UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON DC 20549

                                    FORM 10-K

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

For the fiscal year ended     December 31, 1998
                              -----------------
                                       OR
/ /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from
                                   --------- to ----------
Commission file number   0-21824
                       ----------
                       HOLLYWOOD ENTERTAINMENT CORPORATION
             (Exact name of registrant as specified in its charter)
                                        
        Oregon                           93-0981138
---------------------------------------------------------------
     (State or other jurisdiction of    (IRS Employer
     incorporation or organization)     identification No.)

 9275 SW Peyton Lane, Wilsonville, OR           97070
---------------------------------------------------------------
    (Address of principal executive offices)  (Zip Code)
                    (503) 570-1600
---------------------------------------------------------------
    (Registrant's telephone number, including area code)
                                        
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 Title of Each                     Name of Each Exchange
   Class                            on Which Registered
---------------------------------- ----------------------------
  Common Stock                     Nasdaq National Market

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than 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 the Form 10-K or any amendment to this
Form 10-K.  [  ]
     On March 12, 1999, the registrant had 45,376,257 shares of Common Stock
outstanding, and on such date, the aggregate market value of the shares of
Common Stock held by non-affiliates of the Registrant was $568,092,134 based
upon the last sale price reported for such date on the Nasdaq National Market.
<PAGE>
                        DOCUMENTS INCORPORATED BY REFERENCE
Part  III - Portions of registrant's Proxy Statement which is anticipated to  be
filed  within  120  days  after the end of the registrant's  fiscal  year  ended
December 31, 1998.



                       HOLLYWOOD ENTERTAINMENT CORPORATION
                                        
                           ANNUAL REPORT ON FORM 10-K
                                        
                          YEAR ENDED DECEMBER 31, 1998


Item

                                     PART I

1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
4(a)  Executive Officers and Key Employees of the Registrant

                                     PART II

5. Market for Registrant's Common Stock and Related Stockholder Matters
6.                                   Selected Financial Data
7.   Management's Discussion and Analysis of Financial Condition and Results of
     Operations
8.               Financial Statements and Supplementary Data
9.   Changes in and Disagreements with Accountants on Accounting and Financial
     Disclosure

                                     PART III

10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions

                                     PART IV

14. Exhibits, Financial Statement Schedules and Reports on Form 8-K


<PAGE>
                       PART I

ITEM 1.   BUSINESS

GENERAL

     Hollywood Entertainment owns and operates 1,260 Hollywood Video retail
superstores in 42 states as of December 31, 1998 and is the second largest video
retailer in the United States.  According to video industry analyst, Paul Kagan,
Associates, Inc. ("Paul Kagan"), we operate the highest volume video stores in
the country.  Hollywood Video revenue increased from $17.3 million in 1993 to
$756.6 million in 1998.  We added 353 stores in 1998 and intend to add
approximately 350 stores in each of 1999 and 2000.

     In addition, with the acquisition of Reel.com in October 1998, we became
the leading online video only retailer and began implementing a strategy to
electronically deliver entertainment products directly into the homes of our
customers over the internet.  Reel.com had $7.3 million in revenue in the fourth
quarter of 1998.

INDUSTRY OVERVIEW

     Video Retail Industry

     According to the Video Software Dealers Association ("VSDA"), a video
retailing association, the videocassette rental industry grew approximately 10%
in 1998, reaching $8.1 billion in revenue, in sharp contrast to recent years in
which rental revenue was generally flat and industry growth was driven by
increases in product sales revenue.  We believe this growth may continue in 1999
and possibly beyond, driven in part by greater availability of new release
videocassettes as a result of revenue sharing arrangements and increased
advertising by movie studios and video retailers.  According to Paul Kagan, the
U.S. videocassette rental and sales industry has grown from $9.8 billion in
revenue in 1990 to $16.9 billion in 1998, and is expected to reach $20.8 billion
in 2002.  The video rental industry is highly fragmented and in recent years has
been characterized by increased consolidation as larger "superstore" chains,
video stores with at least 7,500 videocassettes, have continued to increase
market share by opening new stores and acquiring smaller, local operators.
According to VSDA, there were between 25,000 and 30,000 video specialty stores
in operation in 1998.  We believe approximately 8,500 of these stores are
"superstores."  We believe this consolidation will continue as the video retail
industry evolves from independent stores to regional and national superstore
chains.
     
     Movie Studio Dependence on Video Retail Industry

     According to Paul Kagan, the video retail industry is the single largest
source of revenue to movie studios and represented approximately $6.7 billion,
or 48.5%, of the $13.8 billion of estimated domestic studio revenue in 1998.  Of
the hundreds of movies produced by the major studios each year in the U.S.,
relatively few are profitable for the movie studio based on box office revenue
alone. According to the Motion Picture Association of America (the "MPAA"),
between 1990 and 1997 only 7.2% of all movies released generated in excess of
$20 million in U.S. theater revenue for studios. Over the same period, members
of the MPAA reported that the average production, advertising and distribution
cost per movie increased from $38.8 million to $75.7 million. We believe the
customer is more likely to view "non-hit" movies on rented videocassette than in
any other medium because video retail stores provide an inviting opportunity to
browse and make an impulse choice among a very broad selection of new releases.
As a result, video retail stores, including those operated by us, acquire movies
on videocassette regardless of whether the movies were successful at the box
office, thus providing movie studios a reliable source of revenue for almost all
of the hundreds of movies produced each year. Consequently, we believe movie
studios are highly motivated to protect this unique and significant source of
revenue.

<PAGE>

     Historically, movie studios have sought to generate incremental sources of
revenue through the addition of new distribution channels. To maximize revenue,
the studios have implemented a strategy of sequential release "windows," giving
each distribution channel the rights to its movies for a limited time before
making them available to the next sequential channel. The studios have
determined the sequential order in which they release movies to each
distribution channel based upon the order they believe will maximize their total
revenue from all distribution channels combined. These distribution channels
generally include, in release date order, movie theaters, video retail stores,
pay-per-view television, including direct broadcast satellite ("DBS"), premium
channels, basic cable television and, finally, network and syndicated
television.

ORDER OF SEQUENTIAL RELEASE WINDOWS TO PRIMARY CHANNELS OF DISTRIBUTION

                    -    Movie theaters
                    -    Video retail stores
                    -    Pay-per-view television (including DBS)
                    -    Premium channels (HBO, Showtime, etc.)
                    -    Basic cable television
                    -    Network television
                    -    Syndicated television
     
TRENDS IN VIDEO RENTALS AND SALES

     Studios have historically sold videocassettes to video retailers under two
pricing structures, "rental" and "sell-through."  Rental titles are initially
sold at relatively high prices (typically $60 to $65 wholesale) and promoted
primarily for rental, and then later re-released for sale to consumers at a
lower price (typically $10 to $15 wholesale).  Certain high-grossing box office
films, generally with box office revenue in excess of $100 million, are targeted
at the sell-through market.  These titles are released on videocassette at a
relatively low initial price (approximately $15 wholesale) and are both promoted
as a rental title by video stores and sold directly to consumers through a broad
array of retailers including video stores.  Studios elect to release a title
either as rental or sell-through based on which would optimize their income from
the title.

     According to Paul Kagan, video rental revenue has increased from $7.4
billion in 1997 to $8.1 billion in 1998 and is expected to increase to $9.7
billion in 2002.  This growth is in contrast to flat rental revenue in prior
years, when consumers attracted by lower prices increased their video purchases.
Sell-through revenue has increased from $3.2 billion in 1990 to $8.8 billion in
1998 and is expected to increase to $11.1 billion in 2002.

     In 1998 a number of studios and video retailers adopted revenue sharing as
an alternative to the historical rental pricing structure.  Studios began
offering retailers more videocassettes for an individual title at substantially
lower initial cost in exchange for a share of the rental revenue that those
copies generate over their initial release window.  The additional copies have
contributed to improved consumer satisfaction early in a title's release because
the supply of titles better matches demand.  This has led to higher rental
revenues for the video store industry as well as for studios.  Revenue sharing
also gives the studios an incentive to market these titles because they share in
the revenue generated by increased transactions.

<PAGE>

     DVDs are an alternative format to VHS tapes that offer consumers digital
picture and sound and additional features such as enhanced content and
interactivity.  Since their introduction in late 1997, more than 1.3 million DVD
players have reportedly been sold.  The Company introduced DVDs in all its
stores in November 1998, resulting in the most successful introduction of a new
format in the Company's history.  DVDs are the fastest growing new category
introduced by the Company due to increased interest in older movie titles as a
result of the substantial improvement in picture and sound quality over VHS.

BUSINESS  STRATEGY

     Our goal is to build a strong national brand which consumers will identify
with the entertainment industry. We have developed an effective superstore
format that distinguishes us from competitors. We attempt to quickly establish a
leadership position in each of the markets in which we open stores.  We
successfully compete in both well-developed and relatively untapped markets. We
are also investing in technologies that enable us to deliver entertainment
directly into the homes of our customers.  Our business strategy includes the
following key elements:

         Expansion Through Company-Built Superstores. In each of the last two
          years we added approximately 350 stores and we intend to open over 300
          stores in each of 1999 and 2000.  Of our 1,260 video superstores at
          December 31, 1998, over 85% of the stores had been opened as new
          stores by us.

         Broad Selection and Superior Availability. We strive to provide our
          customers with the broadest selection of movies and video games. Our
          superstores typically carry approximately 8,000 titles and 15,000
          videocassettes and video games. Our goal is to offer more copies of
          popular new video releases and more titles than our competitors.  In
          part because of our new revenue sharing arrangements with studios, we
          have increased the availability of most new releases and typically
          acquire 100 to 175 copies of "hit" movies for each Hollywood Video
          store.

         Exciting, Enjoyable and Convenient Shopping Experience. Our
          superstores are designed to capture the bright lights, energy and
          excitement of the motion picture industry. We focus on creating an
          inviting atmosphere that encourages browsing and generates repeat
          customers.  Our superstores are typically located in high traffic,
          high-visibility locations. We believe excellent customer service, a
          bright, clean and friendly shopping environment and convenient store
          locations are important to our success.

         Excellent Entertainment Value. We offer consumers the opportunity to
          rent new releases, video games and any of our catalog movie titles for
          five days in most of our stores.  New release movies typically rent
          for $3.49 and catalog movies typically rent for $1.99.  We believe
          movie rental in general, and our pricing structure and rental terms in
          particular, provide consumers convenient entertainment and excellent
          value.

         Electronic Commerce.  Having established our superstores as physical
          "portals" linking consumers to the movie studios, we have begun
          through

     <PAGE>

          the acquisition of Reel.com in October 1998 to establish an electronic
          "portal," linking customers in their homes to movies and movie related
          entertainment.  We intend to build on our relationships with movie
          studios, internet businesses such as America Online and Yahoo and our
          more than 25 million physical store members to enhance our electronic
          commerce business.

         Expanding Product Opportunities.  We regularly explore opportunities
          to enhance entertainment experiences of our customers.  We are in the
          early stages of testing a new business initiative that sells, buys and
          trades video games, as an expansion of our traditional video game
          rental business.  This initiative is designed as a store within a
          store, leveraging a portion of our existing superstore real estate.
          If the test is successful, we plan to aggressively roll-out this
          concept to a substantial portion of our existing store base.  Although
          DVD may at some point displace videocassettes, we believe it is a
          format that complements our existing business and is well suited to
          rental or sale.  We introduced DVD for rental in the majority of our
          stores in the fourth quarter of 1998, generating the highest revenues
          of any new format in our history, and we plan to expand our DVD
          offerings in 1999.


HOLLYWOOD VIDEO STORE DESIGN
     
       Hollywood Video superstores average approximately 7,200 square feet and
are substantially larger than the stores of most of our competitors.  The store
exteriors generally feature large Hollywood Video signs and colors, which make
our stores easily visible to and recognizable by consumers.  The interior of
each store is clean and brightly lit.  Our superstores are decorated with
colorful neon, murals depicting popular screen stars and walls of video monitors
with hi-fi audio accompaniment to create an exciting Hollywood environment.
Movies are organized into 28 categories, and videocassettes are arranged
alphabetically by title within each category to assist customers in locating the
movies.  New releases are prominently displayed in easily recognizable locations
within the store.  Videocassettes are displayed with the box cover facing the
customer for ease of selection and visual impact.  We use wall-mounted and free-
standing shelves arranged in wide aisles to provide access to products and to
encourage the movement of customers throughout the store.


EXPANSION STRATEGY

Video Store Openings and Flexible Store Format

     We opened our first video superstore in October 1988 and grew to 25 stores
in Oregon and Washington by the end of 1993. In 1994 we significantly
accelerated our store expansion program, adding 88 stores and expanding into
California, Texas, Nevada, New Mexico, Virginia and Utah. In 1995 we added 192
stores and entered major new markets in the midwest, southwest, east and
southeast regions of the United States. Our expansion strategy is to continue to
open stores in regions where we have existing operations and to expand into new
geographic regions where we believe we can become a dominant video retailer. We
opened 246 stores in 1996, 356 stores in 1997 and 353 in 1998. We plan to open
over 300 stores in each of 1999 and 2000.

