1999, 1998 and
       1997, the Company made lease payments of $0.6 million, $0.5 million and
       $0.5 million, respectively, to these partnerships.

(9)    INCOME TAXES

       Income tax expense (benefit) consists of the following (dollars in
       thousands):

<TABLE>
<CAPTION>

                                 1999             1998              1997
                              ----------       ----------       ----------

<S>                           <C>              <C>              <C>
Current Federal               $    1,214       $      600       $    3,257
Current state and local              (32)             105              764
Deferred Federal                  (2,156)          (2,861)            (444)
Deferred state and local            (385)            (493)            (230)
                              ----------       ----------       ----------
                              $   (1,359)      $   (2,649)      $    3,347
                              ==========       ==========       ==========
</TABLE>

       The difference between expected income tax expense (computed by applying
       the statutory rate of 34% for fiscal 1999, 34% for fiscal 1998 and 35%
       for fiscal 1997 to income (loss) before income taxes) and actual income
       tax expense (benefit) is as follows (dollars in thousands):



                                       47
<PAGE>   48

<TABLE>
<CAPTION>


                                                   1999               1998               1997
                                               ------------       ------------       ------------

<S>                                            <C>                <C>                <C>
Computed "expected" tax expense (benefit)      $     (1,198)      $     (2,364)      $      2,958
State and local income taxes, net of
    federal income tax effect                          (275)              (255)               347
Other                                                   114                (30)                42
                                               ------------       ------------       ------------

                                               $     (1,359)      $     (2,649)      $      3,347
                                               ============       ============       ============
</TABLE>

       The Company has an income tax receivable totaling $6.3 million at January
       31, 2000, of which $5.7 million related to income taxes previously paid
       by the Company in fiscal 1998, 1997 and 1996. The Company is filing
       amended income tax returns to recover the tax benefits resulting from the
       accounting restatement discussed in Note 2.



                                       48
<PAGE>   49
       The tax effects of temporary differences that give rise to significant
       portions of the deferred tax assets and deferred tax liabilities are
       presented below (dollars in thousands):

<TABLE>
<CAPTION>

                                                        1999               1998
                                                    ------------      ------------
<S>                                                 <C>               <C>
Deferred tax assets:
    Gift cards                                      $        431      $        197
    Abandoned leases                                       2,461               597
    Deferred rent                                            586               563
    Compensated absences                                     492               402
    Deferred compensation                                    392               392
    Deferred lease incentives                                971                --
    Property and equipment, principally due to
      different depreciation methods for
      financial reporting and income tax
      purposes                                                --             1,374
    Other                                                    132               128
                                                    ------------      ------------

          Total deferred tax assets                        5,465             3,653

Deferred tax liabilities:
    Inventories, principally due to the
      measurement of cost using LIFO for
      income tax purposes prior to fiscal 1998             1,274             2,512
    Property and equipment, principally due to
      different depreciation methods for
      financial reporting and income tax
      purposes                                               509                --
                                                    ------------      ------------

          Total deferred tax liabilities                   1,783             2,512
                                                    ------------      ------------

          Net deferred tax assets                   $      3,682      $      1,141
                                                    ============      ============
</TABLE>

       The Company did not record a valuation allowance for deferred tax assets
       at January 31, 2000 or 1999. In assessing the realizability of deferred
       tax assets, management considers the scheduled reversal of deferred tax
       assets and liabilities, future taxable income and tax planning
       strategies. The Company believes it is more likely than not it will
       realize the benefits of these deductible differences over the periods
       which the deferred tax assets are deductible.

       In fiscal 1997 the Company elected to change from the LIFO cost method to
       the FIFO cost method of inventory accounting for financial reporting and
       income tax purposes. The $4.7 million deferred tax liability related to
       the tax LIFO reserve at January 31, 1997 is being included in taxable
       income ratably over a four-year period beginning in fiscal 1997.


(10)   401K AND ASOP

       Employees who have attained age 21 are eligible to participate in the
       Company's 401k plan and may elect to contribute up to 15 percent of their
       salary, subject to federal limitations, to the plan. Employer
       contributions are determined at the discretion of the Company and are
       allocated solely to those employees who are participating in the plan and
       have completed one year of service. Amounts expensed related to the plan
       were $0.2 million, $0.3 million and $0.5 million during fiscal 1999, 1998
       and 1997, respectively.

       The Company's Associate Stock Ownership Plan (ASOP) permits full-time
       employees, as defined, who have attained age 21 and completed one year of
       service to participate in the ASOP. Employer contributions are



                                       49
<PAGE>   50

       determined at the discretion of the Company. The Board of Directors has
       determined that the level of contributions will be made based on
       attaining operational profit goals as set by the Board of Directors. The
       contribution is based on a percentage of participants' eligible
       compensation and provisions of $0.3 million, $0.4 million and $0.4
       million were made in the accompanying consolidated financial statements
       for fiscal 1999, 1998 and 1997, respectively. Common shares held by the
       ASOP were 124,410, 92,825 and 66,814 at January 31, 2000, 1999 and 1998,
       respectively.

(11)   SHAREHOLDERS' EQUITY

       The Company has four stock option plans: the 1991 and 1994 Stock Option
       Plans, the 1996 Incentive Stock Plan and the Outside Directors Plan (for
       non-employee directors). A total of 505,900 shares may be granted under
       each of the 1991 and 1994 Stock Option Plans, 632,375 shares may be
       granted under the 1996 Incentive Stock Plan, and 101,180 shares may be
       granted under the Outside Directors Plan.

       The 1991 and 1994 Stock Option Plans and the 1996 Incentive Stock Plan
       authorize the award of both incentive stock options and non-qualified
       stock options to purchase Common Stock to officers, other associates and
       directors of the Company. The exercise price per share of incentive stock
       options may not be less than the market price of the Company's Common
       Stock on the date the option is granted. The exercise price per share of
       non-qualified stock options is determined by the Board of Directors, or a
       committee thereof. The term of each option is determined by the Board of
       Directors and generally will not exceed ten years from the date of grant.
       The exercise price of options issued to certain executive officers of the
       Company included fixed annual increases, which were eliminated in fiscal
       1997.

       The 1996 Incentive Stock Plan also authorizes the granting of stock
       appreciation rights, restricted stock, dividend equivalent rights, stock
       awards, and other stock-based awards to officers, other associates,
       directors, and consultants of the Company. There have been no grants of
       these awards under this plan.

       The Company's Chief Executive Officer has an option to acquire 404,720
       shares of Common Stock, which may be exercised in full or in part through
       January 31, 2007. In fiscal 1997, the exercise price of these options was
       reduced from $13.64 to $11.07 and fixed annual increases of the option
       exercise price were eliminated. The Company recorded compensation expense
       of $1.0 million and an income tax benefit of $0.4 million for the change
       in exercise price in fiscal 1997.

       The Company has a management stock purchase plan that authorizes the
       issuance of up to 227,655 shares of Common Stock, pursuant to agreements
       providing for the purchase of Restricted Stock Units (RSU's). The cost of
       each RSU is equal to 75% of the fair market value of the Common Stock of
       the Company on the date the RSU is awarded. As of January 31, 2000, 1999
       and 1998 there were 11,654, 8,025 and zero RSU's awarded under the Plan,
       respectively. The Company recorded approximately $52,000 and $50,000 of
       compensation expense at the time the RSU's were awarded for fiscal year
       1999 and 1998, respectively.



                                       50
<PAGE>   51





       A summary of information with respect to all stock option plans is as
       follows:

<TABLE>
<CAPTION>

                                                                               WEIGHTED-
                                                                                AVERAGE
                                                                                EXERCISE
                                                              OPTIONS            PRICE
                                                           ------------       ------------
<S>                                                        <C>                <C>
Outstanding at January 31, 1997                            $  1,531,668       $      12.33
    Granted                                                     932,617              13.20
    Exercised                                                    (6,612)              6.48
    Forfeited                                                  (660,119)             15.30
                                                           ------------       ------------

Outstanding at January 31, 1998                               1,797,554              11.72
    Granted                                                     787,162              11.05
    Exercised                                                   (13,728)             13.35
    Forfeited                                                  (654,304)             13.56
                                                           ------------       ------------

Outstanding at January 31, 1999                               1,916,684              10.80
    Granted                                                     372,540               9.52
    Exercised                                                  (137,366)              7.61
    Forfeited                                                  (337,893)             11.39
                                                           ------------       ------------

Outstanding at January 31, 2000                            $  1,813,965       $      10.67
                                                           ============       ============

 Reserved and available for grant at January 31, 2000           485,721
</TABLE>


       At January 31, 2000, the options outstanding and options exercisable, and
       their related weighted-average exercise price, and the weighted-average
       remaining contractual life for the ranges of exercise prices are shown in
       the table below.


<TABLE>
<CAPTION>
                                                                                   WEIGHTED-
                                                                 WEIGHTED-         AVERAGE
                                                                 AVERAGE           REMAINING
                                                 OPTIONS      EXERCISE PRICE    CONTRACTUAL LIFE
                                                ----------    --------------    ----------------
<S>                                             <C>           <C>               <C>
RANGE:  $5.25 - $9.99
Options outstanding at January 31, 2000            393,277      $     7.21         5.18 years
Options exercisable at January 31, 2000            192,720      $     6.46

RANGE:  $10.00 - $14.99
Options outstanding at January 31, 2000          1,395,570      $    11.57         7.12 years
Options exercisable at January 31, 2000            864,647      $    11.43

PRICE:  $15.00
Options outstanding at January 31, 2000             25,118      $    15.00         2.57 years
Options exercisable at January 31, 2000             10,548      $    15.00
</TABLE>

       At January 31, 2000, 1999 and 1998, the number of options exercisable was
       1,067,915, 980,139 and 771,649, respectively, and the weighted-average
       exercise price of those options was $10.57, $9.98 and $9.77,
       respectively.