<PAGE>

     We have been testing a smaller superstore format that reduces the target
size of new stores from 7,500 square feet to 5,000 square feet, which lowers our
per store annual rent and initial build-out costs.  These smaller stores are
able to carry the same amount of video and video game inventory as larger stores
due to a new store design and shelving system, and we believe they retain a
"superstore" look to consumers.  This efficient design also allows us greater
flexibility in locating new stores.  Early tests suggest that these smaller,
less expensive stores are generating similar revenue volumes as larger units in
comparable locations, thus increasing our financial return on new stores.  We
are rolling out these smaller stores in most of our new locations.

     We believe the selection of locations for our stores is critical to the
success of our operations. We have assembled a new store development team with
broad and significant experience in retail tenant development.  The majority of
our new store development personnel are located in the geographic area for which
they are responsible, but all final site approval takes place at the corporate
office, where new sites are approved by a committee of senior management
personnel. Final approval of all new sites is the responsibility of the Chairman
of the Real Estate Committee of the Board of Directors. Important criteria for
the location of a Hollywood Video superstore include density of local
residential population, traffic count on roads immediately adjacent to the store
location, visibility and accessibility of the store and availability of ample
parking. We generally seek what we consider the most desirable locations,
typically locating our stores in high-visibility stand-alone structures or in
prominent locations in multi-tenant shopping developments. We typically compete
for these prime sites with other retailers, banks, restaurants and gas stations.
All of our stores are in leased premises; we do not own any real estate.
     
     Our expansion is dependent on a number of factors, including our ability to
hire, train and assimilate management and store level employees, the adequacy of
our financial resources and our ability to identify and successfully compete in
new markets, to locate suitable store sites and negotiate acceptable lease terms
and to adapt its purchasing, management information and other systems to
accommodate expanded operations.  See "Item 7-Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources."  Our expansion is also dependent on the timely fulfillment by
landlords and others of their contractual obligations to us, the maintenance of
construction schedules and the speed at which local zoning and construction
permits can be obtained.
     
     There is no assurance that we will be able to achieve our planned expansion
or that  expansion will be profitable.  Our planned expansion, including
possible growth through acquisitions, will place increasing pressure on our
management controls.  A failure to manage successfully our planned expansion
would adversely affect our business.  There is also no assurance that our new
stores will achieve sales and profitability comparable to our existing stores.

HOLLYWOOD'S INTERNET STRATEGY

     United States internet commerce, which in 1997 accounted for approximately
$10.7 billion in sales, is expected to grow to $268.8 billion by 2002, according
to International Data Corporation.  Additionally, the number of households using
e-mail, the internet or a consumer online service is predicted to grow from an
estimated 21.8 million in 1997 to 57.0 million, representing over 50% of US
households by the year 2002.

<PAGE>

     On October 1, 1999, the Company acquired Reel.com, the leading video only
store on the internet for approximately $96.9 million.  Concurrent with the
acquisition of Reel.com, a group of strategic Reel.com stockholders purchased an
equity interest in the Company.  The group of investors consists of CMG
Information Services, Inc. (NASDAQ: CMGI); Intel Corporation: Paul Allen's
Vulcan Ventures, Incorporated and Scott Beck.  Reel.com offers over 100,000 VHS
titles and 2,300 DVD titles for sale.  According to an internet study conducted
by Opinion Research Corporation in September 1998, Reel.com is the third most
recognized online merchant behind Amazon.com and CDNow and nearly 40 million
Americans recognize the Reel.com brand.  The website, located at
http://www.Reel.com, offers proprietary information about movies including
descriptions, ratings, critics' reviews, recommendations and links to star
filmographies that entertain consumers and help them select and purchase movies
online.  Consumers can also search through Reel.com's proprietary, hyperlinked
database and can preview selected videos.

     Reel.com provides us with a new distribution channel and we believe it
complements our superstores in many ways:

          While both businesses serve video retail customers, our stores
          generate most video-related business through rentals, while our online
          site generates virtually all of its business through product sales.
          Consequently, we believe there are substantial opportunities to add to
          our current on-line customer base of over 400,000 customers by
          promoting the Reel.com brand to our more than 25 million superstore
          customers.

         Reel.com sells both new and previously viewed videocassettes.  From
          our physical superstores we intend to provide Reel.com with a
          continuous supply of previously viewed videos, Reel.com's highest
          margin product.

         Reel.com's existing and developing expertise in using its intellectual
          property to help consumers browse through and select movie titles that
          fit their preferences can be leveraged in Hollywood Video stores to
          increase rentals of videos, particularly highly profitable catalog
          titles.  In the future we plan to combine Reel.com's intellectual
          property with our database of store customer rental history to provide
          personalized video recommendations.

     We believe Reel.com will also help position us for the eventual evolution
of the video business from physical delivery (through videocassettes and DVDs)
to electronic delivery directly to the home (through video-on-demand).  We
believe widespread electronic delivery of movies to the home at acceptable
quality levels will not occur for a number of years due to economic and
technological limitations.  If it becomes feasible in the future, we believe
Reel.com will position us to participate in that business.  See "Competition."

     We are evaluating strategic alternatives to maximize the value of the
acquisition to our shareholders and to provide additional financing sources for
the Reel.com business.  These alternatives could include a public offering of a
minority position in Reel.com, the sale of an equity interest in Reel.com to a
strategic partner, the creation of a Reel.com tracking stock, or other
possibilities.
     
     In February 1999, we created Internet Hollywood, Inc. to act as a holding
company for our internet businesses, which now includes only Reel.com, but which

<PAGE>

we expect may encompass additional e-commerce or internet-related businesses in
the future.  Jeffrey Jordan, who had served as our Chief Financial Officer since
September 1998, was appointed President of Internet Hollywood in February 1999.
     
          Our ability to achieve and manage growth through electronic commerce
is subject to a number of risks and uncertainties, including those associated
with acquisitions generally and those related to the internet in particular.  We
will expend financial, operational, and management resources in operating this
new business and integrating operations with our existing business.  If we are
unable to do this cost-effectively, it could have a material adverse effect on
this new business and also be detrimental to the Company as a whole.  Internet
retailing is highly competitive and is characterized by rapid technological
change and changes in user and customer requirements and preferences.  In
addition, internet-based businesses are susceptible to technical difficulties,
including viruses, security breaches or other computer system interruptions,
which can reduce the availability of products and services, disrupt or delay
order fulfillment, and reduce customer satisfaction.  Customer satisfaction may
also be adversely affected by poor performance of those parties we contract with
to handle order fulfillment.  Our efforts to build recognition as an internet
retailer, enhance website content and promote ease of use, reliability and
support for customers will require us to make additional investments in this
business segment going forward, and these investments may not be profitable. The
risks described in this paragraph will be greater if the Reel.com business
continues to grow rapidly.

PRODUCTS

     Video Rental.  Our primary source of revenue is the rental of
videocassettes. Our superstores typically carry approximately 8,000 movie titles
and 15,000 videocassettes and video games. In 1998 we began renting DVDs in all
of our stores.  Excluding new releases, movie titles are classified into 28
categories, such as "Action," "Drama," "Family" and "Children," and are
displayed alphabetically within those categories. We do not rent or sell adult
movies in our superstores. We are committed to offering more copies of popular
new releases than our competitors.

     Video Sales.  We offer new and previously viewed videos for sale.

     Video Games.  In addition to video rentals and sales, we rent and to a
lesser extent sell video games licensed by Nintendo, Sega and Sony. Each
mature Hollywood Video store offers between 1,200 and 4,000 video games.  See
"Business Strategy."

     Other Products.  We rent audio books, and for the convenience of our
customers we rent videocassette and video game players and sell blank
videocassettes, video cleaning equipment and confectionery and other items.

REVENUE SHARING

     During 1998 we formalized revenue sharing arrangements with a number of
studios which provides us with increased copies of titles in exchange for
sharing the revenues those copies generate.  In the fourth quarter of 1998, we
acquired most of our rental product under these arrangements.  We believe the
resulting increase in copy availability has led to greater customer satisfaction
and rental revenue growth for both the video store industry and the studios.  We
believe

<PAGE>

that by giving the studios a share of video rental revenue will cause them to
increase advertising on rental products.

ADVERTISING AND MARKETING

     To  further our goal of having a strong national brand that consumers  will
identify   with  the  entertainment  industry,  we  advertise  primarily   using
television,  radio, direct mail and the internet.  We frequently use cooperative
movie  advertising  funds  made available by studios and  suppliers  to  promote
certain  videos.   We  intend to increase our advertising  expenditures  in  the
future.


PRICING

     Revenue sharing arrangements significantly increased the number of new
release videocassettes purchased by the Company, thereby allowing the Company to
introduce a 5 day rental program on all product in the majority of the stores.
For the added convenience to our customers, the Company increased its prices in
the majority of the stores in the fourth quarter from $1.49 to $1.99 for catalog
titles and from $2.99 to $3.49 for new releases.  The Company believes that the
pricing structure and rental terms provide consumers convenient entertainment
and excellent value.

INVENTORY AND INFORMATION MANAGEMENT

     Inventory Management.  We maintain detailed information on inventory
utilization. We track rental activity by individual videocassette and video game
to determine appropriate buying, distribution and disposition of videocassettes
and video games. The system provides information allowing us to determine when
to sell excess videocassettes and games, and when to redistribute to new stores.
Our inventory of videocassettes and video games for rental is prepared according
to uniform standards. Each new videocassette and video game is removed from its
original carton and placed in a rental case with a magnetic security device and
bar coding is affixed to each videocassette and video game.

     Information Management.  We use a scalable client-server system and
maintain two distinct system areas: a point-of-sale ("POS") system and a
corporate information system. We maintain information, updated daily, regarding
revenue, current and historical rental and sales activity, demographics of store
membership, individual customer history, and videocassette rental patterns. This
system allows us to compare current performance against historical performance
and the current year's budget, manage inventory, make purchasing decisions on
new releases and manage labor costs. We believe our system has the ability to
continue to improve customer service, operational efficiency, and management's
ability to monitor critical performance factors.

COMPETITION

     The video retail industry is highly competitive. We compete with local,
regional and national video retail stores, including Blockbuster, and with
supermarkets, pharmacies, convenience stores, bookstores, mass merchants, mail
order operations and other retailers, as well as with noncommercial sources such
as libraries. According to the Video Software Dealers Association, in 1998 there

<PAGE>

were approximately 25,000 to 30,000 video specialty stores in the U.S.  We
believe approximately 8,500 of these stores were video retail superstores,
including approximately 4,200 Blockbuster stores.  Some of our competitors have
significantly greater financial and marketing resources, market share and name
recognition than we have.

     We believe the principal competitive factors in the video retail industry
are title selection, rental period, the number of copies of popular titles
available, store location and visibility, customer service and employee
friendliness, convenience of store access and parking and, to a lesser extent,
pricing. Substantially all of our stores compete with stores operated by
Blockbuster, most in very close proximity. As a result of direct competition
with Blockbuster, rental pricing of videocassettes and greater availability of
new releases are significant competitive factors in our business and from time
to time, in certain markets, Blockbuster has lower prices than those offered in
our stores.  If price cutting occurs on a more sustained or widespread basis, it
could have an adverse impact on our results of operations. We believe we
generally offer more titles and more copies of popular titles for longer rental
periods than the majority of our competitors. In addition to competing with
other video retailers, we compete with all leisure-time activities, especially
entertainment activities such as movies, sporting events and network and cable
television programs.

     We compete with cable, satellite and pay-per-view television systems, in
which subscribers pay a fee to see a movie selected by the subscriber. Existing
pay-per-view services offer a limited number of channels and movies and are only
available to households with a direct broadcast satellite receiver or a cable
converter to unscramble incoming signals. Digital compression technology and
other developing technologies are enabling cable companies, direct broadcast
satellite companies, telephone companies and other telecommunications companies
to transmit a much greater number of movies to homes at more frequently
scheduled intervals throughout the day. Certain cable and other
telecommunications companies have tested "video on demand" service in some
markets. Video on demand service would allow a viewer to pause, rewind and fast
forward movies. Based on publicly available information, we believe these tests
have been unsuccessful. We also believe movie studios have a significant
interest in maintaining a viable movie rental business because their sale of
videocassettes to stores represents the largest source of their revenue. In
addition, home video provides the only reliable source of revenue on "non-hit"
or "B-title" movies which make up the majority of movies produced by the major
studios each year. As a result, we believe movie studios will continue to make
movie titles available to cable television, satellite services or other
distribution channels only after revenues have been derived from the sale of
videos to video stores.  Currently, video stores receive product approximately
two months earlier than pay per view, cable and satellite distribution
companies.  The window provided to video stores by the studios has lengthened
significantly over the last two years.

     In addition, we believe substantial technological developments will be
necessary to allow pay-per-view television to match the viewing convenience and
selection available through video rental, and substantial capital expenditures
will be necessary to implement these systems. In contrast, according to Adams
Media Research, 78.8 million, or 82%, of all U.S. television households own a
VCR. Although we do not believe cable television, video on demand or other
distribution channels represent a near-term competitive threat to our business,
technological advances or changes in the manner in which movies are marketed,
including in particular the earlier release of movie titles to pay-per-view,
including DBS, cable television or other distribution channels, could make these

<PAGE>

technologies more attractive and economical, which could have a material adverse
effect on our business.

SEASONALITY

     The video retail industry generally experiences relative revenue declines
in April and May, due in part to the change to Daylight Savings Time and to
improved weather, and in September and October, due in part to the start of
school and introduction of new television programs.  The Company believes these
seasonality trends will continue.

EMPLOYEES

     As of December 31, 1998, the Company had approximately 22,197 employees, of
which 21,510 were in the retail stores and zone offices and the remainder in the
Company's corporate administrative, and warehousing operations.

     Store managers report to district managers who supervise the operations of
the stores.  The district managers report to regional managers, who report
directly to the Vice President or Senior Vice President of Operations for each
zone office.  The corporate support staff periodically has meetings with zone
personnel, regional managers, district managers and store managers to review
operations.  None of the Company's employees are covered by collective
bargaining agreements and employee relations are considered to be excellent.

SERVICE MARK

     The Company owns United States federal registrations for its service marks
"Hollywood Video", "Hollywood Video Superstores" and "Reel.com".  The Company
considers its service mark important to its continued success.


ITEM 2.   PROPERTIES

Store Locations

As of December 31, 1998, the Company's stores by location are as follows:

          California                           227
          Texas                                133
          Illinois                              69
          Ohio                                  66
          Florida                               56
          Michigan                              54
          Pennsylvania                          48
          Washington                            47
          New York                              46
          Arizona                               39
          Oregon                                38
          Georgia                               34
          Virginia                              31
          Minnesota                             30
          Tennessee                             29
          Indiana                               23
          Missouri                              23

<PAGE>

          Colorado                              22
          North Carolina                        22
          Utah                                  21
          Wisconsin                             21
          Maryland                              19
          Oklahoma                              15
          Kentucky                              15
          Nevada                                14
          New Jersey                            14
          Massachusetts                         12
          Kansas                                11
          Nebraska                              10
          Iowa                                   9
          Idaho                                  9
          Alabama                                9
          Louisiana                              8
          Arkansas                               7
          South Carolina                         6
          Connecticut                            6
          New Mexico                             6
          Rhode Island                           4
          Mississippi                            2
          South Dakota                           2
          Delaware                               1
          District of Columbia                   1
          Maine                                  1
          Total                              1,260

     All of the Company's stores are located in leased premises with an initial
lease term of five to 15 years and most have options to renew for between five
and 15 additional years.  Most of the store leases are "triple net," requiring
the Company to pay all taxes, insurance and common area maintenance expenses
associated with the properties.  The Company anticipates that future new stores
will also be located in leased premises.

     The Company's corporate headquarters is located at 9275 Southwest Peyton
Lane, Wilsonville, Oregon, and consists of approximately 123,000 square feet of
leased space.  The Company's warehouse facility is located at 25600 Southwest
Parkway Center Drive, Wilsonville, Oregon and consists of approximately 175,000
square feet of leased space.  These facilities are leased pursuant to agreements
that expire November 2008 and November 2005, respectively.

<PAGE>

ITEM 3.        LEGAL PROCEEDINGS

     In April 1998 a complaint seeking injunctive relief and monetary damages in
the amount of approximately $200 million was filed against us, entitled Rentrak
Corporation v. Hollywood Entertainment, et al., Case No. 98-04-02811, Circuit
Court for the County of Multnomah, Portland, Oregon.  The plaintiff, Rentrak,
alleges that we are contractually obligated until December 31, 2011 to deal
exclusively with Rentrak whenever we obtain videocassettes on a revenue sharing
basis, and that we have violated this alleged obligation by obtaining
videocassettes on a revenue sharing basis directly from movie studios.  In
addition, Rentrak alleges that we have violated alleged audit and reporting
obligations under contractual arrangements. We believe this suit is without
merit and are vigorously defending the litigation. We do not believe the
ultimate outcome of the litigation will have a material effect on the Company.
If, however, Rentrak prevails, the results could have an adverse effect on our
relationships with revenue sharing studios and on our financial condition and
results of operations.
     
     In July 1998 a related lawsuit seeking monetary damages in the amount of at
least $5 million was filed against the Company by Twentieth Century Fox Home
Entertainment, Inc. ("Fox"), entitled Twentieth Century Fox Home Entertainment,
Inc. v. Hollywood Entertainment Corporation and Does 1 through 100, Case No. SC
053 551, Superior Court for the County of Los Angeles, Los Angeles, California.
Fox alleges that the Company has knowingly or negligently reported inaccurate
transaction-related data concerning Fox titles to Rentrak Corporation, and that
the Company either knew or should have known that Rentrak would report to Fox
the same allegedly inaccurate transaction data for purposes of Fox's generation
of invoicing to Rentrak. In March 1999, Fox filed an amended complaint against 
the Company in which it added allegations of potential misrepresentation and 
fraud. We believe this suit is without merit and are vigorously defending the 
litigation. We do not believe the ultimate outcome of the litigation will have 
a material effect on the Company. If, however, Fox prevails, the results could 
have an adverse effect on our relationships with revenue sharing studios and on 
our financial condition and results of operations.

<PAGE>

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

     At a special meeting held on December 30, 1998, Hollywood Entertainment
Corporation common shareholders approved the conversion of 2,380,263 shares of
Series A Redeemable Preferred Stock issued and sold in connection with the
Reel.com acquisition into Common Stock on a one-for-one basis. The vote on the
matter was as follows:

          In favor:               30,190,774
          Against or withheld:        35,266
          Abstentions:                20,864


ITEM 4(A).  EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT

     The following table sets forth information with respect to our executive
officers and certain other key employees as of March 26, 1999.

<TABLE>
<S>                  <C>  <C>
Name                 Age  Positions with the Company

Mark J. Wattles*     38   Chairman of the Board and Chief Executive Officer
Jeffrey B. Yapp*     40   President and Chief Operating Officer
Jeffrey D. Jordan*   40   President, Internet Hollywood, Inc.
David G. Martin*     33   Executive Vice President and Chief Financial Officer
Donald J. Ekman*     46   Senior Vice President, General Counsel, Secretary 
                          and Director
Alex M. Bond         29   Senior Vice President of Internet Design
F. Bruce Giesbrecht  39   Senior Vice President of Strategic Planning
Glenn E. Hahn        47   Senior Vice President of Human Resources
Dale A. Naftzger     53   Senior Vice President of Operations
Roger J. Osborne     46   Senior Vice President of Operations
J. Patrick O'Malley  48   Senior Vice President of Information Systems
William E. Shull III 40   Senior Vice President of Operations
William M. Spae      47   Senior Vice President of Operations Administration

</TABLE> 
    
     MARK J. WATTLES founded the Company in June 1988 and has served as Chairman
of the Board and Chief Executive Officer since that time. Mr. Wattles served as
President of the Company from June 1988 to September 1997.  Mr. Wattles has been
an owner and operator in the video rental industry since 1985. He has been a
participant and key speaker in several entertainment industry panels and
conferences and currently serves as a member of the Video Software Dealers
Association (VSDA) Board of Directors.

     JEFFREY B. YAPP was appointed President and Chief Operating Officer of the
Company in September 1997. Prior to joining the Company, Mr. Yapp served as
President Worldwide of Twentieth Century Fox Home Entertainment, Inc. from May
1997 until September 1997, and as President of Fox International from October
1994 to May 1997.  Previously, Mr. Yapp was Vice President of Marketing for
Pizza Hut, Inc. from October 1994, and International Vice President of Ernest
and Julio Gallo Winery from April 1986 to October 1992.

<PAGE>

     JEFFREY D. JORDAN became President of Internet Hollywood, Inc. in February
1999.  From September 1998 to February 1999, Mr. Jordan was Chief Financial
Officer of the Company.  Mr. Jordan worked at the Walt Disney Company from
September 1990 until joining Hollywood, most recently as Senior Vice President
and Chief Financial Officer of the Disney Store Worldwide, a specialty retailer
that operates over 600 company-owned stores in eleven countries. Prior to that
position, he was Vice President in Disney's corporate Strategic Planning group.
Mr. Jordan worked at The Boston Consulting Group from September 1987 to
September 1990.

     DAVID G. MARTIN was appointed Executive Vice President and Chief Financial
Officer, in February 1999.  From 1996 until he joined the Company, Mr. Martin
worked for NationsBanc Montgomery Securities LLC, most recently as a Managing
Director of high yield finance.  From 1991 to 1996, he was a Vice President of
high yield finance and merchant banking at Nomura Securities International, Inc.
Prior to 1991 Mr. Martin was an investment banker with Salomon Brothers, Inc,
specializing in mergers and acquisitions.

     DONALD J. EKMAN became a director of the Company in June 1993, became Vice
President and General Counsel in March 1994 and became Senior Vice President in
1995. Mr. Ekman was a partner in Ekman & Bowersox from January 1992 until
March 1994, and from August 1990 until December 1991 he practiced law with
Foster Pepper & Shefelman.

     ALEX M. BOND joined Internet Hollywood in March 1999 as Senior Vice
President of Internet Development.  From January 1997 until February 1999 he was
Executive Vice President of Strategic Development for Just for Feet, Inc.  From
January of 1995 until January 1997 he was with Hollywood Entertainment
Corporation as Vice President of Strategic Development. From February 1993 until
January 1995, he was an investment banker with Montgomery Securities
specializing in growth retail.

     F. BRUCE GIESBRECHT was named Senior Vice President of Product Management
in January 1996 and became Senior Vice President of Strategic Planning in
January 1998.  He joined the Company in May 1993 as Vice President of Corporate
Information Systems and Chief Information Officer. Mr. Giesbrecht was a founder
of RamSoft, Inc., a software development company specializing in management
systems for the video industry, and served as its President.

     GLENN E. HAHN joined the Company in April 1996 as Senior Vice President of
Operations and in January 1997 became Senior Vice President of Human Resources.
From 1993 to 1996 Mr. Hahn was Senior Vice President Director of Stores for
Fayva/Parade of Shoes (a specialty retail footwear division of J. Baker),
overseeing approximately 400 stores. From 1979 to 1993 Mr. Hahn worked for
Payless Shoesource (a division of May Department Stores) in various capacities.
From 1987 to 1993 Mr. Hahn worked as Division Operations Manager for Payless
Shoesource, overseeing approximately 580 specialty retail footwear stores at the
time of his departure.

     DALE A. NAFTZGER joined the Company in April 1996 as Senior Vice President
of Operations.  From March 1995 to December 1995, Mr. Naftzger was Chief
Operating Officer of Caribou Coffee Company, a privately owned specialty coffee
retailer.  From 1994 to 1995 Mr. Naftzger was President and Chief Executive
Officer of Chop Chop Chinese to You, a Chinese food delivery business.  From
1992 to 1994 Mr. Naftzger was Senior Vice President Operations for Checkers
Drive-In Restaurants, overseeing all 248 company-owned and 200 franchised units.

<PAGE>

     ROGER J. OSBORNE is the Senior Vice President of Operations.  Prior to
joining Hollywood in January 1999, he was the Executive Vice President of J.
Baker,Corporation, an apparel and footwear retailer, and President of its Work
`N Gear Division since June 1997.  Before joining J. Baker Corporation, Mr.
Osborne was Senior Vice President and Zone Director for Mid-West and East coast
markets for Hollywood from November 1996 until May of 1997, and from January
1995 to November 1996, he served as the Senior Vice President of J. Baker, Inc.
and Director of its licensed shoe department business.  From 1988 until January
1995, Mr. Osborne was employed as Senior Vice President and Director of Store
Operations for Pic `n Pay Stores, Inc., a chain of discount footwear stores.

     J. PATRICK O'MALLEY joined the Company in October 1995 as Senior Associate
General Counsel.  In May 1998, Mr. O'Malley was promoted to Senior Vice
President of Asset Management.  In January 1999, Mr. O'Malley became the Senior
Vice President of Information Systems.  Prior to joining the Company,
Mr. O'Malley practiced law for over 17 years and was most recently the senior
partner in O'Malley & Antell.

     WILLIAM B. SHULL III joined the Company in February 1998 as Senior Vice
President of Operations.  Mr. Shull previously served in various capacities at
AutoZone, most recently as the Regional Vice President overseeing the operations
and development for 250 stores.

     WILLIAM M. SPAE joined the Company in July 1996 as Senior Vice President of
Operations, and in 1997 became Senior Vice President of Operations
Administration.  From 1991 to June 1996 Mr. Spae worked for Wendy's
International as Divisional Vice President, overseeing the development of
approximately 130 new units during this period and the overall operations of
more than 100 company-owned and 150 franchised units at the time of his
departure. From 1987 to 1991 Mr. Spae was a Zone Vice President for Taco Bell
Corporation, overseeing more than 160 company-owned and approximately 100
franchised units.
*Executive officers

<PAGE>


                                     PART II

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

     The Company has not paid any cash dividends on its common stock since its
initial public offering in July 1993 and anticipates that future earnings will
be retained for the development of its business.  The payment of any future
dividends will be at the discretion of the Company's Board of Directors.  Loan
covenants contained in its senior subordinated notes limit the amount of
dividends the Company may pay and the amount of stock it may repurchase.  As of
December 31, 1998, these covenants effectively prohibit any dividends or stock
repurchases.  The Company's common stock is traded on the Nasdaq National Market
("Nasdaq") under the symbol "HLYW".  The following table sets forth the
quarterly high and low last sale prices per share, as reported on Nasdaq.