                                       51
<PAGE>   52





       The Company applies APB 25 and related interpretations in accounting for
       its Plans. Since the Company grants all stock options, except for options
       granted and re-priced to the Company's Chief Executive Officer and RSUs
       as described above, with an exercise price equal to or greater than the
       current market price of the stock on the grant date, compensation expense
       recorded is not significant. Had the Company determined compensation cost
       based on the fair/minimum value at the date of grant for its stock
       options under SFAS 123, the Company's net income (loss) and income (loss)
       per share would have been reduced to the pro forma amounts indicated
       below (in thousands except per share data):

<TABLE>
<CAPTION>

                                 1999             1998            1997
                               ---------       ---------       ---------
<S>                            <C>                <C>              <C>
Net income (loss):
    As reported                $  (2,165)         (4,305)          5,104
    Pro forma                     (3,419)         (5,196)          4,546

Income (loss) per share:
    As reported - basic            (0.19)          (0.41)           0.60
    As reported - diluted          (0.19)          (0.41)           0.58
    Pro forma - basic              (0.29)          (0.50)           0.53
    Pro forma - diluted            (0.29)          (0.50)           0.52
</TABLE>

       The per share weighted-average exercise price and the per share
       weighted-average minimum and fair value of stock options at the date of
       grant, using the Black-Scholes option-pricing model for SFAS 123
       disclosure purposes, is as follows:

<TABLE>
<CAPTION>

                                                                                                                 MINIMUM
                                             EXERCISE PRICE                            FAIR VALUE                 VALUE
                                ------------------------------------------      --------------------------      ----------
                                   1999            1998            1997           1999             1998            1997
                                ----------      ----------      ----------      ----------      ----------      ----------
<S>                             <C>                  <C>             <C>              <C>             <C>             <C>
Options granted at
    market price                $     9.54           10.55           13.64            6.41            7.06            6.48

Options granted at prices
    exceeding market price           12.00           12.94           16.53            0.31            2.82            4.14

Options granted at prices
    below market price                7.62            6.19           11.06            5.71            4.55            7.25

Total options granted                 9.52           11.05           13.20            6.19            7.58            6.26
</TABLE>

       The following assumptions were used in the calculation:

<TABLE>
<CAPTION>

                                1999             1998             1997
                             ----------       ----------        ---------
<S>                          <C>              <C>              <C>
Expected dividend yield      $       --               --               --
Risk-free interest rate            6.62%            5.26%            6.47%
Expected life in years          3 to 10          3 to 10          3 to 10
Volatility                          .58              .59               --
</TABLE>




                                       52
<PAGE>   53




(12)   STOCK REDEMPTION AGREEMENT

       The Company was a party to a stock redemption agreement with the estate
       of the Company's founder. Under the agreement, the estate could, at its
       option, require the Company to purchase shares of Common Stock at fair
       value in amounts equal to or less than specified annual obligations of
       $1.5 million for fiscal 1998 through 2001 and $1.0 million for fiscal
       2002 and 2003. In fiscal 1997, the Company purchased shares valued at
       $1.5 million in aggregate pursuant to this agreement. The agreement was
       terminated upon the Company's stock becoming publicly traded in June
       1998.

(13)   SUPPLEMENTAL CASH FLOW INFORMATION

       Cash payments for interest during fiscal 1999, 1998 and 1997 totaled $3.6
       million, $3.8 million and $3.3 million, respectively. Cash payments for
       income taxes during fiscal 1999, 1998 and 1997 totaled $0.7 million, $7.8
       million and $2.8 million, respectively.

       Non-cash investing activities during fiscal 1997 include the transfer of
       videos with a depreciated cost of $5.8 million from property and
       equipment to merchandise inventory. There were no non-cash investing
       activities in fiscal 1999 and 1998.

       Non-cash financing activities during fiscal 1999 and 1998 include the
       issuance of treasury stock to pay outside director fees of approximately
       $35,000 and $31,000, respectively, and the receipt of the Company's
       common stock valued at $1.0 million and $0.1 million, respectively,
       relating to the exercise of stock options. There were no non-cash
       financing activities in fiscal 1997.

(14)   LITIGATION AND CONTINGENCIES

       The Company's employees are covered under a self-insured health plan.
       Claims in excess of $100,000 per employee are insured by an insurance
       company. Estimated claims incurred but not reported have been accrued in
       the accompanying financial statements. Health insurance expense during
       fiscal 1999, 1998 and 1997 was $2.0 million, $1.4 million and $1.1
       million, respectively.

       The Company is partially self-insured for workers' compensation. Claims
       in excess of $100,000 per accident and $1.1 million in the aggregate
       annually are insured by an insurance company. Estimated claims incurred
       but not reported have been accrued in the accompanying consolidated
       financial statements. Workers' compensation expense during fiscal 1999,
       1998 and 1997 was $0.3 million, $0.1 million and $0.4 million,
       respectively.

       Following the Company's initial announcement on March 7, 2000 of the
       requirement for the accounting restatements, six purported class action
       lawsuits were filed in the United States District Court for the Northern
       District of Texas against the Company and certain of the current and
       former directors and officers of the Company asserting various claims
       under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
       Although four of the lawsuits were originally filed in the Dallas
       Division of the Northern District of Texas, all of the five pending
       actions have been or will be transferred to the Amarillo Division of the
       Northern District and should be consolidated. One of the Section 10(b)
       and 20(a) lawsuits filed in the Dallas Division was voluntarily
       dismissed. On May 15, 2000, a lawsuit was filed in the United States
       District Court for the Northern District of Texas against the Company,
       its current and former directors and officers at the time of the
       Company's June 1998 initial public offering and three underwriters,
       Salomon Smith Barney, A.G. Edwards & Sons, Inc. and Furman Selz, LLC
       asserting various claims under Sections 11, 12(2) and 15 of the
       Securities Act of 1933.

       None of the six pending complaints specify the amount of damages sought.
       Although it is not feasible to predict or determine the final outcome of
       the proceedings or to estimate the potential range of loss with respect
       to these matters, an adverse outcome with respect to such proceedings
       could have a material adverse impact on the Company's financial position,
       results of operations and cash flows.



                                       53
<PAGE>   54

       The Company is also involved in various other claims and legal actions
       arising in the ordinary course of business. In the opinion of management,
       the ultimate disposition of these matters will not have a material
       adverse effect on the Company's financial position, results of operations
       and cash flows.

(15)   SALE OF MALL STORES

       During fiscal 1993, the Company sold the assets, primarily inventory and
       leasehold improvements, related to 26 mall stores to Camelot Music, Inc.
       (Camelot). Proceeds from the sales were $9.4 million and the Company
       recognized a gain of $3.8 million. During fiscal 1994, the Company sold
       the assets of an additional 16 mall stores to Camelot. Proceeds from the
       1994 sales were $8.7 million and the Company recognized a gain of $4.1
       million. The leases on all stores were assigned to Camelot in connection
       with the transactions. In the initial assignments, the Company was
       relieved from any further liability under eight leases.

       In August 1996, Camelot filed for protection from creditors under the
       federal bankruptcy code. At the time Camelot filed bankruptcy, seven
       additional leases had expired, and the Company believed that an
       additional seven leases had been terminated or amended by agreement of
       Camelot and the lessors such that the Company would have no liability,
       leaving a total of 20 leases on which the Company believed it might have
       potential liability. In 1996, the Company recorded a $2.5 million reserve
       for future lease obligations related to these stores.

       Camelot ultimately rejected six leases in its bankruptcy proceeding, and
       the bankruptcy court approved the plan in December 1997. Based on these
       events, the Company reduced its recorded reserve for future lease
       obligations to $0.5 million at January 31, 1998.

       In fiscal 1998, the Company was released from contingent liability on the
       remaining six leases by a bankruptcy court order. Accordingly, in the
       fourth quarter of fiscal 1998, the Company reduced the remaining $0.5
       million reserve for future lease obligations to zero and included such
       amount in gain (loss) on sale of mall stores in the Consolidated
       Statements of Operations.



                                       54
<PAGE>   55





(16)     SEGMENT DISCLOSURES

         The Company has two operating segments, retail stores and Internet
         operations. The Internet operations became a reportable segment in
         fiscal 1999 and fiscal 1998 information has been included for
         comparability. There were no Internet operations in fiscal 1997, and
         the Company operated as a single segment for such year. The Company's
         chief operating decision maker, as that term is defined in the relevant
         accounting standard, regularly reviews financial information about each
         of the above operating segments for assessing performance and
         allocating resources. Revenue for retail stores is derived from the
         sale of merchandise and rental of videocassettes, video games and DVD.
         Revenue for Internet operations is derived solely from the sale of
         merchandise. Segment information regarding the Company's retail stores
         and Internet operations for fiscal years 1999 and 1998 is presented
         below.

<TABLE>
<CAPTION>

1999:                                 RETAIL           INTERNET
(Dollars in thousands)                STORES          OPERATIONS           TOTAL
                                   ------------      ------------       ------------
<S>                                <C>               <C>                <C>
Total revenue                      $    447,010               145       $    447,155


Depreciation and amortization      $     32,664               259       $     32,923

Operating income (loss)            $      1,712            (1,733)      $        (21)

Total assets                       $    246,858             1,075       $    247,933

Capital expenditures               $     46,487               823       $     47,310
</TABLE>


<TABLE>
<CAPTION>

1998:                            RETAIL            INTERNET
(Dollars in thousands)           STORES            OPERATIONS           TOTAL
                               ------------       ------------       ------------
<S>                            <C>                <C>                <C>
Total revenue                  $    399,133                 30       $    399,163


Depreciation and amortization  $     55,291                 40       $     55,331

Operating income (loss)        $     (3,685)              (228)      $     (3,913)

Total assets                   $    233,256                223       $    233,479

Capital expenditures           $     42,325                243       $     42,568
</TABLE>





                                       55
<PAGE>   56








(17)     INTERIM FINANCIAL RESULTS (UNAUDITED)

<TABLE>
<CAPTION>

FISCAL 1999:                                                                     QUARTER
-----------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share data              First            Second            Third             Fourth
-----------------------------------------------------------------------------------------------------------------------
                                                      As Restated       As Restated       As Restated

<S>                                                   <C>               <C>               <C>               <C>
Total revenues                                        $   100,579       $   102,438       $   100,861       $   143,277

Total cost of revenues (a)                                 61,200            65,380            65,359            96,273

Selling, general and administrative expenses (b)           34,095            34,093            38,057            51,038

Development and pre-opening expenses                          179               538               801               163

Operating income (loss)                                     5,105             2,427            (3,356)           (4,197)

Interest and other expense, net                               822               955             1,026               700

Income (loss) before taxes                                  4,283             1,472            (4,382)           (4,897)

Income tax expense (benefit)                                1,585               606            (1,646)           (1,904)

Net income (loss)                                           2,698               866            (2,736)           (2,993)

Basic income (loss) per share                         $      0.23       $      0.07       $     (0.24)      $     (0.26)

Diluted income (loss) per share                       $      0.23       $      0.07       $     (0.24)      $     (0.26)
</TABLE>


<TABLE>
<CAPTION>

FISCAL 1998:                                                                     QUARTER
-----------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share data            First            Second             Third              Fourth
-----------------------------------------------------------------------------------------------------------------------
                                                   As Restated        As Restated        As Restated        As Restated

<S>                                               <C>                <C>                <C>                <C>
Total revenues                                    $     89,882       $     91,187       $     91,622       $    126,472

Total cost of revenues(c)                               58,414             56,797             58,491             97,522

Selling, general and administrative expenses            27,299             32,317             33,913             36,849

Development and pre-opening expenses                       159                611                647                 57

Operating income (loss)                                  4,010              1,462             (1,429)            (7,956)

Interest and other expense, net                          1,199                955                746                595

Gain on sale of mall stores(d)                              --                 --                 --                454

Income (loss) before taxes                               2,811                507             (2,175)            (8,097)

Income tax expense (benefit)                             1,077                217               (831)            (3,112)

Net income (loss)                                        1,734                290             (1,344)            (4,985)

Basic income (loss) per share                     $       0.20       $       0.03       $      (0.12)      $      (0.43)

Diluted income (loss) per share                   $       0.20       $       0.03       $      (0.12)      $      (0.43)
</TABLE>




                                       56
<PAGE>   57




(17)     INTERIM FINANCIAL RESULTS (UNAUDITED) (CONTINUED)


(a)  The Company recorded a pre-tax charge of approximately $3.5 million in the
     fourth quarter of fiscal year 1999 for the write down of inventory to the
     lower of cost or market.

(b)  The Company recorded a pre-tax charge of approximately $5.1 million in the
     fourth quarter of fiscal year 1999 related to the closing of two of its
     superstores during fiscal 1999 and five of its stores during the first
     quarter of fiscal year 2000. This charge includes the net present value of
     future minimum lease payments, write-off of property and equipment, and
     other costs associated with the closing of these locations.

(c)  The Company adopted a new, accelerated method of amortizing its rental
     video assets in the fourth quarter of fiscal 1998. The adoption of the new
     amortization method was accounted for as a change in accounting estimate
     effected by a change in accounting principle and, accordingly, the Company
     recorded a non-cash, non-recurring, pre-tax charge of $18.5 million in
     rental video cost of revenues in the fourth quarter of fiscal 1998.

(d)  In fiscal 1996, the Company established a reserve of $2.5 million ($1.6
     million after-tax charge) to cover potential losses related to certain mall
     store leases that were sold prior to fiscal 1995 to Camelot Music, Inc.,
     which filed for bankruptcy protection in August 1996. In fiscal 1997, the
     reserve was reduced to $0.5 million, and $1.7 million was included in Gain
     on sale of mall stores. In fiscal 1998, the Company was released from any
     contingent liability on the remaining leases by order of a bankruptcy
     court. Accordingly, the Company reduced the remaining $0.5 million reserve
     to zero as of January 31, 1999.



                                       57
<PAGE>   58




(17)     INTERIM FINANCIAL RESULTS (UNAUDITED) (CONTINUED)

Restatement adjustments that significantly impact the Company's operating
results in the first three quarters of fiscal 1999 include certain costs and
expenses that were previously not properly recorded (principally shrinkage
expense and inventory costing recorded in cost of revenue and merchandise
returns expense recorded in selling, general and administrative expense). The
effects of the adjustments on the previously reported results of operations for
the first three quarters of fiscal 1999 are as follows:

<TABLE>
<CAPTION>

FISCAL 1999:                                                           QUARTER
-----------------------------------------------------------------------------------------------------
Dollars in thousands, except per share data           First             Second              Third
-----------------------------------------------------------------------------------------------------
<S>                                                <C>                <C>                <C>
Total cost of revenue:
     As previously reported                        $     62,197       $     63,674       $     64,068
     Adjustments:
      Shrinkage expense                                    (567)               954              1,311
      Inventory costing                                    (430)               752                (20)
                                                   ------------       ------------       ------------
      As restated                                  $     61,200       $     65,380       $     65,359
                                                   ============       ============       ============

Selling, general and administrative expenses:
     As previously reported                        $     34,631       $     33,912       $     38,604
     Adjustment:
     Cost of merchandise returns to vendors                (536)               181               (547)
                                                   ------------       ------------       ------------
     As restated                                   $     34,095       $     34,093       $     38,057
                                                   ============       ============       ============

Operating income (loss):
     As previously reported                        $      3,572       $      4,314       $     (2,612)
     Adjustments                                          1,533             (1,887)              (744)
                                                   ------------       ------------       ------------
     As restated                                   $      5,105       $      2,427       $     (3,356)
                                                   ============       ============       ============

Income (loss) before taxes:
     As previously reported                        $      2,750       $      3,359       $     (3,638)
     Adjustments                                          1,533             (1,887)              (744)
                                                   ------------       ------------       ------------
     As restated                                   $      4,283       $      1,472       $     (4,382)
                                                   ============       ============       ============

Income tax expense (benefit):
     As previously reported                        $      1,045       $      1,271       $     (1,384)
     Adjustments                                            540               (665)              (262)
                                                   ------------       ------------       ------------
     As restated                                   $      1,585       $        606       $     (1,646)
                                                   ============       ============       ============

Net income (loss):
 As previously reported                            $      1,705       $      2,088       $     (2,254)
  Adjustments                                               993             (1,222)              (482)
                                                   ------------       ------------       ------------
 As restated                                       $      2,698       $        866       $     (2,736)
                                                   ============       ============       ============

Basic income (loss) per share:
   As previously reported                          $       0.15       $       0.18       $      (0.19)
   Adjustments                                             0.08              (0.11)             (0.05)
                                                   ------------       ------------       ------------
   As restated                                     $       0.23       $       0.07       $      (0.24)
                                                   ============       ============       ============

Diluted income (loss) per share:
   As previously reported                          $       0.15       $       0.18       $      (0.19)
   Adjustments                                             0.08              (0.11)             (0.05)
                                                   ------------       ------------       ------------
   As restated                                     $       0.23       $       0.07       $      (0.24)
                                                   ============       ============       ============
</TABLE>






                                       58
<PAGE>   59




(17)     INTERIM FINANCIAL RESULTS (UNAUDITED) (CONTINUED)

         Restatement adjustments that significantly impact the Company's
         operating results for fiscal 1998 include certain revenues, costs and
         expenses that were not properly recorded (principally related to the
         timing of gift certificate revenue recognition, shrinkage expense and
         inventory costing recorded in cost of revenue and merchandise returns
         expense recorded in selling, general and administrative expenses and
         the timing of the reversal of the recognition of the loss on sale of
         mall stores). The impact of the adjustments to previously reported
         results of operations for the fiscal 1998 quarters is as follows:

<TABLE>
<CAPTION>

FISCAL 1998:                                                                       QUARTER
------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except per share data                First             Second              Third            Fourth
------------------------------------------------------------------------------------------------------------------------------
                                                          As restated       As restated        As restated        As restated
<S>                                                      <C>                <C>                <C>                <C>
Total revenues:
     As previously reported                              $     89,387       $     91,187       $     91,622       $    126,472
     Adjustment:
     Timing of gift certificate revenue recognition               495                 --                 --                 --
                                                         ------------       ------------       ------------       ------------
     As restated                                         $     89,882       $     91,187       $     91,622       $    126,472
                                                         ============       ============       ============       ============
Total cost of revenue:
     As previously reported                              $     57,717       $     55,716       $     56,455       $     98,797
     Adjustments:
     Shrinkage expense                                          1,114                437              2,006               (874)
     Inventory costing                                           (417)               644                 30               (401)
                                                         ------------       ------------       ------------       ------------
     As restated                                         $     58,414       $     56,797       $     58,491       $     97,522
                                                         ============       ============       ============       ============
Selling, general and administrative expenses:
     As previously reported                              $     28,373       $     30,928       $     31,590       $     34,720
     Adjustment:
     Cost of merchandise returns to vendors                    (1,074)             1,389              2,323              2,129
                                                         ------------       ------------       ------------       ------------
    As restated                                          $     27,299       $     32,317       $     33,913       $     36,849
                                                         ============       ============       ============       ============
Operating income (loss):
     As previously reported                              $      3,138       $      3,932       $      2,930       $     (7,102)
     Adjustments                                                  872             (2,470)            (4,359)              (854)
                                                         ------------       ------------       ------------       ------------
    As restated                                          $      4,010       $      1,462       $     (1,429)      $     (7,956)
                                                         ============       ============       ============       ============