<TABLE>
<CAPTION>

                       1998                 1997
                 ----------------     -----------------
     Quarter     High       Low       High       Low
     ----------  ------     -----     ------     ------
     <S>        <C>        <C>       <C>        <C>
     First      $14.81     $8.03     $25.88     $18.25
     
     Second      15.00     10.13      25.25      17.50
     
     Third       20.00      9.75      23.38      11.50
     
     Fourth      29.88      8.75      14.38       8.13

</TABLE>

     As of December 31, 1998, there were 211 holders of record of the Company's
common stock.
          
<PAGE>
     
     
ITEM 6.   SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

                                 YEAR ENDED DECEMBER 31,
                      ---------------------------------------------
                         1998     1997     1996     1995    1994
                      ---------------------------------------------
                            (in thousands, except per share amounts)

<S>                  <C>        <C>       <C>       <C>      <C>
OPERATING RESULTS:
Revenue              $763,908   $500,501  $302,342  $149,430  $ 73,288
                     --------   --------  --------  --------  --------

Income (loss) from
 operations          (37,913)     41,681    38,418    17,537    12,610
                     --------   --------  --------  --------  --------

Interest expense       31,893     13,806     4,339       490      795
                     --------   --------  --------  --------  --------
Income (loss) before
 extraordinary item 
 and cumulative 
 effect of a change 
 in accounting
 principle            (50,464)      5,559    20,630    11,786    8,143
                      --------   --------  --------  --------  -------
Net income (loss)     (50,464)      4,996    20,630     9,226    8,143
                      --------   --------  --------  --------  -------
--------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE BEFORE EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE:
Basic                 $(1.30)     $ 0.15    $ 0.60    $ 0.37   $ 0.33
Diluted                (1.30)       0.15      0.59      0.36     0.32
NET INCOME (LOSS)
 PER SHARE:
 Basic               $ (1.30)     $ 0.14    $ 0.60    $ 0.28   $ 0.33
 Diluted               (1.30)       0.13      0.59      0.28     0.32
------------------------------------------------------------------------------
BALANCE SHEET DATA:
Videocassette rental
 inventory, net       $259,255   $226,051  $144,264  $ 86,889  $36,656
Property and 
 equipment, net        328,182    234,497   115,812    65,958   14,606
Total assets           934,434    689,123   451,295   334,660  142,861
Long-term
 obligations (1)       392,145    233,496    82,361     7,971    3,505
Mandatorily 
 redeemable common 
 stock                       -          -         -    54,250        -
Shareholders' equity   345,695    289,896   274,703   217,783  110,765
------------------------------------------------------------------------------
OTHER DATA
Adjusted EBITDA (2)
Hollywood 
 Superstores          $129,397    $76,880   $57,740   $31,516  $17,875
Reel.com               (7,322)          -         -         -        -
 --------             --------  ---------  --------  --------  -------
Consolidated           122,075     81,486    57,740    31,516   17,875
--------------------------------------------------------------------------------
</TABLE>

(1) Includes the current portion of long-term obligations.

(2) Adjusted EBITDA is significant to the Company's calculations of its
    financial covenants and represents income from operations before 
    depreciation and amortization plus non-cash expenses that reduced EBITDA, 
    less 30% of rental revenue after deducting from such 30% of rental revenue 
    any cash charges associated with the acquisition of new release 
    videocassettes.  The non-cash expenses represent the cost of goods sold on 
    previously viewed videocassettes and losses on inventory shrink. The 
    Company believes 30% of rental revenue approximates amounts spent on 
    purchase of new release videocassettes which are capitalized.  Adjusted 
    EBITDA should not be viewed as a substitute for Generally Accepted 
    Accounting Principles (GAAP) measurements such as net income or cash
    flow from operations.

<PAGE>

FINANCIAL HIGHLIGHTS
<TABLE> 
<CAPTIONN>
                                   Year Ended December 31,
                       -----------------------------------------------
                           1998      1997     1996       1995     1994
                       -----------------------------------------------
             (in thousands, except per share amounts and other operating data)
<S>                    <C>       <C>       <C>      <C>       <C>
FINANCIAL DATA:
Rental revenue         $633,140  $418,527  $252,625  $123,894 $ 61,941
Product sales           130,768    81,974    49,717    25,536   11,347
                       --------  --------  --------  -------- --------
Total revenue           763,908   500,501   302,342   149,430   73,288
                       --------  --------  --------  -------- --------
Net income (loss) (1)  (50,464)     4,996    20,630     9,226    8,143
------------------------------------------------------------------------------
PRO FORMA STATEMENT OF
 OPERATIONS DATA
HOLLYWOOD VIDEO
 SUPERSTORES (2):
Income from 
 operations             $83,921  $ 53,083  $ 38,418  $ 17,537  $ 9,745
Net income               31,139    23,573    20,630    11,786    6,277
Net income per
diluted share (3)          0.78      0.63      0.59      0.36     0.25
REEL.COM (2):
Loss from operations    (7,479)         -         -         -        -
------------------------------------------------------------------------------
OPERATING DATA:
Number of stores at
 year end                 1,260       907       551       305      113
Comparable store 
 revenue increase (4)        8%        3%        7%        1%       7%
------------------------------------------------------------------------------
OTHER DATA:
Weighted average 
 shares outstanding:
  Basic                  38,844    36,659    34,162    32,230   24,717
  Diluted                38,844    37,718    35,159    32,962   25,578

</TABLE>
<PAGE>

(1)  Net income(loss) for the years presented includes the following special
 and/or unusual charges:

<TABLE>
<S>                          <C>       <C>        <C>        <C>        <C>
(in thousands)                  1998       1997       1996       1995      1994
----------------------       -------   --------   --------   --------   -------
SPECIAL AND/OR UNUSUAL
 PRE-TAX CHARGES:
HOLLYWOOD VIDEO
 SUPERSTORES:
Settlement of securities
 class action lawsuit             -     $18,874          -          -         -
Write-off obsolete video
 game inventory and related
 accessories                      -       6,798          -          -         -
Failed self-tender
 offer                            -       4,604          -          -         -
Inventory valuation
 charge                     $99,910           -          -          -         -
REEL.COM:
Purchased in-process
 research and development     1,900           -          -          -         -

OTHER UNUSUAL CHARGES,
 NET OF RELATED INCOME
 TAX EFFECT:
HOLLYWOOD VIDEO
 SUPERSTORES:
Extraordinary loss on
 extinguishment of debt           -         563          -          -         -
Cumulative effect of a
 change in accounting
 principle                        -           -          -    $ 2,560         -

</TABLE>

(2) Pro forma income (loss) from operations and net income eliminates special
 and/or unusual charges noted above by segment and in addition Reel.com loss
 from operations excludes goodwill amortization of $12.5 million (see Notes 4,
 10 and 15 to the Consolidated Financial Statements).  See Note 17 to the
 Consolidated Financial Statements for the presentation of segment reporting.

(3) Net income per diluted share for Hollywood Video Superstores was computed by
 assuming a 40.5% effective tax rate and diluted weighted average shares
 outstanding of 40,133.

(4)  A store is comparable after it has been open and owned by the Company for
 12 full months.  An acquired store converted to the Hollywood Video name and
 store design is removed from the comparable store base when the conversion
 process is initiated and returned 12 full months after reopening.

<PAGE>

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

RESULTS OF OPERATIONS

Summary Results of Operations

     The Company's net loss for 1998 was $50.5 million, compared to net income
of $5.0 million and $20.6 million in 1997 and 1996, respectively.  The 1998 and
1997 results included special and/or unusual items as previously noted.

     The following table sets forth, for the periods indicated, (i) selected
statement of operations data expressed as a percentage of total revenue; and
(ii) the number of stores open at the end of each such period.

<TABLE>
<CAPTION>
                                      Year Ended December 31,
                                      ------------------------
                                        1998   1997(1)    1996
                                      ------    ------  ------
<S>                                   <C>       <C>     <C>
REVENUE:
  Rental revenue                       82.9%     83.6%   83.6%
  Product sales                        17.1%     16.4%   16.4%
                                      ------    ------  ------
                                      100.0%    100.0%  100.0%
                                      ------    ------  ------
OPERATING COSTS AND EXPENSES:
  Cost of product sales                11.5%     10.2%   10.2%
  Operating and selling                72.6%     72.4%   69.1%
  General and administrative            4.9%      5.4%    6.0%
  Amortization of intangibles           2.6%      1.3%    2.0%
  Purchased in-process research and
   development                          0.3%         -       -
  Inventory valuation charge           13.1%         -       -
                                      ------    ------  ------
                                      105.0%     89.3%   87.3%
                                      ------    ------  ------
INCOME (LOSS) FROM OPERATIONS         (5.0%)     10.7%   12.7%
Nonoperating expense                  (4.1%)    (2.7%)  (1.4%)
                                      ------    ------  ------
Income (loss) before income taxes     (9.1%)      8.0%   11.3%
                                      ======    ======  ======
Net income (loss)                     (6.6%)      4.7%    6.8%
                                      ======    ======  ======
------------------------------------------------------------------------------
Number of superstores - end of period  1,260       907     551

</TABLE>

(1)  Adjusted to exclude the special and/or unusual costs and expenses in 1997.
     See Notes 10 and 15 to the Consolidated Financial Statements.
<PAGE>
REVENUE

     Revenue increased by $263.4 million, or 53%, in 1998 compared to 1997,
primarily due to the addition of 353 new superstores in 1998.  Revenue was also
favorably impacted by an increase of 8% in comparable store revenue in the
current year and the purchase of Reel.com in October 1998, which added $7.3 (on-
line revenue of $6.8 million) million in revenue.  Revenue increased by $198.2
million, or 66%, in 1997 compared to 1996, due to the addition of 356 new
superstores in 1997 combined with an increase of 3% in comparable store revenue.
The Company ended 1998 with 1,260 superstores operating in 42 states, compared
to 907 stores operating in 42 states at the end of 1997 and 551 stores operating
in 29 states at the end of 1996.  The Company increased its prices at most
stores in the fourth quarter of 1998 from $1.49 to $1.99 for catalog titles and
from $2.99 to $3.49 for new releases.

OPERATING COSTS AND EXPENSES

Cost of Product Sales

     The cost of product sales as a percentage of product revenue increased from
62.4% in 1997, as adjusted for the game inventory write-off discussed below, to
65.2% in 1998, excluding Reel.com.  The decline in product margin in 1998 is
primarily due to continuing pricing pressure on sell-through video merchandise
from mass merchant retailers, which use video sales as a loss leader to drive
customer traffic.  The cost of product sales, as a percentage of product
revenue, including Reel.com was 67.1% in 1998.

     The cost of product sales as a percentage of product sales increased from
61.8% in 1996 to 65.2% in 1997 due to the write-off of obsolete video game
inventory and related accessories caused by advancements in video game
technology (see Note 15 to the Consolidated Financial Statements) and pricing
pressures in the fourth quarter of 1997.  The cost of product sales, as
adjusted, as a percentage of product sales remained relatively constant in 1997
compared to 1996.

Operating and Selling

     Operating and selling expenses as adjusted, which consist principally of
all store expenses, including payroll, occupancy, advertising, depreciation and
rental revenue sharing, increased slightly from 72.4% in 1997 to 72.6% in 1998
primarily due to increased advertising and revenue sharing expense, mostly
offset by increased revenues without a proportionate increase in other store
operating expenses.  The Company anticipates that rental product amortization
combined with revenue sharing expense will increase as a percentage of total
revenue in 1999.  This increase is due to the Company's new revenue sharing
business model and new amortization method (see Note 4 to the Consolidated
Financial Statements).  The Company expects that other operating and selling
expenses will decline as a percentage of revenue due to the increased sales
generated by the revenue sharing arrangements.
     
     Operating and selling expenses, as adjusted increased as a percentage of
total revenue to 72.4% in 1997 from 69.1% in 1996.  This increase was due to the
lower average revenues per store in 1997, resulting primarily from the addition
of 606 new superstores in 1996 and 1997, which had lower revenue per store than
mature Hollywood Video superstores.

<PAGE>

General and Administrative

     General and administrative expenses, as adjusted, decreased as a percentage
of total revenue to 4.9% in 1998 compared to 5.4% in 1997 and 6.0% in 1996.
These decreases as a  percentage of total revenue were due to the increase in
total revenue without a proportionate increase in corporate overhead.

Amortization of Intangibles

     Amortization of intangibles increased by $13.4 million in 1998 compared to
1997 due to the Reel.com acquisition as discussed in Note 7 to the Consolidated
Financial Statements combined with the full year impact of amortizing deferred
financing costs associated with the Company's notes and credit facility.
Amortization of intangibles increased by $0.7 million in 1997 compared to 1996,
primarily due to the impact of amortizing deferred financing costs associated
with the Company's senior subordinated notes and new revolving credit facility.