Gain on sale of mall stores
     As previously reported                              $         --       $         --       $         --       $      1,454
     Adjustments:
     Recognition  of gain on mall stores                           --                 --                 --             (1,000)
                                                         ------------       ------------       ------------       ------------
    As restated                                          $         --       $         --       $         --       $        454
                                                         ============       ============       ============       ============
Income (loss) before taxes:
    As previously reported                               $      1,939       $      2,977       $      2,184       $     (6,243)
    Adjustments                                                   872             (2,470)            (4,359)            (1,854)
                                                         ------------       ------------       ------------       ------------
    As restated                                          $      2,811       $        507       $     (2,175)      $     (8,097)
                                                         ============       ============       ============       ============
Income tax expense (benefit):
    As previously reported                               $        737       $      1,179       $        866       $     (2,390)
    Adjustments                                                   340               (962)            (1,697)              (722)
                                                         ------------       ------------       ------------       ------------
    As restated                                          $      1,077       $        217       $       (831)      $     (3,112)
                                                         ============       ============       ============       ============
Net income (loss):
    As previously reported                               $      1,202       $      1,798       $      1,318       $     (3,853)
    Adjustments                                                   532             (1,508)            (2,662)            (1,132)
                                                         ------------       ------------       ------------       ------------
    As restated                                          $      1,734       $        290       $     (1,344)      $     (4,985)
                                                         ============       ============       ============       ============
Basic income (loss) per share:
   As previously reported                                $       0.14       $       0.18       $       0.11       $      (0.33)
   Adjustments                                                   0.06              (0.15)             (0.23)             (0.10)
                                                         ------------       ------------       ------------       ------------
   As restated                                           $       0.20       $       0.03       $      (0.12)      $      (0.43)
                                                         ============       ============       ============       ============
Diluted income (loss) per share:
   As previously reported                                $       0.14       $       0.17       $       0.11       $      (0.33)
   Adjustments                                                   0.06              (0.14)             (0.23)             (0.10)
                                                         ------------       ------------       ------------       ------------
   As restated                                           $       0.20       $       0.03       $      (0.12)      $      (0.43)
                                                         ============       ============       ============       ============
</TABLE>




                                       59
<PAGE>   60







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

Not applicable.



                                       60
<PAGE>   61


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors of the Company

     The following is certain information concerning the directors of the
Company.

     JOHN H. MARMADUKE, age 53, has served as President and Chief Executive
Officer of the Company since July 1976 and as Chairman of the Board since
October 1993. Mr. Marmaduke served as President of the Company's former parent
company, Western Merchandisers, Inc. ("Western"), from 1982 through June 1994,
including the years 1991 through 1994 when Western was a division of Wal-Mart.
Mr. Marmaduke also serves on the board of directors of the Video Software
Dealers Association (VSDA). Mr. Marmaduke has been active in the entertainment
retailing industry with the Company and its predecessor company for over 30
years. John H. Marmaduke and Stephen S. Marmaduke are brothers.

     STEPHEN S. MARMADUKE, age 50, has served as a director of the Company since
October 1991. From 1978 to September 1992, Mr. Marmaduke served as Vice
President of Purchasing for Western, the Company's former parent company. Mr.
Marmaduke is currently a private investor. John H. Marmaduke and Stephen S.
Marmaduke are brothers.

     LEONARD L. BERRY, age 57, has served as a director of the Company since
March 1994. Dr. Berry served as a Professor of Marketing and the Director of the
Center for Retailing Studies in the College of Business Administration at Texas
A&M University from January 1982 through February 2000. Dr. Berry holds the J.C.
Penney Chair of Retailing Studies at Texas A&M, a position awarded in January
1991. In 1999 he was named Distinguished Professor of Marketing. From July 1986
to July 1987, Dr. Berry served as the National President of the American
Marketing Association. Dr. Berry also serves as a director of Canned Goods,
Inc., Genesco and the Lowe's Companies, Inc. He is the author of the 1999 book,
"Discovering the Soul of Service," and many other business publications.

     PETER A. DALLAS, age 65, has served as a director of the Company since
October 1991 and its predecessor since 1970. Mr. Dallas is presently employed as
a banking consultant. Mr. Dallas has served as an officer of Bank of America,
N.A. and its predecessors, NationsBank, N.A., Boatmen's First National Bank of
Amarillo and The First National Bank of Amarillo, since 1965.

     GAINES L. GODFREY, age 66, has served as a director of the Company since
October 1991 and was appointed Senior Vice President and Chief Financial Officer
of the Company in May 2000. Mr. Godfrey has been associated with Godfrey
Ventures in the field of financial consulting, including evaluations, financing,
underwriting, purchases and sales in a wide range of industries, since 1982 .
From 1973 to 1982, Mr. Godfrey was Vice President, Finance for Mesa Petroleum
Co.

     CRAIG R. LENTZSCH, age 51, has served as a director of the Company since
April 1994. Mr. Lentzsch is President and Chief Executive Officer of Greyhound
Lines, Inc. a position held since November 1994. On March 16, 1999, Greyhound
merged with and became a wholly owned subsidiary of Laidlaw, Inc. Mr. Lentzsch
has served as a director of Greyhound since August 1994. From November 1994 to
April 1995, Mr. Lentzsch also served as Chief Financial Officer of Greyhound.
From August 1992 to November 1994, Mr. Lentzsch was employed by Motor Coach
Industries International, Inc., where he served as Executive Vice President and
Chief Financial Officer. Mr. Lentzsch is a member of the Board of Directors of
the American Bus Association, the Intermodal Transportation Institute, The Great
American Stations Foundation and Enginetech, Inc.

     JEFFREY G. SHRADER, age 49, has served as a director of the Company since
October 1992. Mr. Shrader has served as a shareholder in the law firm of
Sprouse, Smith & Rowley, PC in Amarillo, Texas since January 1993.

     RON G. STEGALL, age 52, has served as a director of the Company since May
1996. Mr. Stegall is the founder and has served as the Chief Executive Officer
of Arlington Equity Partners, Inc. since January 1992. Mr. Stegall is



                                       61
<PAGE>   62

also the founder of BizMart, Inc. and from October 1987 to December 1991 served
as Chief Executive Officer of BizMart. For more than 16 years prior to 1987, Mr.
Stegall was employed by Tandy Corporation/Radio Shack Division, serving as
Senior Vice President from 1983 to 1987 and Vice President from 1979 to 1983.
Mr. Stegall currently serves as Chairman of the Board of InterTAN, Inc. and as a
director of Gadzooks, Inc.


Executive Officers of the Company

     The following is certain information concerning the executive officers of
the Company.

<TABLE>
<CAPTION>

           Name                       Age    Position
           ----                       ---    --------
<S>                                   <C>    <C>
           John H. Marmaduke           53    Chairman of the Board, President and Chief
                                             Executive Officer
           Gaines L. Godfrey           66    Senior Vice President, Chief Financial
                                             Officer and Director
           Robert A. Berman            51    Vice President of Store Operations
           Michael J. Woods            38    Vice President and Chief Information Officer
           James S. Hicks              43    Vice President of Purchasing
</TABLE>


     All executive officers are chosen by the Company's Board of Directors and
serve at the Board's discretion. Set forth below is information concerning the
business experience of the executive officers of the Company (other than
Messers. Marmaduke and Godfrey, information with respect to whom is set forth
above under the caption "Directors of the Company").


     ROBERT A. BERMAN, age 51, has served the Company as Vice President of Store
Operations since January 1997. From June 1995 to January 1997, Mr. Berman was
self-employed in the financial services industry. From January 1989 to June
1995, Mr. Berman served as Vice President and Senior Vice President of Store
Operations for Builders Square, Inc., a chain of 185 building material
superstores. At Builders Square, Inc., Mr. Berman was responsible for store
operations, store planning and design, purchasing and construction.

     MICHAEL J. WOODS, age 38, has served as Vice President of Information
Systems of the Company since October 1992. From August 1990 to October 1992, Mr.
Woods served as Director of Microsystems for the Company, focusing on store
systems development. From October 1989 to August 1990, Mr. Woods served as a
programming specialist and analyst for the Company.

     JAMES S. HICKS, age 43, has served as Vice President of Purchasing of the
Company since August of 1999. From August 1997 to August 1999, Mr. Hicks served
as the Senior Director of Purchasing and from April 1994 to August 1997, was the
Director of Purchasing. He was a District Leader for the Company from July of
1984 to April 1994. From October 1982 to July 1984, Mr. Hicks served as a
company troubleshooter and from April 1982 to October 1982 was a store manager.
Mr. Hicks began his career with Hastings in August 1981 as a manager trainee.
Prior to joining the Company, Mr. Hicks was the Regional Credit Manager for
Liquid Carbonics Corporation, a gas distributor and manufacturer headquartered
in Houston.


                                       62
<PAGE>   63




Compliance with Section 16(a) of the Securities Exchange Act of 1934

     To the Company's knowledge, based solely on its review of the forms
submitted to the Company during and with respect to the 1999 fiscal year, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with and have been
timely filed, except for the following: Form 5s reflecting beneficial ownership
for Jeffrey G. Shrader, John H. Marmaduke, James Stephen Hicks, Phillip Hill,
Craig R. Lentzsch, Dennis McGill, Thomas Nugent, Robert R. Berman, Leonard L.
Berry, Peter A. Dallas, Gaines L. Godfrey, Stephen S. Marmaduke, Bill Millikin,
Ron G. Stegall and Michael J. Woods were due March 16, 2000 and were filed
between March 17 and 20, 2000; Form 4s reflecting changes in beneficial
ownership for Phillip Hill, Craig R. Lentzsch and Dennis McGill were due October
10, 1999 and were filed October 12, 1999; a Form 4 for Jeffrey G. Shrader
reflecting a change in beneficial ownership was due April 10, 1999 and was filed
May 17, 1999; a Form 4 for John H. Marmaduke reflecting a change in beneficial
ownership was due July 10, 1999 and was filed July 22, 1999; a Form 3 for James
Stephen Hicks reflecting Mr. Hicks' promotion to Vice President of Purchasing
was due July 26, 1999 and was filed August 11, 1999; and a Form 4 for Thomas
Nugent reflecting a change in beneficial ownership was due December 10, 1999 and
was filed December 23, 1999.



                                       63
<PAGE>   64





     ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

     The following table sets forth information concerning the annual and
long-term compensation earned during the last three fiscal years by the
Company's Chief Executive Officer and each of the Company's four other most
highly compensated officers (collectively, the "named executive officers").


<TABLE>
<CAPTION>

                                                                   Annual
                                                                Compensation             Long Term Compensation
                                                           -------------------------   -------------------------
                                                                                                Awards
                                                                                       -------------------------
                                                                                                     Securities
                                                                                       Restricted    Underlying
              Name and                                                                   Stock         Option/      All Other
              Principal                                      Salary        Bonus        Award(s)         SARs      Compensation
              Position                           Year          ($)          ($)           ($)            (#)            ($)
--------------------------------------       -----------   -----------   -----------   ----------    -----------   -----------
<S>                                          <C>           <C>           <C>           <C>           <C>           <C>
John H. Marmaduke                                   1999   $   174,750   $   228,375          -0-         32,500   $     9,047(1)
Chairman of the Board, President and                1998   $   164,060   $   240,141          -0-         17,500   $     8,365
Chief Executive Officer                             1997   $   156,991   $   234,326          -0-         65,767   $     6,622
                                             -----------   -----------   -----------   ----------    -----------   -----------
Robert A. Berman                                    1999   $   100,000   $    76,250   $   31,667(2)      43,000   $     7,096(4)
Vice President of Store Operations                  1998   $    90,000   $    44,998   $   59,998(3)       9,000   $     1,684
                                                    1997   $    86,550   $    48,167          -0-         55,649           -0-
                                             -----------   -----------   -----------   ----------    -----------   -----------
Michael Woods                                       1999   $    87,500   $    70,000          -0-         33,000   $     4,089(5)
Vice President of Information Systems               1998   $    80,095   $    56,862   $    7,619(6)       9,000   $     3,561
                                                    1997   $    74,418   $    44,430          -0-         15,177   $     2,748
                                             -----------   -----------   -----------   ----------    -----------   -----------
Phillip Hill(7)                                     1999   $    57,500   $    63,250          -0-         27,500   $    78,040(8)
Senior Vice President,                              1998   $   106,683   $   114,647          -0-         12,500   $     5,289
Chief Operating Officer and Director                1997   $    97,355   $   106,568          -0-         60,708   $     5,790
                                             -----------   -----------   -----------   ----------    -----------   -----------
Dennis McGill(9)                                    1999   $    71,875   $    50,000          -0-         31,000   $    59,316(10)
Vice  President of Finance, Chief                   1998   $    96,350   $    64,817   $   26,420(10)     29,000   $     6,901
Financial Officer, Treasurer and Secretary          1997   $    91,748   $    82,169          -0-         30,354   $     1,673
                                             -----------   -----------   -----------   ----------    -----------   -----------
</TABLE>

(1) In fiscal 1999 the Company contributed $5,047 in matching funds to Mr.
     Marmaduke's account under the Company's 401k Plan and $4,000 to Mr.
     Marmaduke's account under the Company's Associate Stock Ownership Plan.

(2)  In fiscal 1999, in lieu of cash bonuses in the amount of $23,750, Mr.
     Berman received 3,699 restricted stock units with a market value of at the
     date of award of $31,667.

(3)  In fiscal 1998, in lieu of cash bonuses in the amount of $44,998, Mr.
     Berman received 5,963 restricted stock units with a market value of at the
     date of award of $59,998.

(4)  In fiscal 1999 the Company contributed $4,794 in matching funds to Mr.
     Berman's account under the Company's 401k Plan and $2,302 to Mr. Berman's
     account under the Company's Associate Stock Ownership Plan.

(5)  In fiscal 1999 the Company contributed $2,087 in matching funds to Mr.
     Woods' account under the Company's 401k Plan and $2,002 to Mr. Woods'
     account under the Company's Associate Stock Ownership Plan.

(6)  In fiscal 1998, in lieu of cash bonuses in the amount of $5,714, Mr. Woods
     received 923 restricted stock units with a market value of at the date of
     award of $7,619.

(7)  Mr. Hill's service with the Company terminated on July 27, 1999.

(8)  In fiscal 1999 the Company contributed $3,318 in matching funds to Mr.
     Hill's account under the Company's 401k Plan and $2,722 to Mr. Hills'
     account under the Company's Associate Stock Ownership Plan. Upon
     termination of employment with the Company, Mr. Hill received $63,250 in
     satisfaction of any and all amounts due him under the Company's Corporate
     Officer Incentive Plan. This amount is shown in the Table under "Bonus". In
     addition, he received $72,000 during the Company's last fiscal year in
     consideration for the release of all claims against the Company and for a
     covenant not to compete.

(9)  Mr. McGill's service with the Company terminated on October 15, 1999.

(10) In fiscal 1999 the Company contributed $4,881 in matching funds to Mr.
     McGill's account under the Company's 401k Plan and $2,472 to Mr. McGill's
     account under the Company's Associate Stock Ownership Plan. As per the
     Company's Management Stock Purchase Plan, after Mr. McGill's termination
     the Company bought out his unvested Restricted Stock Units for $19,815. In
     addition Mr. McGill received $4,648 as compensation for unused vacation
     time and $27,500 pursuant to a Separation Agreement, dated October 1, 1999
     in which Mr. McGill released all claims against the Company and entered
     into a covenant not to compete. Pursuant to the Company's Management Stock
     Purchase Plan under which Mr. McGill's restricted stock was issued, in
     fiscal 1999 the Company bought back all the restricted shares it had
     granted to Mr. McGill in 1998 at the then current market value of $26,420,
     the value of such grant being reflected in this table, for a price of
     $19,815. This value of this transaction received by Mr. McGill is reflected
     in the column of this table titled "All Other Compensation."




                                       64
<PAGE>   65

Table of Options Granted in Last Fiscal Year

     The following table sets forth information concerning the stock options and
stock appreciation rights (SARs) granted during fiscal 1999 to the named
executive officers. Note that there have been no grants of SARs during fiscal
1999 or prior years.

<TABLE>
<CAPTION>

                                                                                         Potential realizable value
                                                                                         at assumed annual rates of
                                                                                         stock price appreciation
                                        Individual Grants                                     for option term
-----------------------------------------------------------------------------------------------------------------------
                         Number of      Percent of total
                         securities       options/SARs
                         underlying        granted to
                          Options/        employees in    Exercise or
                            SARs             fiscal        base price    Expiration
       Name              granted (#)          year           ($/sh)          dates          5%($)             10%($)
--------------------    ------------    --------------    ------------   ------------   ------------      ------------
<S>                     <C>             <C>               <C>            <C>            <C>               <C>
John H. Marmaduke             17,500(1)           4.68%   $       9.00      3/30/2009   $     99,051      $    251,041
                              15,000(2)           4.02%   $      12.00      7/16/2009   $    113,201      $    286,874
                        ------------      ------------    ------------   ------------   ------------      ------------
 Robert A. Berman              9,000(1)           2.41%   $       9.00      3/30/2009   $     50,941      $    129,094
                              12,000(2)           3.22%   $      12.00      7/16/2009   $     90,561      $    229,469
                              22,000(3)           5.89%   $       9.69      9/17/2009   $    134,068      $    339,754
                        ------------      ------------    ------------   ------------   ------------      ------------
  Michael Woods                9,000(1)           2.41%   $       9.00      3/30/2009   $     50,941      $    129,094
                               9,000(2)           2.41%   $      12.00      7/16/2009   $     67,920      $    172,125
                              15,000(3)           4.02%   $       9.69      9/17/2009   $     91,410      $    231,650
                        ------------      ------------    ------------   ------------   ------------      ------------
   Phillip Hill               12,500(4)           3.35%   $       9.00      7/31/2000   $      7,075      $     14,234
                              15,000(4)           4.02%   $      12.00      7/31/2000   $      9,369      $     18,756
                        ------------      ------------    ------------   ------------   ------------      ------------
  Dennis McGill                9,000(5)           2.41%   $       9.00      3/30/2009   $     50,941      $    129,094
                               9,000(4)           2.41%   $       9.00     10/31/2000   $      6,504      $     13,191
                              12,000(6)           3.22%   $      12.00      7/16/2009   $     90,561      $    229,469
                              22,000(4)           5.89%   $       9.69     10/31/2000   $     11,754      $     23,564
                              22,000(7)           5.89%   $       9.69      9/17/2009   $    134,068      $    339,754
                        ------------      ------------    ------------   ------------   ------------      ------------
</TABLE>

(1)  Twenty percent (20%) of the options are exercisable on each anniversary of
     March 30, 1999 until all such options are exercisable.

(2)  Twenty percent (20%) of the options are exercisable on each anniversary of
     July 16, 1999 until all such options are exercisable.

(3)  Twenty percent (20%) of the options are exercisable on each anniversary of
     September 17, 1999 until all such options are exercisable.

(4)  Options are exercisable immediately.

(5)  These options were cancelled automatically upon the termination of Mr.
     McGill's employment. Twenty percent (20%) of the options were exercisable
     on each anniversary of March 30, 1999 until all such options were
     exercisable.

(6)  These options were cancelled automatically upon the termination of Mr.
     McGill's employment.