Other Operating Charges

     The Company incurred a non-cash charge of $1.9 million in 1998 to write off
the value of purchased in-process research and development costs in connection 
with the acquisition of Reel.com.  The Company also changed its method of
amortizing its videocassette rental inventory in 1998 and recorded a non-cash 
charge of $99.9 million to reflect the application of the new method to 
inventory on hand at October 1, 1998.  See Notes 4 and 7 to the Consolidated 
Financial Statements.

Nonoperating Income (Expense), Net

     Interest expense, net of interest income increased in 1998 compared to 1997
and 1996 due to increased levels of borrowings associated with the issuance of
senior subordinated notes in August 1997 (see Note 10 to the Consolidated
Financial Statements), combined with increased borrowings under the revolving
credit facility.  The Company incurred a cash charge of $18.9 million in 1997
for the settlement of the securities litigation (see Note 15 to the Consolidated
Financial Statements).


INCOME TAXES

     The Company's effective tax rate was a benefit of 27.6% in 1998 compared to
a provision of 40.5% in 1997 and a provision of 39.8% in 1996, given the
Company's net loss for financial reporting purposes versus net income for tax
reporting purposes as a result of the non-deductibility of goodwill amortization
associated with the Reel.com acquisition (see Note 11 to the Consolidated
Financial Statements).  The Company believes that in 1999 the effective tax 
rate will exceed 40%.

LIQUIDITY AND CAPITAL RESOURCES

     The Company generates substantial operating cash flow because most of its
revenue is received in cash.  The amount of cash generated from operations in
1998 significantly exceeded debt service requirements of the Company' long-term
obligations.  The capital expenditures (including purchases of videocassette
rental inventory) of the Company are primarily funded by the excess operating
cash flow and through loans under a revolving line of credit.  The Company has a
$300 million revolving line of credit available to address the timing of certain
working capital and capital expenditure disbursements.  The Company believes
cash

<PAGE>

flow from operations, supplemented by the availability of a revolving line of
credit, will provide the Company with adequate liquidity and the capital
necessary to achieve its planned expansion through at least 1999.

     At December 31,1998, the Company had cash and cash equivalents of $4.0
million and a working capital deficit of $64.8 million.  Videocassette rental
inventories are accounted for as noncurrent assets under Generally Accepted
Accounting Principles because they are not assets which are reasonably expected
to be completely realized in cash or sold in the normal business cycle.
Although the rental of this inventory generates a substantial portion of the
Company's revenue, the classification of these assets as noncurrent excludes
them from the computation of working capital.  The acquisition cost of
videocassette rental inventories, however, is reported as a current liability
until paid and, accordingly, included in the computation of working capital.
Consequently, the Company believes working capital is not as significant a
measure of financial condition for companies in the video retail industry as it
is for companies in other industries.  Because of the accounting treatment of
videocassette rental inventory as a noncurrent asset, the Company may, from time
to time, operate with a working capital deficit.

Cash Provided by Operating Activities

     During 1998, net cash generated by operations was $69.1 million higher than
the prior year.  This increase was primarily due to an increase in depreciation
and amortization expenses combined with improved results of operations,
excluding the impact of the non-cash charges related to the inventory valuation
charge and the write-off of purchased in process research and development costs
(see "Results of Operations"), partially offset by a net unfavorable change in
deferred income taxes (see Note 11 to the Consolidated Financial Statements).

Cash Used in Investing Activities

     Net cash used in investing activities increased by $100.3 million from the
prior year primarily due to increased purchases of videocassette rental
inventory for new and existing stores and an increase in investment in
businesses acquired, partially offset by reduced capital expenditures with
respect to new store construction, remodeling of certain existing stores and for
the continued development of management information systems (see "Capital
Expenditures").  The Company paid approximately $32.7 million in cash for
Reel.com and approximately $14.1 million for 41 video stores, of which $8.1
million was paid in cash and $6.0 million was paid with a note payable (see Note
7 to the Consolidated Financial Statements). The Company incurred a $99.9
million non-cash, pre-tax charge in the fourth quarter of 1998 for a change in
the method of amortization of its videocassette rental inventory (see Note 4 of
the Consolidated Financial Statements).

Cash Provided by Financing Activities

     Net cash provided by financing activities increased by $40.2 million from
the prior year primarily due to the issuance of 3.4 million shares of the
Company's common stock in connection with the Reel.com acquisition for an
aggregate amount of $45.4 million (see Note 7 to the Consolidated Financial
Statements), partially offset by the repurchase of 850,000 shares of the
Company's common stock for approximately $10.5 million.

<PAGE>

Capital Expenditures

The Company's capital expenditures include product for stores, store equipment
and fixtures, remodeling a certain number of existing stores, implementing and
upgrading office and store technology and opening for new store locations.  Each
new store opening requires initial capital expenditures, including leasehold
improvements, inventory, equipment and costs related to site location, lease
negotiations and construction permits of $0.6 million, excluding leasehold
improvements that are customarily paid for by the property developer.  These
capital expenditures will be funded primarily by cash  generated from
operations, supplemented by the availability of a senior revolving line of
credit or other forms of equipment financing and/or leasing, if necessary.


YEAR 2000 ISSUES

   The year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year.  For example,
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000.  To the extent that the
Company's software applications contain source code that is unable to interpret
appropriately the upcoming calendar year 2000 and beyond, some level of
modification or replacement of such applications will be necessary to avoid
system failures and the temporary inability to process transactions or engage in
other normal business activities.

   The Company's year 2000 project group has been coordinating the Company's
year 2000 compliance efforts and has identified all computer-based systems and
applications (including embedded systems) the Company uses in its operations
that might not be year 2000 compliant.  The Company is determining what
modifications or replacements will be necessary to achieve compliance;
implementing any necessary modifications and replacements; conducting tests
necessary to verify that the modified systems are operational; and transitioning
the compliant systems into the regular operations of the Company.  The Company
estimates that these actions with respect to systems that we believe would have
a material effect on the business are approximately three-fourths complete.  The
Company estimates that all critical systems and applications will be year 2000
compliant by June 30, 1999.

   The year 2000 project group is also examining the Company's relationship with
certain key outside vendors and others with whom the Company has significant
business relationships to determine, to the extent practical, the degree of such
outside parties' year 2000 compliance.  The project group has begun testing
procedures with certain vendors identified as having potential year 2000
compliance issues.  The Company does not believe that its relationship with any
third party is material to the Company's operations and, therefore, does not
believe that the failure of any particular third party to be year 2000 compliant
would have a material adverse effect on the Company. The Company believes that,
if it, or any third party with whom the Company has a significant business
relationship, has a year 2000 related systems failure, the most significant
impact would likely be the inability, with respect to a group of stores, to
conduct operations due to a power failure, to deliver inventory in timely
fashion, to receive certain products from vendors or to process electronically
customer sales at store level.  The Company does not anticipate that any such
impact would be material to the Company's liquidity or results of operations.

<PAGE>

   The year 2000 project group is establishing and implementing a contingency
plan to provide for viable alternatives to ensure that the Company's core
business operations are able to continue in the event of a year 2000 related
systems failure.  The Company expects to have a comprehensive contingency plan
established by June 30, 1999.

   The Company estimates that it will incur approximately $0.7 million, to
address year 2000 compliance issues, which includes the estimated costs of all
modifications, testing and consultant fees.

GENERAL ECONOMIC TRENDS, QUARTERLY RESULTS AND SEASONALITY

     The Company anticipates that its business will be affected by general
economic and other consumer trends.  Future operating results may be affected by
various factors, including variations in the number and timing of new store
openings, the performance of new or acquired stores, the quality and number of
new release titles available for rental and sale, the expense associated with
the acquisition of new release titles, additional and existing competition,
marketing programs, weather, special or unusual events and other factors that
may affect retailers in general.  In addition, any concentration of new store
openings and the related new store pre-opening costs and other expenses
associated with the opening of new stores near the end of a fiscal quarter could
have an adverse effect on the financial results for that quarter and could, in
certain circumstances, lead to fluctuations in quarterly financial results.

     The video retail industry generally experiences relative revenue declines
in April and May, due in part to the change in Daylight Savings Time and due to
improved weather, and in September and October, due in part to the start of
school and the introduction of new television programs.  The Company believes
these seasonality trends will continue.

FORWARD LOOKING STATEMENTS

     The information set forth in this report in Item 1, Business, under the
caption "Expansion Strategy" with respect to planned new store openings and in
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, under the caption "Liquidity and Capital Resources" with respect
to planned new store openings and the sufficiency of financial resources and
under the caption "Year 2000 Issues" with respect to Year 2000  preparedness and
financial consequences includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and is subject to the safe harbor
created by that section.  Certain factors that could cause results to differ
materially from those projected in the forward-looking statements are set forth
in Item 1, Business, under the captions "Expansion Strategy" and "Competition,"
in Item 7, Management's Discussions and Analysis of Financial Conditions and
Results of Operations, under the caption "General Economic Trends, Quarterly
Results and Seasonality" and in Item 3, Legal Proceedings.


<PAGE>

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Incorporated by reference to Item 14 of this report on Form 10-K.

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

     None

<PAGE>
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information with respect to directors of the Company is hereby incorporated
by reference from the Company's definitive proxy statement, under the caption
"Nomination and Election of Board of Directors," for its 1999 annual meeting of
shareholders (the "1999 Proxy Statement") to be filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, which proxy statement is anticipated to be filed no later
than 120 days after the end of the Company's fiscal year ended December 31,
1998.  Information with respect to executive officers of the Company is included
under Item 4(a) of Part I of this report.

ITEM 11.  EXECUTIVE COMPENSATION

     Information required by this Item 11 is hereby incorporated by reference
from the 1999 Proxy Statement.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information required by this Item 12 is hereby incorporated by reference
from the 1999 Proxy Statement.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information required by this Item 13 is hereby incorporated by reference
from the 1999 Proxy Statement.

<PAGE>

                                     PART IV

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

     Listed below are all financial statements, notes, schedules and exhibits
filed as part of this Annual Report on Form 10-K:

     (a)(1), (2) FINANCIAL STATEMENTS

     The following financial statements of the Registrant, together with the
     Report of Independent Accountants dated March 1, 1999, on pages F-1 to F-24
     of this report on Form 10-K are filed herewith:

     (i)  Financial Statements

     Report of Independent Accountants

     Consolidated Balance Sheets as of December 31, 1998 and 1997

     Consolidated Statements of Operations for the years ended December 31,
     1998, 1997 and 1996

     Consolidated Statements of Changes in Shareholders' Equity for the years
     ended December 31, 1998, 1997 and 1996

     Consolidated Statements of Cash Flows for the years ended December 31,
     1998, 1997 and 1996

     Notes to Consolidated Financial Statements

     (ii)  FINANCIAL SCHEDULES

       All financial schedules are omitted as the required information is
     inapplicable or the information is presented in the respective consolidated
     financial statements or related notes.
     (a)(3)    Exhibits

     The following exhibits are filed with or incorporated by reference into
     this Annual Report:

<PAGE>

EXHIBIT
NUMBER         DESCRIPTION
------         -----------
3.1       1993B Restated Articles of Incorporation, as amended  (incorporated by
          reference to the Registrant's Registration Statement on Form S-1 (File
          No. 33-63042)(the "Form S-1") to Exhibit 4 to the Registrant's
          Registration Statement on Form S-3 (File No. 33-96140), and to Exhibit
          3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
          ended September 30, 1998.

3.2       Bylaws (incorporated by reference to Exhibit 3.2 to the Form S-1).

4.1       Rights of Security Holders - See Article II of Exhibit 3.1 and
          Articles I and V of Exhibit 3.2.

10.1      Indenture, dated August 13, 1997, between the Registrant and U.S.
          Trust Company of California, N.A. (incorporated by reference to
          Exhibit 4.1 to the Registration Statement on Form S-4 (No.333-351)(the
          "1997 S-4").

10.2      1993 Stock Incentive Plan, as amended (incorporated by reference to
          Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the
          quarter ended June 30, 1997).

10.3      Form of Incentive Stock Option Agreement (incorporated by reference to
          Exhibit 10.1 of the Form S-1).

10.4      Form of Nonqualified Stock Option Agreement (incorporated by reference
          to Exhibit 10.3 of the Form S-1).

10.5      Revolving Credit Agreement, dated as of September 5, 1997, among the
          Registrant, as Borrower, and Societe Generale, DLJ Capital Funding,
          Inc. Goldman Sachs Credit Partners L.P. and certain other financial
          institutions, as Lenders, and Societe Generale, as Agent for the
          Lenders, Donaldson, Lufkin & Jenrette Securities Corporation, as
          Administrative Agent, Goldman Sachs Credit Partners, L.P., as
          Documentation Agent, and Credit Lyonnais Los Angeles Branch, Barclays
          Bank PLC, Deutsche Bank AG, New York Branch, U.S. Bank National
          Association and KeyBank National Association, as Co-Agents
          (incorporated by reference to Exhibit 10.1 of the 1997 S-4).