(7)  These options were cancelled automatically upon the termination of Mr.
     McGill's employment. Twenty percent (20%) of the options were exercisable
     on each anniversary of September 17, 1999 until all such options were
     exercisable



                                       65
<PAGE>   66


Table of Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year
End Valuations of All Held Options

     The following table sets forth the value of all options held by the named
executive officers of the Company at the end of fiscal 1999. Note that none of
the named executives exercised any options in fiscal 1999.

<TABLE>
<CAPTION>


                                                                 Number of
                                                                 securities             Value of
                                                                 underlying            unexercised
                                                                unexercised           in-the-money
                                                               options/SARs at       options/SARs at
                                                               fiscal year end       fiscal year end
                                                                     (#)                  ($)
-----------------------------------------------------------------------------------------------------
                          Shares
                        Acquired on             Value             Exercisable/        Exercisable/
    Name                Exercise (#)         Realized ($)        Unexercisable       Unexercisable
-----------------    -----------------    -----------------    -----------------    -----------------
<S>                  <C>                  <C>                  <C>                  <C>
John H. Marmaduke                  -0-                  N/A    573,615 / 138,907            -0- / -0-
                     -----------------    -----------------    -----------------    -----------------
Robert A. Berman                   -0-                  N/A     29,560 / 78,089             -0- / -0-
                     -----------------    -----------------    -----------------    -----------------
  Michael Woods                    -0-                  N/A     43,798 / 67,606             -0- / -0-
                     -----------------    -----------------    -----------------    -----------------
  Phillip Hill                     -0-                  N/A    152,649 / 112,376            -0- / -0-
                     -----------------    -----------------    -----------------    -----------------
  Dennis McGill                    -0-                  N/      31,000 / 0                  -0- / -0-
                     -----------------    -----------------    -----------------    -----------------
</TABLE>

Director Compensation

     The Company reimburses all directors for expenses incurred in connection
with their activities as directors. Non-employee directors of the Company
receive an annual cash retainer of $15,000 and a grant of shares of Common Stock
valued at $5,000 for service as directors, and a fee of $750 for each director
meeting and $500 for each committee meeting attended in person or by telephone.
The Company has a Stock Option Plan for Outside Directors (the "Directors Option
Plan") for its non-employee directors under which 101,180 shares of Common Stock
are reserved for issuance thereunder and a Stock Grant Plan for its non-employee
directors under which 25,295 shares of Common Stock are reserved for issuance
thereunder. The Directors Option Plan provides that each non-employee director
receives an initial option for 2,530 shares of Common Stock upon election as a
director, and an annual grant of 2,530 shares thereafter. Each option is granted
at the fair market value of the Common Stock of the Company at the time of the
grant. All initial and annual stock options granted pursuant to the Directors
Option Plan are nonqualified stock options and are generally exercisable for a
period of 10 years from the date of grant or one year after the optionee ceases
to be a director of the Company. During the fiscal year ending January 31, 2000,
outside directors were granted a total of 17,710 options under the Directors
Option Plan. As of January 31, 2000, options covering 70,840 shares have been
granted to date under the Directors Option Plan. The Stock Grant Plan for
outside directors provides for a grant as of May 1 of each year to each
non-employee director of Common Stock with a fair market value of $5,000 on the
date of grant. As of January 31, 2000, 6,587 shares of Common Stock have been
granted to non-employee directors under the Stock Grant Plan for Outside
Directors. The Company also granted options covering 7,832 shares under a
previous director compensation plan that was terminated in fiscal 1997, of which
no options remain outstanding as of January 31, 2000.

Employee Contracts and Change of Control Arrangements

     The Company is a party to employment agreements with each of Messrs.
Marmaduke, Berman and Woods (each, an "Executive"). Each employment agreement
provides that the Executive's salary shall be determined by the Board of
Directors and that the Executive's employment shall continue until terminated by
either the Executive or the Company. Either the Company or the Executive has the
right to terminate the employment at any time with or without cause (as defined
in each agreement) by delivering written notice of termination to the other
party. Each



                                       66
<PAGE>   67

agreement provides for a severance payment if the agreement is terminated by
the Company without cause. Under such circumstances, Mr. Marmaduke would
receive his base annual salary and bonus for a period of 36 months and Mr.
Berman and Mr. Woods would receive their base annual salary and bonus for a
period of 24 months following the date of termination, payable over such period
at such times as executives of the Company receive their regular salary and
bonus payments, and any benefits under any plans of the Company in which the
Executive is a participant to the full extent of such Executive's rights under
such plans. If the agreements are terminated either voluntarily by the
Executive or by the Company with cause, or by reason of death or disability,
then the Executive will not be entitled to payments under his employment
agreement.

     Upon a change in control of the Company, each Executive will receive a
payment to compensate him for the loss of long-term capital gains treatment of
certain options granted to the Executive. Each employment agreement provides
that, in the event the Executive terminates employment with the Company, the
Executive may not, for a period of 18 months following termination, work for or
assist a competitor of the Company, use certain information obtained from the
Company, or induce any other employees of the Company to terminate their
relationship with the Company.

Compensation Committee Interlocks and Insider Participation

     Messrs. Berry, Lentzsch and Shrader presently serve as the members of the
Compensation Committee. Mr. Shrader is a shareholder in the law firm of Sprouse,
Smith & Rowley, PC in Amarillo, Texas, which has provided legal services to the
Company since 1993. (See "Item 13. Certain Relationships and Related
Transactions").

Compensation Committee Report

     The Company's compensation program is designed to motivate, reward and
retain the management talent the Company needs to achieve its business goals.
This program makes a significant portion of officers' compensation dependent
upon increases in shareholder value.

     The Compensation Committee of the Board of Directors (the "Compensation
Committee") supervises the Company's compensation program. The Compensation
Committee is made up of non-employee Directors who do not participate in any of
the compensation plans they administer. The Compensation Committee recommends
the salary and other incentives packages of the executive officers of the
Company to the Board of Directors, which in turn actually approves the
compensation packages.

     The Company's success depends on attracting and retaining executives who
have developed the skills and expertise required to lead and manage a multimedia
entertainment retailer. The Company's philosophy is to do this with (1)
competitive base salaries, (2) rewards for performance and accomplishments on an
annual basis, and (3) incentives to meet long-term objectives.

     The Company pays for performance based on an individual's level of
responsibility. For this purpose, performance means both individual and
corporate 7. The Company motivates performance by recognizing the year's results
and by providing incentives for improvement in the future. The three major
components of the Company's compensation program are base salary, incentive
bonus awards made on a annual basis, and long-term incentive awards.

     Base Salary. The Company's salaries are reviewed annually based on
competitive positioning (comparing the Company's salary structure with salaries
paid by other companies) and the Company's business performance. Initially, the
Company's Chief Executive Officer recommends base salary amounts to the
Compensation Committee. In reviewing these recommendations, the Compensation
Committee uses a number of surveys to determine competitive salary positions.
Primarily, the Compensation Committee compares salary structure with both
entertainment and non-entertainment retailing companies.

     The Company's general headquarters and most of its retail operations are
not located in large metropolitan areas. Accordingly, salary ranges are targeted
at the median level of the survey data. Within these ranges, the



                                       67
<PAGE>   68

Compensation Committee determines each individual executive officer's salary
based on performance, responsibility, experience and results.

     Incentive Awards Made on an Annual Basis. A significant portion of an
executive officer's income is based upon the Corporate Officer Incentive Program
("COIP"). This program provides for incentive cash payments based upon incentive
targets expressed as a percentage of a participant's base salary if certain
performance goals are met. Each fiscal year is divided into two separate
six-month performance periods, and awards are made for each performance period.
Amounts payable under COIP are not guaranteed, and thus a significant portion of
each officer's annual compensation is essentially at risk.

     At the beginning of each performance period, each officer is assigned an
incentive target amount expressed as a percentage of base salary. Generally, the
higher the level an officer's responsibility is with the Company, the greater
the percentage of his overall annual compensation is subject to being earned
under COIP. The incentive target for a performance period can then be increased
to not more than 125% of the targeted amount or decreased to not less than 50%
of the targeted amount based upon performance achievement. At the beginning of
each performance period, the Compensation Committee establishes writing the
performance goals that will determine the size of the Incentive Plan awards. As
of January 31, 2000, the performance measures for all incentive plan
participants are based upon sales and return on equity as defined in the
Company's annual business plan. Return on equity is defined as the after-tax
rate of return on beginning shareholders' equity for the performance period.

     Within 90 days after the end of each performance period, each participant's
base salary rate is multiplied by the earned incentive plan award percentage to
determine the dollar value of the award for the performance period in question.
The maximum award payable under the COIP is the lesser of 250% of the
participant's most recent annualized base salary or $1,000,000. A portion of any
bonus may be used to purchase Restricted Stock Units ("RSU's") of the Company.

     In fiscal 1999, during the first six-month performance period, the Company
realized 100% of the incentive target and in the second six-month performance
period the Company realized 75% of the incentive target. The Board of Directors
authorized the payment of 100% of the incentive target in the second six-month
performance period for all COIP participants except for the President and Chief
Executive Officer.

     Long-term Incentive Awards. Long-term incentive rewards are intended to
develop and retain strong management through share ownership. Stock options are
the primary long-term incentive granted to officers, as well as other key
employees of the Company. The Compensation Committee believes that a significant
portion of officers' compensation should depend on value created for the
shareholders. Options are an excellent way to accomplish this because they tie
the officers' interest directly to the shareholders' interest.

     The number of options granted to officers is based upon individual
performance and level of responsibility. Option grants must be of sufficient
size to provide a strong incentive for executives who work for long-term
business interests and become significant owners of the business. The
Compensation Committee reviews market studies for long-term compensation awards,
and endeavors to make option grants to provide the necessary incentive to
attract and retain qualified executives.

     Deductibility of Compensation. The Compensation Committee has reviewed the
impact of Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), which limits the deductibility of certain otherwise deductible
compensation in excess of $1 million paid to the Chief Executive Officer or
other named executive officers. It is the policy of the Company to attempt to
have its executive compensation plans treated as tax deductible compensation
wherever, in judgment of the Compensation Committee, to do so would be
consistent with the objectives of that compensation plan.

     Chief Executive Officer Compensation. The total compensation of John H.
Marmaduke, the Company's Chairman, President and Chief Executive Officer, was
$403,125 during fiscal 1999, representing a base salary of $174,750 and a bonus,
pursuant to the COIP, of $228,375. Mr. Marmaduke's compensation was based upon a
comparison to the compensation of officers in similar positions of other
retailers, taking into consideration the



                                       68
<PAGE>   69

Company's size, performance and business philosophy. Also in fiscal year 1999,
Mr. Marmaduke was granted a non-qualified option to acquire 17,500 shares of
Common Stock at an exercise price of $9.00 per share and 15,000 options at an
exercise price of $12.00 per share.

     This report is submitted by the members during fiscal 1999 of the
Compensation Committee:

                                         Leonard L. Berry
                                         Craig R. Lentzsch
                                        Jeffrey G. Shrader


Performance Graph

     The following graph compares the annual cumulative total stockholder return
on an investment of $100 on June 12, 1998 (the first day of public trading) in
the Company's Common Stock, based on the market price of the Common Stock, with
the cumulative total return of a similar investment in the Nasdaq National
Market Retail Trade Stocks Index and in the S&P 500 Market Index.


                              [PERFORMANCE GRAPH]



                                       69
<PAGE>   70




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth the beneficial stock ownership of (i) all
holders of greater than 5% of the Company's Common Stock, (ii) each director and
each named executive officer and (iii) all directors and named executive
officers as a group. The total number of shares of Common Stock issued and
outstanding as of January 31, 2000 is 11,628,973. A total of 1,076,184 options
may be exercised within 60 days of January 31, 2000. In the chart below the
percent of Common Stock owned is calculated by expressing the number of shares
beneficially owned as a percent of the total Common Stock issued and outstanding
plus the total number of options that may be exercised within the next 60 days.
Unless otherwise noted, the shares are owned directly by the individual.

<TABLE>
<CAPTION>

                                                                       PERCENT OF
                                                                      OUTSTANDING
NAME AND ADDRESS(1)                                SHARES OWNED       COMMON STOCK
                                                   ------------       ------------
<S>                                                <C>                 <C>
John H. Marmaduke(2)                                 4,330,707           34.09%

Stephen S. Marmaduke(3)                              1,455,403           11.46%

Estate of Sam Marmaduke(4)                           1,024,403            8.06%
P.O. Box 33251
Amarillo, Texas 79102

Leonard Berry(5)                                        19,326               *

Peter A. Dallas(6)                                      23,223               *

Gaines L. Godfrey(7)                                    33,096               *

Craig R. Lentzsch(8)                                    24,314               *

Ron G. Stegall(9)                                       11,921               *

Jeffrey G. Shrader(10)                                  32,517               *

Thomas D. Nugent                                           500               *

Robert A. Berman(11)                                    44,528               *

Michael J. Woods(12)                                    47,948               *

James S. Hicks(13)                                      13,945               *

Officers and directors as a group (12 persons)       6,037,428           47.52%
</TABLE>

----------
* Represents less than 1%.

(1)  Unless otherwise indicated, the address for each of the beneficial owners
     identified is c/o the Company, 3601 Plains Boulevard, Amarillo, Texas
     79102.

(2)  Includes 1,024,403 shares held by the Estate of Sam Marmaduke, of which
     John H. Marmaduke is the Independent Executor, and 2,254,525 shares held by
     the John H. Marmaduke Family Limited Partnership, the managing general
     partner of which is John H. Marmaduke Management, Inc., of which John H.
     Marmaduke is president, 44,738 shares held by Martha A. Marmaduke, John H.
     Marmaduke's wife, 2,001 shares held by Margaret Hart Marmaduke, John H.
     Marmaduke's daughter, 10,118 shares held by Owen M. Marmaduke, John H.
     Marmaduke's son, and 577,115 shares subject to stock options exercisable
     within 60 days, and excludes

                                       70
<PAGE>   71

     shares held in trusts for John H. Marmaduke's children of which Bank of
     America is trustee. Also, John H. Marmaduke and Stephen S. Marmaduke are
     brothers.

(3)  Includes 1,381,785 shares held by the Stephen S. Marmaduke Family Limited
     Partnership, the managing general partner of which is Stephen S. Marmaduke
     Management, Inc., of which Stephen S. Marmaduke is president, 60,840 shares
     held by Shelley R. Marmaduke, Stephen S. Marmaduke's wife, and 8,096 shares
     subject to options exercisable within 60 days. Excludes shares held
     directly by Stephen S. Marmaduke's adult children and shares held in trusts
     for Stephen S. Marmaduke's children, of which Bank of America is trustee.
     Also, John H. Marmaduke and Stephen S. Marmaduke are brothers.

(4)  Shares held by the Estate of Sam Marmaduke are voted by its executor, John
     H. Marmaduke. Note also that these same shares are also included in the
     number of shares held by John H. Marmaduke.

(5)  Includes 8,096 options exercisable within the next 60 days.

(6)  Includes 8,096 options exercisable within the next 60 days.

(7)  Includes 8,096 options exercisable within the next 60 days.

(8)  Includes 8,096 options exercisable within the next 60 days and 4,541 held
     in trust over which Mr. Lentzsch has voting control as trustee.

(9)  Includes 3,542 options exercisable with the next 60 days, 355 shares held
     by Arlington Equity Partners, and 7,083 shares held by Ron Stegall Limited
     Partnership.

(10) Includes 8,096 options exercisable within the next 60 days.

(11) Includes 31,360 options exercisable within the next 60 days.

(12) Includes 45,598 options exercisable within the next 60 days.

(13) All shares disclosed are pursuant to options exercisable within the next 60
     days.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Jeffrey G. Shrader, a director of the Company, is a shareholder in the
law firm of Sprouse, Smith & Rowley, PC, Amarillo, Texas, which has provided
legal services to the Company since 1993. During fiscal years 1999, 1998 and
1997, the Company made aggregate legal payments of $0.2 million, $0.3 million
and $0.1 million, respectively, to such law firm. The Company believes that
these services have been provided on terms as favorable as those which the
Company could have obtained from a non-affiliated third party.

         Gaines L. Godfrey, a director of the Company and the Company's Senior
Vice President and Chief Financial Officer since May 2000, is a limited partner
in certain limited partnerships that lease land and improvements to the Company
under triple net leases. During fiscal years 1999, 1998 and 1997, the Company
made aggregate lease payments of $0.6 million, $0.5 million, and $0.5 million,
respectively, to such limited partnerships. The Company believes that these
leases are on terms as favorable as those which the Company could have obtained
from a non-affiliated third party.



                                       71
<PAGE>   72
                                     PART IV

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

(a)  1.  The following consolidated financial statements of the Company are
         included in Part II, Item 8:

<TABLE>
<S>                                                                                              <C>
                   Independent Auditors' Report.........................................         30
                   Consolidated Balance Sheets as of January 31, 2000 and 1999..........         31
                   Consolidated Statements of Operations for the years ended
                       January 31, 2000, 1999 and 1998..................................         32
                   Consolidated Statements of Shareholders' Equity for the years
                       ended January 31, 2000, 1999 and 1998............................         33
                   Consolidated Statements of Cash Flows for the years ended
                       January 31, 2000, 1999 and 1998..................................         34
                   Notes to Consolidated Financial Statements...........................         35
</TABLE>

     2.  The following financial statement schedules and other information
         required to be filed by Items 8 and 14(d) of Form 10-K are included in
         Part IV:

                   Schedule II - Valuation and Qualifying Accounts

     All other schedules are omitted because they are not applicable, not
     required or the required information is included in the Consolidated
     Financial Statements and notes thereto.

     3.   The following exhibits are filed herewith or incorporated by reference
          as indicated as required by Item 601 of Regulation S-K. The exhibits
          designated by an asterisk are management contracts and/or compensatory
          plans or arrangements required to be filed as exhibits to this report.

   Exhibit
   Number                      Description

          3.1        (1)    Third Restated Articles of Incorporation of the
                            Company.

          3.2        (1)    Amended and Restated Bylaws of the Company.

          4.1        (1)    Specimen of Certificate of Common Stock of the
                            Company.

          4.2        (1)    Third Restated Articles of Incorporation of the
                            Company (see 3.1 above).

          4.3        (1)    Amended and Restated Bylaws of the Company (see 3.2
                            above).

         10.1        (1)    Form of Indemnification Agreement by and between the
                            Company and its directors and executive officers.

         10.2        (1)    Note Purchase Agreement regarding $25,000,000 7.75%
                            Senior Notes Due June 13, 2003

         10.3        (1)    Credit Agreement among Hastings Entertainment, Inc.
                            and NationsBank as of December 16, 1998

         10.4        (1)    Hastings Amended 1996 Incentive Stock Plan.

         10.5  *     (1)    Hastings 1994 Stock Option Plan.

         10.6  *     (1)    Hastings 1991 Stock Option Plan.

         10.7  *     (1)    Hastings Entertainment, Inc. Associates' 401(k) Plan
                            and Trust.

         10.8  *     (1)    Hastings Employee Stock Ownership Plan Trust
                            Agreement.

         10.9  *     (1)    Chief Executive Officer Stock Option , as amended.

        10.10  *     (1)    Corporate Officer Incentive Plan.

        10.11  *     (1)    Management Stock Purchase Plan.

        10.12  *     (1)    Management Incentive Plan.