10.6      Employment letter between the Registrant and Jeffrey B. Yapp, dated 
          July 31, 1997 (incorportated by reference to Exhibit 10.7 to the 
          Registrant's Annual Report on Form 10-K for the year ended 
          December 31, 1998). *

<PAGE>

18.1      Preferability letter from PricewaterhouseCoopers LLP.

21.1      List of Subsidiaries.

23.1      Consent of PricewaterhouseCoopers LLP.

27.1 Financial Data Schedule.
          

          (b)  REPORTS ON FORM 8-K:

          A report on Form 8-K was filed by the Company on October 15, 1998 to
          report under Item 2 the acquisition of Reel.com, Inc.  Form 8-K/A was
          filed by the Company on December 15, 1998 to report under Item 7 the
          financial statements and pro forma financial information relating to
          the acquisition of Reel.com, Inc.
          
          
          *Management Contract.
          
          
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of Hollywood Entertainment Corporation


In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Hollywood Entertainment Corporation and its subsidiaries at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.  These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits.  We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.

As discussed in Note 4 of the consolidated financial statements, the Company
changed its amortization method for videocassette rental inventory in 1998.


PricewaterhouseCoopers LLP

Portland, Oregon
March 1, 1999

<PAGE>

<TABLE>
<CAPTION>
                       HOLLYWOOD ENTERTAINMENT CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)
                                        
                                               December 31
                                           ------------------
                                               1998      1997
                                           --------  --------
<S>                                       <C>       <C>
ASSETS
--------
Current assets:
 Cash and cash equivalents                 $ 3,975   $ 3,909
 Accounts receivable                        40,862    39,566
 Merchandise inventories                    58,083    61,482
 Prepaid expenses and other current 
 assets                                     12,138     6,488
                                          --------  --------
  Total current assets                     115,058   111,445
  
Videocassette rental inventory, net        259,255   226,051
Property and equipment, net                328,182   234,497
Goodwill, net                              185,711    93,760
Deferred income tax                         35,513    11,334
Other assets, net                           10,715    12,036
                                          --------  --------
                                          $934,434  $689,123
                                          ========  ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
 Current maturities of long-term 
obligations                               $  8,418   $ 2,341
 Accounts payable                          121,365   103,823
 Accrued expenses                           21,164    29,423
 Accrued revenue sharing                    13,500         -
 Accrued interest                            9,693     8,256
 Income taxes payable                        5,739         -
                                          --------  --------
  Total current liabilities                179,879   143,843
  
Long-term obligations, less current
 portion                                   383,727   231,155
Other liabilities                           25,133    24,229
                                          --------  --------
                                           588,739   399,227
                                          --------  --------
Commitments and contingencies                    -         -
Shareholders' equity:
 Preferred stock, 19,500,000 shares
  authorized no shares issued and
  outstanding                                    -         -
 Common stock 100,000,000 shares
  authorized; 44,933,055
  and 36,786,396 shares
  issued and outstanding                   354,067   247,950
 Retained (deficit) earnings               (6,476)    43,988
 Intangible assets, net                    (1,896)   (2,042)
                                          --------  --------
  Total shareholders' equity               345,695   289,896
                                          --------  --------
                                          $934,434  $689,123
                                          ========  ========
</TABLE>
   
                                     
            See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>  
                       HOLLYWOOD ENTERTAINMENT CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

                                           Year Ended December 31,
                                     -------------------------------
                                          1998        1997      1996
                                     ---------   --------- ---------
<S>                                 <C>         <C>       <C>
REVENUE:
 Rental revenue                     $ 633,140   $ 418,527 $ 252,625
 Product sales                        130,768      81,974    49,717
                                    ---------   --------- ---------
                                      763,908     500,501   302,342
                                    ---------   --------- ---------
OPERATING COST AND EXPENSES:
 Cost of product sales                 87,799      53,471    30,707
 Operating and selling                554,596     366,960   208,895
 General and administrative            37,543      31,698    18,302
 Amortization of intangibles           20,073       6,691     6,020
 Purchased in-process research
  and development                       1,900           -         -
 Inventory valuation charge            99,910           -         -
                                    ---------   ---------  --------
                                      801,821     458,820   263,924
                                    ---------   ---------  --------

INCOME (LOSS) FROM OPERATIONS        (37,913)      41,681    38,418

Nonoperating income (expense):
 Interest income                          141         342       203
 Interest expense                    (31,893)    (13,806)   (4,339)
 Litigation settlement                      -    (18,874)         -
                                    ---------   ---------  --------
Income (loss) before income taxes
 and extraordinary item              (69,665)       9,343    34,282
Benefit from (provision for)
 income taxes                          19,201     (3,784)  (13,652)
                                    ---------   ---------  --------
Income (loss) before extraordinary
 item                                (50,464)       5,559    20,630
Extraordinary loss on
 extinguishment of debt
 (net of income tax 
  benefit of $372)                         -        (563)         -
                                    ---------   ---------  --------
NET INCOME (LOSS)                   $(50,464)     $ 4,996  $ 20,630
                                    =========   ========= =========
-----------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM:
 Basic                               $ (1.30)     $  0.15    $ 0.60
 Diluted                               (1.30)        0.15      0.59
-----------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE:
 Basic                               $ (1.30)     $  0.14    $ 0.60
 Diluted                               (1.30)        0.13      0.59
-----------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
 Basic                                 38,844      36,659    34,162
 Diluted                               38,844      37,718    35,159
-----------------------------------------------------------------------------
</TABLE>

             See notes to consolidated financial statements.

<PAGE>
<TABLE>
<CAPTION>

                       HOLLYWOOD ENTERTAINMENT CORPORATION
            CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                      (In thousands, except share amounts)



                                   Common Stock                   Retained
                                  --------------------Intangible  Earnings
                                      Shares    Amount    Assets (Deficit)     Total
                                  ----------  --------  --------  --------  --------
<S>                               <C>         <C>       <C>        <C>      <C>     
Balance at December 31, 1995      33,879,738  $202,005  $(2,584)   $18,362  $217,783
Issuance of common stock:
  Public offerings, net            2,000,000    34,705         -         -    34,705
  Stock options exercised            126,463       838         -         -       838
  Tax benefit from stock options           -       473         -         -       473
Amortization of intangible assets          -         -       274         -       274
Net income                                 -         -         -    20,630    20,630
                                  ----------  --------  --------  --------  --------
Balance at December 31, 1996      36,006,201   238,021   (2,310)    38,992   274,703

Issuance of common stock:
  Public offerings, net              300,000     4,695         -         -     4,695
  Stock options exercised            480,195     3,712         -         -     3,712
  Tax benefit from stock options           -     1,522         -         -     1,522
Amortization of intangible assets          -         -       268         -       268
Net income                                 -         -         -     4,996     4,996
                                  ----------  --------  --------  --------  --------
Balance at December 31, 1997      36,786,396   247,950   (2,042)    43,988   289,896

Issuance of common stock:
  Stock options exercised            633,859     4,376         -         -     4,376
  Tax benefit from stock options           -     2,563         -         -     2,563
  Reel.com acquisition             5,000,000    53,450         -         -    53,450
  Sold to Reel.com affiliates      3,362,800    45,398         -         -    45,398
Stock options issued for
 Reel.com acquisition                      -    10,840         -         -    10,840
Common stock repurchases           (850,000)  (10,510)         -         -  (10,510)
Amortization of intangible assets          -         -       146         -       146
Net loss                                   -         -         -  (50,464)  (50,464)
                                  ----------  --------  --------  --------  --------
Balance at December 31, 1998      44,933,055  $354,067  $(1,896)  $(6,476)  $345,695
                                  ==========  ========  ========  ========  ========
</TABLE>

                See notes to consolidated financial statements

<PAGE>
<TABLE>
<CAPTION>
                       HOLLYWOOD ENTERTAINMENT CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

                                                    Year Ended December 31,
                                               ------------------------------
                                                    1998      1997       1996
                                               ---------   -------   --------
<S>                                            <C>         <C>       <C>
OPERATING ACTIVITIES:                     
Net income (loss)                              $(50,464)   $ 4,996   $ 20,630
Adjustments to reconcile net income (loss)
 to cash provided by operating activities:
Extraordinary loss on extinguishment of debt           -       563          -
Depreciation and amortization                    196,849   140,201     87,115
Inventory valuation charge                        99,910         -          -
Write-off of purchased in-process
research and development                           1,900         -          -
Change in deferred rent                            3,961     3,467      3,083
Change in deferred income taxes                 (27,236)   (1,985)      3,350
Net change in operating assets and liabilities:
 Accounts receivable                             (1,071)  (13,781)    (9,631)
 Merchandise inventories                           3,749  (16,227)   (19,264)
 Accounts payable                                 10,194    36,616     24,429
 Accrued interest                                  1,437     7,843        358
 Other current assets and liabilities              4,849    13,263      5,728
   Cash provided by operating activities         244,078   174,956    115,798
INVESTING ACTIVITIES:
Purchases of videocassette rental
 inventory, net                                (265,158) (194,273)  (124,253)
Purchase of property and equipment,
 net                                           (132,122) (139,709)   (64,038)
Investment in businesses acquired               (40,804)         -          -
Increase in intangibles and other
 assets                                            (327)   (4,138)      (794)
Cash used in investing activities              (438,411) (338,120)  (189,085)
FINANCING ACTIVITIES:
Proceeds from the issuance of common
 stock, net                                       45,398     4,695     34,705
Issuance of long-term obligations                      -   203,159          -
Repayments of long-term obligations              (2,429)   (1,864)    (7,610)
Repurchase of common stock                      (10,510)         -          -
Proceeds from exercise of stock options            4,376     3,712        838
Tax benefit from exercise of stock
 options                                           2,563     1,522        473
Repurchase of mandatorily redeemable
 common stock                                          -         -   (54,250)
Increase (decrease) in revolving loan, net       155,001  (57,000)     82,000
  Cash provided by financing activities          194,399   154,224     56,156
  Increase (decrease) in cash and
   equivalents                                        66   (8,940)   (17,131)
Cash and cash equivalents at
 beginning of year                                 3,909    12,849     29,980
Cash and cash equivalents at end of year         $ 3,975   $ 3,909   $ 12,849
Other Cash Flow Information:
Interest expense paid                             31,562   $ 6,735      4,339
Income taxes paid (refunded), net                  (706)     7,282      6,130

</TABLE>

               See notes to consolidated financial statements.


<PAGE>

                       HOLLYWOOD ENTERTAINMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31,1998, 1997, 1996

1.   SIGNIFICANT ACCOUNTING POLICIES

     Corporate Organization and Consolidation
     
     The accompanying financial statements include the accounts of Hollywood
     Entertainment Corporation and its wholly owned subsidiaries (the
     "Company").  The Company's subsidiaries include Hollywood Video
     Superstores, Inc., Hollywood Management Company, Reel.com, Inc. and Title
     Wave Stores, Inc. All significant intercompany transactions have been
     eliminated.
     
     Nature of the Business

     The Company operates a chain of video superstores ("Hollywood Video")
     throughout the United States and an internet retailer of video only
     products ("Reel.com").  The Company was incorporated in Oregon on June 2,
     1988 and opened its first store in October 1988. As of December 31, 1998
     and 1997, the Company operated 1,260 stores in 42 states and 907 stores in
     42 states, respectively.

     Use of Estimates in the Preparation of Financial Statements
     
     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities as of 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.  Significant estimates relative to the Company include
     depreciation and amortization policies.

     Cash and Cash Equivalents

     The Company considers highly liquid investment instruments, with an
     original maturity of three months or less, to be cash equivalents.

     Inventories

     Merchandise inventories, consisting primarily of prerecorded
     videocassettes, concessions, and other accessories held for resale, are
     stated at the lower of cost or market.  Cost of sales are determined on a
     first-in, first-out basis ("FIFO"). Videocassette rental inventory, which
     also includes video games, DVDs and audio books, is stated at cost and
     amortized over its estimated useful life to a specified salvage value.  See
     Note 4 for a discussion of the amortization policy applied to videocassette
     rental inventory and a discussion of the change in amortization method
     effective October 1, 1998.

<PAGE>

     Property, Equipment, Depreciation and Amortization

     Property is stated at cost and is depreciated on the straight-line basis
     for financial reporting purposes over the estimated useful life of the
     assets, which range from approximately five to ten years.  Leasehold
     improvements are amortized primarily over the lesser of ten years or the
     term of the lease.
     
     Additions to property and equipment are capitalized and include
     acquisitions of property and equipment, costs incurred in the development
     and construction of new stores, major improvements to existing property and
     major improvements in management information systems.  As property and
     equipment is sold or retired, the applicable cost and accumulated
     depreciation and amortization are eliminated from the accounts and any gain
     or loss thereon is recorded.
     
     In 1998, the Company adopted Statement of Position 98-1 ("SOP 98-1"), which
     defines the types of costs that may be capitalized for internally developed
     computer software.  Accordingly, the Company capitalized $1.5 million.

     Long-Lived Assets

     The Company follows Statement of Financial Accounting Standards (SFAS) No.
     121, "Accounting for the Impairment of Long-Lived Assets."  The statement
     establishes accounting standards for the impairment of long-lived assets to
     be held and used, and for long-lived assets to be disposed.  Impairment of
     long-lived assets is recognized when events or changes in circumstances
     indicate that the carrying amount of the asset or related group of assets
     may not be recoverable.  Measurement of the amount of the impairment may be
     based on the market values of similar assets or estimated discounted future
     cash flows resulting from use and ultimate disposition of the asset.
     Management has determined that there has been no material impairment to any
     long-lived assets as of December 31, 1998 and 1997.
     
     Income Taxes

     The Company calculates income taxes in accordance with SFAS No. 109,
     "Accounting for Income Taxes", which requires recognition of deferred tax
     liabilities and assets for the expected future tax consequences of events
     that have been included in the financial statements and tax returns.
     
     Deferred Rent

     Many of the Company's operating leases contain predetermined fixed
     increases of the minimum rental rate during the initial lease term.  For
     these leases, the Company recognizes the related rental expense on a
     straight-line basis and records the difference between the amount charged
     to expense and the rent paid as deferred rent.
     
     Fair Value of Financial Instruments

     In accordance with SFAS No. 107, "Disclosure about Fair Value of Financial
     Instruments", the Company has disclosed the fair value, related carrying
     value and method for determining the fair value for the following financial
     instruments in the accompanying notes as referenced: cash and cash
     equivalents (see Note 1), accounts receivable (see Note 2), and long-term
     obligations (see Note 10).

<PAGE>

     Earnings per Share
     
     The Company adopted SFAS No. 128, "Earnings per Share", effective December
     31, 1997.  SFAS No. 128 requires a dual presentation of basic and diluted
     earnings per share ("EPS").  Basic EPS is computed by dividing net income
     (loss) by the weighted average shares outstanding for the period.  Diluted
     EPS reflects the potential dilution that could occur if contracts to issue
     common stock were exercised or converted to common stock.  Prior periods
     have been restated to conform to SFAS No. 128.

     Comprehensive Income

     The Company adopted SFAS No. 130, "Reporting Comprehensive Income" as of
     January 1, 1998.  Comprehensive income is equal to net income (loss) for
     all periods presented.

     Advertising

     Advertising costs, net of cooperative reimbursements from vendors, are
     expensed as incurred.

     Segment Reporting

     The Company has adopted SFAS 131, "Disclosures about Segments of an
     Enterprise and Related Information" in 1998.  This statement establishes
     standards for reporting information about operating segments in annual
     financial statements and requires selected information about operating
     segments in interim financial reports issued to shareholders.  The Company
     has disclosed the information required by SFAS 131 in Note 17 to its
     Consolidated Financial Statements.

     Store Preopening Costs

          Store preopening costs, including store employee labor costs and
     advertising, incurred prior to the opening of a new store have been
     expensed during the first full month of a store's operation.  In April
     1998, SOP 98-5, "Reporting on the Costs of Start-up Activities" was
     finalized, which requires that costs incurred for start-up activities, such
     as store openings, be expensed as incurred.  The Company will implement SOP
     98-5 during the first quarter of 1999 and anticipates a charge of $1.4
     million, net of tax.


2.   ACCOUNTS RECEIVABLE

     Accounts receivable as of December 31, 1998 and 1997 consists of:

<TABLE>
<CAPTION>
                                     -------------------
                                         1998       1997
                                     --------    -------
                                        (In thousands)
     <S>                             <C>        <C>  
     Construction receivables        $  9,234   $ 18,906
     Marketing allowances and other    31,628     20,660
                                     --------   --------
                                     $ 40,862   $ 39,566
                                     ========   ========
</TABLE>                         

     The carrying amount of accounts receivable approximates fair value because
     of the short maturity of those receivables.
     
<PAGE>
     
3.   VIDEOCASSETTE RENTAL INVENTORY

     Videocassette rental inventory as of December 31, 1998 and 1997 consists
     of:
<TABLE>
<CAPTION>     
                                      --------------------
                                           1998       1997
                                      ---------  ---------
                                          (In thousands)
    
    <S>                               <C>        <C>
    Videocassette rental inventory    $ 450,593  $ 324,727
    Less accumulated amortization     (191,338)   (98,676)
                                      ---------  ---------
                                      $ 259,255  $ 226,051
                                      =========  =========
</TABLE>

     Amortization expense related to videocassette inventory was $135.2 million,
     $112.5 million and $67.1 million in 1998, 1997 and 1996, respectively, and
     is included in operating and selling expenses. As videocassette rental
     inventory is sold, the applicable cost and accumulated amortization are
     eliminated from the accounts, determined on a FIFO basis applied in the
     aggregate based on monthly purchases. Any gain or loss thereon is recorded
     in the Company's consolidated statements of operations.
     
4.   CHANGE IN AMORTIZATION METHOD FOR VIDEOCASSETTE RENTAL INVENTORY

     Effective October 1, 1998, Hollywood Video adopted a new method of
     amortizing videocassette rental inventory.  During the fourth quarter of
     1998, Hollywood Video purchased a majority of new video releases under
     revenue sharing arrangements with major studios, which the Company expects
     to continue in the future.  Revenue sharing allows the Company to purchase
     videocassettes at a lower product cost than the traditional buying
     arrangements, with, a percentage of the net rental revenues shared with the
     studios over a contractually determined period of time.  The increased copy
     depth under revenue sharing arrangements satisfies consumer demand for new
     releases over a shorter period of time.  As the new business model results
     in significantly greater proportion of rental revenue received over a
     shorter period of time, the Company has changed its method of amortizing
     rental inventory in order to match expenses with the anticipated revenues 
     to be generated therefrom.
     
     Under the new accounting method, the Company expenses the studio's share of
     revenue (net of a salvage value of $4) as revenues are earned pursuant to 
     the applicable contractual arrangements.
     
     Non-revenue sharing videocassettes acquired at a fixed price are amortized
     on an accelerated basis to an average net book value of $8 over four months
     and then to a salvage value of $6 over the following 56 months.  Previous
     to October 1, 1998, new release videocassettes were amortized on an
     accelerated basis over 4 months to an average net book value of $15 and
     then on a straight-line basis to their salvage value of $6 over the next 32
     months.  Base stock videocassettes purchased at a fixed price for new store
     openings

<PAGE>

     are amortized straight-line over 60 months to an estimated $6 salvage
     value.  Prior to October 1, 1998 base stock was amortized on a straight-
     line basis to a $6 salvage value over 36 months.  The change in estimate,
     effective October 1, 1998 decreased net loss by $1.0 million, net of tax in
     the fourth quarter of 1998.  The Company anticipates that rental product
     amortization combined with revenue sharing expense will increase as a
     percentage of total revenue in 1999, as compared to 1998, due to the change
     in the accounting method.

     The new method of amortization has been applied to rental inventory held as
     of October 1, 1998.  The adoption of the new method of amortization has
     been accounted for as a change in accounting estimate effected by a change
     in accounting principle, and accordingly the Company recorded a pre-tax
     charge of $99.9 million in the fourth quarter of 1998. The calculation of 
     the change in operating expense attributable to videocassettes for periods 
     prior to October 1, 1998 would not be meaningful because the new business 
     model involving revenue sharing arrangements had not been implemented.


5.   PROPERTY AND EQUIPMENT

     Property and equipment as of December 31, 1998 and 1997 consists of:

<TABLE>
<CAPTION>
                                              ----------------------
                                                    1998        1997
                                              ----------  ----------
                                                (In thousands)

     <S>                                      <C>         <C>
     Fixtures and equipment                    $ 123,068    $ 72,306
     Leasehold improvements                      279,805     195,203
     Equipment under capital lease                 3,426       3,426
     Leasehold improvements under
       capital lease                               7,167       7,167
                                              ----------  ----------
                                                 413,466     278,102
     Less accumulated depreciation
       and amortization                         (85,284)    (43,605)
                                              ----------  ----------
                                               $ 328,182   $ 234,497
                                              ==========  ==========

</TABLE>

     Accumulated depreciation and amortization, as presented above, includes
     accumulated amortization of assets under capital leases of $3.0 million and
     $1.6 million at December 31, 1998 and 1997, respectively.
     
     
<PAGE>
     
6.   GOODWILL
     
     Goodwill as of December 31, 1998 and 1997 consists of:
     
<TABLE>
<CAPTION>
                                      -------------------
                                          1998       1997
                                      --------   --------
                                         (In thousands)
     <S>                              <C>        <C>
     Goodwill                         $219,502   $109,383
     Less accumulated amortization    (33,791)   (15,623)
                                      --------   --------
                                      $185,711    $93,760
                                      ========   ========
</TABLE>
     

     Goodwill represents the excess of cost over fair value of net assets
     purchased and is being amortized on a straight-line basis over 2 or 20
     years.  Goodwill in connection with store acquisitions is amortized over 20
     years.  Goodwill from the Reel.com acquisition is being amortized over 2
     years.  The Company assesses the recoverability of store acquisition
     intangibles by determining whether the amortization of the goodwill over
     the remaining lives can be recovered through projected future operating
     results on an undiscounted basis.  The Company believes that there are no
     impaired intangible assets with respect to store acquisitions.
     
<PAGE>

7.   ACQUISITIONS
     
     Reel.com
     
     On October 1, 1998, the Company completed the merger of Reel.com, Inc.
     ("Reel.com") with and into Hollywood Entertainment Corporation.  At the
     closing, the Company acquired all the outstanding shares of Reel.com for
     $32.7 million and 4,000,000 shares of Common Stock and 1,000,000 shares of
     Series A Redeemable Preferred Stock.  In addition, the Company assumed
     Reel.com's incentive stock option plan and converted all outstanding
     Reel.com stock options into options to acquire the Company's Common Stock.
     Options for a total of 958,568 shares were issued in connection with the
     acquisition.
          
     Concurrent with the acquisition of Reel.com, the Company sold 1,982,537
     shares of Common Stock and 1,380,263 shares of Series A Redeemable
     Preferred Stock at a price of $13.50 per share to certain shareholders and
     affiliates of Reel.com.
     
     The Series A Redeemable Preferred Stock was converted into Common Stock on
     a one for one basis upon shareholder approval on December 30, 1998.
          
     The acquisition of Reel.com for approximately $96.9 million has been
     accounted for under the purchase method of accounting.  The financial
     statements reflect the allocation of the purchase price and assumption of
     Reel.com's liabilities and include the operating results from the date of
     acquisition.

     The following sets forth the reconciliation of the cash paid (in thousands)
     for Reel.com, Inc.:

<TABLE>

      <S>                                      <C>    
      Fair value of assets acquired             $ 3,634
      Goodwill                                  100,349
      Purchased research and development          1,900
      Value of stock issued                    (53,450)
      Value of stock options issued            (10,840)
      Liabilities assumed                       (8,934)
                                               --------
   Cash paid, including transaction costs,
     net of cash received                       $32,659
                                               ========
 
</TABLE>
         
     The value of stock options issued was determined using the Black-Scholes
     stock option pricing model.  Goodwill is being amortized over the estimated
     useful life of 2 years.

     The following unaudited pro forma information presents the results of the
     Company's operations assuming the Reel.com acquisition occurred at the
     beginning of each period presented (in thousands, except per share data):

<PAGE>
<TABLE>
<CAPTION>
                                   Year Ended December 31,
                                   -----------------------
                                        1998          1997
                                   ---------     ---------
       <S>                         <C>           <C>
       Total revenue               $ 773,812     $ 502,033
       Net loss                     (97,306)      (46,247)
       Net loss per share:
         Basic                        (2.16)        (1.03)
         Diluted                      (2.16)        (1.03)

</TABLE>

     The pro forma financial information is not necessarily indicative of the
     operating results that would have occurred had the Reel.com acquisition
     been consummated as of the beginning of each period, nor is it necessarily
     indicative of future operating results.
          
     Store Acquisitions
          
     During 1998, the Company acquired the assets of 41 video superstores
     located in New York (11) and Florida (30) for an aggregate purchase price
     of $14.1 million.   $6.0 million of the purchase price was paid with a note
     payable bearing interest at 10.0% per annum due April 1, 1999, and the
     remainder was paid in cash.  The acquisitions were accounted for under the
     purchase method of accounting. $9.8 million  was allocated to Goodwill and
     is being amortized over the estimated useful life of 20 years.  The results
     of operations for these acquisitions do not have a material effect on the
     consolidated operating results and therefore are not included in the pro
     forma data presented above.

8.   OPERATING LEASES

     The Company leases all of its stores, corporate offices, distribution
     center and zone offices under non-cancelable operating leases.  All of the
     Company's stores have an initial operating lease term of five to 15 years
     and most have options to renew for between five and 15 additional years.
     Most operating leases require payment of property taxes, utilities, common
     area maintenance and insurance.  Total rent expense, including related
     lease-required costs,  incurred during 1998, 1997, and  1996 was $154.8
     million, $96.0 million and $54.1 million,  respectively.