        10.13  *     (1)    Salary Incentive Plan.

        10.14  *     (1)    Hastings Entertainment, Inc. Stock Option Plan for
                            Outside Directors.

        10.15  *     (1)    Lease Agreement, dated August 3, 1994, as amended,
                            between Omni Capital Corporation and the Company,
                            for office space located at Sunset Center in
                            Amarillo, Texas.

        10.16        (1)    Lease Agreement, dated August 3, 1994, as amended,
                            between Omni Capital Corporation and



                                       72
<PAGE>   73

                            the Company, for warehouse space located at Sunset
                            Center in Amarillo, Texas.

        10.17        (1)    Stock Redemption Agreement dated May 3, 1994, as
                            amended, between John H. Marmaduke, Independent
                            Executor of the Estate of Sam Marmaduke, Deceased,
                            and the Company.

        10.18        (1)    Lease Agreement, dated May 28, 1992, between the
                            City of Amarillo and the Company for space located
                            at 1900 W. 7th Avenue in Amarillo, Texas.

        10.19        (1)    $1,600,000 Promissory Note and Security Agreement in
                            favor of First Interstate Bank of Texas, NA.

        10.20        (1)    Stock Grant Plan for Outside Directors.

        10.21*       (1)    Form of Employment Agreement by and between the
                            Company and certain of its executives.

        10.22               Amended Lease Agreement, dated October 13, 1999,
                            between Omni Capital Corporation and the Company,
                            for office space located at Sunset Center in
                            Amarillo, Texas.

        21.1 *       (1)    Subsidiaries of the Company.

        23.1                Consent of KPMG LLP

        24.1                Powers of Attorney (included on signature pages)

        27.1                Financial Data Schedule


----------
          (1)  Incorporated by reference from the Company's Registration
               Statement on Form S-1 (File No. 333-47969) and with a
               corresponding exhibit number herein. The financial statements set
               forth under Item 8 of this report on Form 10-K are incorporated
               herein by reference.

(b)  Reports on Form 8-K

     (i)  Hastings Entertainment, Inc. filed a Current Report on Form 8-K on
          March 8, 2000 regarding the requirement for accounting restatements
          for the first three quarters of fiscal 1999 and the prior four fiscal
          years.

     (ii) No report on Form 8-K was filed by the registrant during the last
          quarter of the fiscal year for which this report on Form 10-K is
          filed.

                                       73
<PAGE>   74







Financial Statement Schedule II -

                          HASTINGS ENTERTAINMENT, INC.
                 Valuation and Qualifying Accounts and Reserves
                   Years Ended January 31, 2000, 1999 and 1998
                             (Amounts in thousands)

<TABLE>
<CAPTION>

                                                                            FISCAL YEAR
                                                         --------------------------------------------------
                      Description                            1999               1998                1997
                      -----------                        ------------       ------------       ------------
                                                                            As restated        As restated
<S>                                                      <C>                <C>                <C>
Reserves deducted from assets:
Allowance for inventory shrinkage and obsolescence:
   Balance at the beginning of period                    $      2,146       $      2,755       $      3,061
   Additions charged to costs and expenses                     11,958             12,749             13,639
   Deductions for write-offs                                  (11,560)           (13,358)           (13,945)
                                                         ------------       ------------       ------------
   Balance at end of period                              $      2,544       $      2,146       $      2,755
                                                         ============       ============       ============

Reserves added to liabilities:
Allowance for cost of inventory returns:
   Balance at the beginning of period                    $     11,418       $      4,040       $      4,338
   Additions charged to costs and expenses(1)                   7,170              8,748              6,403
   Deductions for write-offs                                   (9,125)            (1,370)            (6,701)
                                                         ------------       ------------       ------------
   Balance at end of period                              $      9,463       $     11,418       $      4,040
                                                         ============       ============       ============
</TABLE>

(1)  Total returns expense was $9.1 million, $10.6 million and $8.0 million for
     the fiscal years 1999, 1998 and 1997, respectively. The table does not
     include the cost of operating the Company's return center ($1.9 million,
     $1.9 million and $1.6 million for the fiscal years 1999, 1998 and 1997,
     respectively), which is recorded directly to returns expense.



                                       74
<PAGE>   75



                                   SIGNATURES

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

                                         HASTINGS ENTERTAINMENT, INC.


DATE:  December 29, 2000                 By:  /s/ John H. Marmaduke
                                              ---------------------------------
                                               John H. Marmaduke
                                               Chairman of the Board, President
                                               and Chief Executive Officer


                                POWER OF ATTORNEY

     Each person whose signature appears below hereby authorizes and constitutes
John H. Marmaduke and Gaines L. Godfrey, and each of them singly, his true and
lawful attorneys-in-fact with full power of substitution and redistribution, for
him and in his name, place and stead, in any and all capacities to sign and file
any and all amendments to this report with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
and he hereby ratifies and confirms all that said attorneys-in-fact or any of
them, or their substitutes, may lawfully do or cause to be done by virtue
hereof.

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

<TABLE>
<CAPTION>

Signature                                Title                                         Date
---------                                -----                                         ----
<S>                                      <C>                                      <C>
 /s/ John H. Marmaduke                   Chairman of the Board, President and     December 29, 2000
---------------------------------        Chief Executive Officer (Principal
John H. Marmaduke                        Executive Officer)

/s/ Gaines L. Godfrey                    Senior Vice President and Director       December 29, 2000
---------------------------------
Gaines L. Godfrey

/s/ Leonard L. Berry                     Director                                 December 29, 2000
---------------------------------
Leonard L. Berry

/s/ Peter A. Dallas                      Director                                 December 29, 2000
---------------------------------
Peter A. Dallas

/s/ Craig R. Lentzsch                    Director                                 December 29, 2000
---------------------------------
Craig R. Lentzsch

/s/ Stephen S. Marmaduke                 Director                                 December 29, 2000
---------------------------------
Stephen S. Marmaduke

/s/ Jeffrey G. Shrader                   Director                                 December 29, 2000
---------------------------------
Jeffrey G. Shrader

/s/ Ron G. Stegall                       Director                                 December 29, 2000
---------------------------------
Ron G. Stegall
</TABLE>



                                       75



<PAGE>   76
                              INDEX TO EXHIBITS

<TABLE>
<CAPTION>

   EXHIBIT
   NUMBER                      DESCRIPTION
   ------                      -----------
<S>                         <C>
          3.1        (1)    Third Restated Articles of Incorporation of the
                            Company.

          3.2        (1)    Amended and Restated Bylaws of the Company.

          4.1        (1)    Specimen of Certificate of Common Stock of the
                            Company.

          4.2        (1)    Third Restated Articles of Incorporation of the
                            Company (see 3.1 above).

          4.3        (1)    Amended and Restated Bylaws of the Company (see 3.2
                            above).

         10.1        (1)    Form of Indemnification Agreement by and between the
                            Company and its directors and executive officers.

         10.2        (1)    Note Purchase Agreement regarding $25,000,000 7.75%
                            Senior Notes Due June 13, 2003

         10.3        (1)    Credit Agreement among Hastings Entertainment, Inc.
                            and NationsBank as of December 16, 1998

         10.4        (1)    Hastings Amended 1996 Incentive Stock Plan.

         10.5  *     (1)    Hastings 1994 Stock Option Plan.

         10.6  *     (1)    Hastings 1991 Stock Option Plan.

         10.7  *     (1)    Hastings Entertainment, Inc. Associates' 401(k) Plan
                            and Trust.

         10.8  *     (1)    Hastings Employee Stock Ownership Plan Trust
                            Agreement.

         10.9  *     (1)    Chief Executive Officer Stock Option, as amended.

        10.10  *     (1)    Corporate Officer Incentive Plan.

        10.11  *     (1)    Management Stock Purchase Plan.

        10.12  *     (1)    Management Incentive Plan.

        10.13  *     (1)    Salary Incentive Plan.

        10.14  *     (1)    Hastings Entertainment, Inc. Stock Option Plan for
                            Outside Directors.

        10.15  *     (1)    Lease Agreement, dated August 3, 1994, as amended,
                            between Omni Capital Corporation and the Company,
                            for office space located at Sunset Center in
                            Amarillo, Texas.

        10.16        (1)    Lease Agreement, dated August 3, 1994, as amended,
                            between Omni Capital Corporation and
</TABLE>





<PAGE>   77
<TABLE>
<S>                         <C>
                            the Company, for warehouse space located at Sunset
                            Center in Amarillo, Texas.

        10.17        (1)    Stock Redemption Agreement dated May 3, 1994, as
                            amended, between John H. Marmaduke, Independent
                            Executor of the Estate of Sam Marmaduke, Deceased,
                            and the Company.

        10.18        (1)    Lease Agreement, dated May 28, 1992, between the
                            City of Amarillo and the Company for space located
                            at 1900 W. 7th Avenue in Amarillo, Texas.

        10.19        (1)    $1,600,000 Promissory Note and Security Agreement in
                            favor of First Interstate Bank of Texas, NA.

        10.20        (1)    Stock Grant Plan for Outside Directors.

        10.21  *     (1)    Form of Employment Agreement by and between the
                            Company and certain of its executives.

        10.22               Amended Lease Agreement, dated October 13, 1999,
                            between Omni Capital Corporation and the Company,
                            for office space located at Sunset Center in
                            Amarillo, Texas.

        21.1   *     (1)    Subsidiaries of the Company.

        23.1                Consent of KPMG LLP

        24.1                Powers of Attorney (included on signature pages)

        27.1                Financial Data Schedule
</TABLE>
----------

          (1)  Incorporated by reference from the Company's Registration
               Statement on Form S-1 (File No. 333-47969) and with a
               corresponding exhibit number herein. The financial statements set
               forth under Item 8 of this report on Form 10-K are incorporated
               herein by reference.