     At December 31, 1998, the future minimum annual rental commitments under
     non-cancelable operating leases were as follows:

<TABLE>
<CAPTION>

                                     Operating
                                  (in thousands)
                                  ---------------
              <S>                   <C>
              Year
              --------------
               1999                 $ 160,757
               2000                   153,951
               2001                   152,036
               2002                   149,216
               2003                   147,721
               Future years           698,380

</TABLE>
<PAGE>

9.   EMPLOYEE BENEFIT PLANS

     The Company is self-insured for employee medical benefits under the
     Company's group health plan.  The Company maintains stop loss coverage for
     individual claims in excess of $100,000 and for annual Company claims which
     exceed approximately $3.0 million in the aggregate.  While the ultimate
     amount of claims incurred is dependent on future developments, in
     management's opinion, recorded reserves are adequate to cover the future
     payment of claims. Adjustments, if any, to recorded estimates resulting
     from ultimate payments will be reflected in operations in the period in
     which such adjustments are known.
          
     Beginning January 1, 1998, the Company added a 401(k) plan in which
     eligible employees may elect to contribute up to 15% of their earnings.
     Eligible employees who are at least 21 years of age, have completed at
     least one year of service and work at least 1,000 hours in a year.  The
     Company does not make any matching contributions to the 401(k) plan.
          
     The Company does not maintain any other retirement plans nor offer any form
     of post-retirement benefits.


10.  LONG-TERM OBLIGATIONS
     
     The Company had the following long-term obligations as of December 31, 1998
     and 1997:
<TABLE>
<CAPTION>
     
                                             --------------------
                                                 1998        1997
                                            ---------   ---------
                                               (In thousands)
     <S>                                    <C>         <C>     
     Senior subordinated notes              $ 200,000   $ 200,000
     Borrowings under bank revolving
       credit agreement                       180,000      24,999
     Obligations under capital leases           6,111       8,452
     Other                                      6,034          45
                                            ---------   ---------
                                              392,145     233,496
     Less current obligations                   8,418       2,341
                                            ---------   ---------
                                            $ 383,727   $ 231,155
                                            =========   =========

</TABLE>

     In August 1997, the Company issued $200 million principal amount of 10.625%
     senior subordinated notes (the "Notes") due August 15, 2004. The proceeds
     received from the sale of the Notes, net of offering costs of $6.8 million,
     were used to repay the entire outstanding indebtedness under the then
     existing bank revolving loan.  The Company recorded a charge for the write-
     off of the remaining deferred financing costs related to the indebtedness
     repaid as an extraordinary loss of $0.6 million, net of related income tax
     benefit of $0.4 million, in 1997.
     
<PAGE>
     
     The Notes are redeemable, at the option of the Company, after August 14,
     2001 at rates starting at 105.313% of principal amount reduced annually
     through August 15, 2003, at which time they become redeemable at 100% of
     the principal amount.  In addition, at any time prior to August 15, 2000,
     the Company may redeem in the aggregate up to 35% of the original principal
     amount of the Notes with the proceeds of one or more public equity
     offerings, at a redemption price of 110.625% of principal amount. The terms
     of the Notes may restrict, among other things, the payment of dividends and
     other distributions, investments, the repurchase of capital stock and the
     making of certain other restricted payments by the Company, the incurrence
     of additional indebtedness by the Company or any of its subsidiaries, and
     certain mergers, consolidations and disposition of assets.  Additionally,
     if a change of control occurs, as defined, each holder of the Notes will
     have the right to require the Company to repurchase such holder's Notes at
     101% of principal amount thereof.
     
     The Company is limited in the amount of cash dividends that it can pay and
     the amount of common stock and subordinated indebtedness that it may
     repurchase by applicable covenants contained in the Notes.

     In September 1997, the Company entered into a senior revolving credit
     agreement which provides for the availability of up to $300 million in
     aggregate extension of credit. The outstanding balance is due and payable
     on September 5, 2002.  Revolving credit loans under the credit agreement
     bear interest, at the Company's option, at an applicable margin  over  the
     bank's base rate loan or the IBOR rate.   The applicable margin is based
     upon the ratio of consolidated indebtedness to consolidated adjusted
     EBITDA, as defined below.  The credit agreement also provides for a
     commitment fee of 1/2% of any unused portion of the credit agreement. 
     Among other restrictions, the credit agreement contains financial covenants
     relating to specified levels of: indebtedness to income from operations
     before depreciation and amortization less 30% of rental revenue after
     deducting from such 30% of rental revenue any non-cash charges associated
     with the acquisition of new release videocassettes (adjusted EBITDA);
     adjusted EBITDA less taxes paid in cash to interest expense; maintenance of
     average store contribution levels; and the maintenance of minimum tangible
     net worth.  Amounts outstanding under the credit agreement are
     collateralized by substantially all of the assets of the Company.

     The Company was not in compliance with the net worth covenant as of
     December 31, 1998 due to the $99.9 million pre-tax write-off of
     videocassette rental inventory (see Note 4 to the Consolidated Financial
     Statements).  The Company has, however, obtained a waiver from the Banks
     with respect to the covenant specified in the revolving credit agreement.
     Effective March 1, 1999, the Company replaced the net worth covenant with a
     tangible net worth covenant
     
     As of December 31, 1998, the fair value of the Notes was $202 million. The
     fair value of the Notes was based on quoted market prices as of December
     31, 1998.  The revolving credit facility is a variable rate loan, and thus,
     the fair value approximates the carrying amount as of December 31, 1998.

<PAGE>

<TABLE>
<CAPTION>
              ---------------------------------
              Year                 December 31,
              -------------     ---------------
                                (In thousands)
              <S>               <C>          
              1999                   $   8,418
              2000                       3,727
              2001                           -
              2002                     180,000
              2003                           -
              Thereafter               200,000
                                --------------
                                     $ 392,145
                                ==============

</TABLE>
     
11.  INCOME TAXES

     The provision for (benefit from) income taxes for the years ended December
     31, 1998, 1997 and 1996 consists of:

<TABLE>
<CAPTION>
     
                                   -----------------------------
                                        1998      1997      1996
                                   ---------   -------  --------
                                           (In thousands)
 <S>                               <C>         <C>      <C>                  
 Current:
  Federal                             $    -   $ 1,581   $ 8,052
  State                                  983       218     2,250
                                   ---------   -------  --------
    Total current provision              983     1,799    10,302
 Deferred:
  Federal                           (17,281)     1,468     2,757
  State                              (2,903)       517       593
                                   ---------   -------  --------
    Total deferred liability
     (benefit)                      (20,184)     1,985     3,350
                                   ---------   -------  --------
    Total provision (benefit)      $(19,201)   $ 3,784   $13,652
                                   =========   =======  ========
</TABLE>


     The Company is subject to minimum state taxes in excess of statutory state
     income taxes in many of the states which it operates.  These taxes are
     included in the current provision for state and local income taxes.
     Certain acquisitions in 1995 and the Reel.com acquisition in 1998 yielded
     nondeductible goodwill which is reflected in the tax rate reconciliation
     below.  The tax impact of purchase accounting adjustments is reflected in
     deferred taxes.  A reconciliation of the statutory federal income tax rate
     with the Company's effective income tax rate is as follows:
                                        
<PAGE>
<TABLE>
<CAPTION>
                                    -----------------------
                                      1998    1997     1996
                                    ------- ------- -------
    <S>                            <C>     <C>     <C>
    Statutory federal rate 
     (benefit)                     (34.0%)   34.0%    35.0%
    State income taxes, net of
     federal income tax benefit      (1.8)     5.5      4.6
    Tax exempt interest income           -       -     (0.3)
    Amortization of nondeductible
     goodwill                          6.9       -        -
    Other, net                         1.3     1.0      0.5
                                  -------- ------- --------
                                    (27.6%)   40.5%    39.8%
                                  ======== ======= ========

</TABLE>
    
     Deferred income taxes reflect the impact of "temporary differences" between
     amounts of assets and liabilities for financial reporting purposes and such
     amounts as measured by tax laws.  The tax effects of temporary differences
     that give rise to significant portions of deferred tax assets and
     liabilities at December 31 are as follows:

<TABLE>
<CAPTION>     
                                           ---------------------
                                                 1998       1997
                                           ----------  ---------
                                               (In thousands)
    <S>                                     <C>        <C>
    DEFERRED TAX ASSETS:
     Tax loss carryforward                   $ 26,618    $   326
     Deferred rent                              5,589      3,985
     Financial leases                           3,883      2,039
     Income deferred for financial
       statement purposes                       2,308        634
     Tax credit carryforward                    1,906      2,476
     Financial statement expenses
       deferred for tax purposes                  784      1,114
     Difference between assigned
       value and tax basis of
       acquired entities                            -        690
     Other                                         24         70
                                            ---------  ---------
     Total deferred tax assets                 41,112     11,334
     Valuation allowance                      (5,599)          -
                                            ---------  ---------
     
     Net deferred tax assets                   35,513     11,334
                                            ---------  ---------
   DEFERRED TAX LIABILITIES:
     Depreciation and amortization            (8,227)   (12,468)
     Capitalized leases                       (2,778)    (1,842)
     Tax expenses deferred for
       financial statement purposes             (248)          -
                                            ---------  ---------
     Total deferred tax liabilities          (11,253)   (14,310)
                                            ---------  ---------
   Net deferred tax asset (liability)        $ 24,260   $(2,976)
                                            =========  =========
</TABLE>

<PAGE>

     At December 31, 1998, the Company had approximately $52.5 million of net
     operating loss carryforwards available to reduce future income taxes,
     representing operating losses of Hollywood Entertainment, Reel.com and
     Title Wave, a company acquired during 1995 through a stock purchase.  For
     tax purposes, the preacquisition losses resulting from a change of
     ownership of Reel.com and Title Wave are treated as separate return
     limiting year losses.  The Company expects to fully utilize Hollywood
     Entertainment, post acquisition Reel.com and Title Wave losses in future
     years and thus no valuation allowance has been recorded. The Company has
     provided a valuation allowance for pre-acquisition losses of Reel.com.  The
     carryforward periods expire in years 2008 through 2018. The Company has
     federal Alternative Minimum Tax ("AMT") credit carryforwards of  $1.9
     million which are available to reduce future regular taxes in excess of
     AMT.  These credits have no expiration date.

     The Company may realize tax benefits as a result of the exercise of certain
     employee stock options.  For financial reporting purposes, any reduction in
     income tax obligations as a result of these tax benefits is credited to
     shareholders' equity.

12.  SHAREHOLDERS' EQUITY

     Preferred Stock
     
     At December 31, 1998, the Company is authorized to issue 19,500,000 shares
     of preferred stock in one or more series.  The Board of Directors has
     authority over the designations, preferences, special rights, limitations
     or restrictions thereof as it may determine.  The Company issued and sold a
     total of 2,380,263 shares of Series A Redeemable Preferred Stock in
     connection with the Reel.com acquisition.  These shares were converted into
     Common Stock on a one for one basis upon shareholder approval on December
     30,1998.
     
     Common Stock

     During 1998, the Company repurchased 850,000 Common Shares on the open
     market for $10.5 million.
     
     In October 1998, the Company issued and sold a total of 8,362,800 shares of
     its Common Stock in connection with the acquisition of Reel.com as
     discussed in Note 7.  This amount includes the Preferred Shares converted
     to Common Stock discussed above.
     
     In December 1996, the Company completed a public offering of 2,000,000
     shares of its common stock. The net proceeds from the offering were
     approximately $34.7 million.  Additionally, in January 1997, the
     underwriters purchased an additional 300,000 shares pursuant to the
     overallotment option for net proceeds to the Company of approximately $4.7
     million.

<PAGE>

13.   STOCK OPTION PLANS

     In general, the Company's stock option plans provide for the granting of
     options to purchase Company shares at the market price of such shares as of
     the option grant date.  The options generally have a nine year term and
     become excercisable on a pro rata basis over five years.
     
     The Company adopted stock option plans in 1993 and 1997 providing for the
     granting of non-qualified stock options, stock appreciation rights, bonus
     rights and other incentive grants to employees up to an aggregate of
     10,000,000 shares of common stock.  The 1997 plan provides for the granting
     of nonqualified stock options to employees up to an aggregate of 2,000,000
     shares of common stock.  The Company granted non-qualified stock options
     pursuant to the 1993 and the 1997 Plans totaling 5,347,269, 2,165,513, and
     2,858,150 in 1998, 1997 and 1996, respectively.

     The Company has elected to follow APB No. 25;  "Accounting for Stock Issued
     to Employees" ("APB 25"), and related interpretations in accounting for its
     employee stock options.  Under APB 25, because the exercise price of the
     Company's employee stock options equals the market price of the underlying
     stock on the date of the grant, no compensation expense is recognized.  Pro
     forma information regarding net income per share is required by SFAS No.
     123, "Accounting for Stock-Based Compensation", and has been determined as
     if the Company had accounted for its employee stock options under the fair
     value method of that statement.  The fair value of these options was
     estimated at the date of grant using Black-Scholes option pricing model
     with the following weighted-average assumptions for 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                           ---------------------------
                                              1998       1997     1996
                                           -------   --------   ------
     <S>                                   <C>        <C>      <C>
     Risk free interest rate                  4.5%       5.7%     6.4%
     Expected dividend yield                    0%         0%       0%
     Expected lives                        5 years    5 years  5 years
     Expected volatility                       75%        65%      60%
     
</TABLE>

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

     Using the Black-Scholes option valuation model, the weighted average grant
     date value of options granted during 1998 (excluding the options issued in
     connection with the Reel.com acquisition) was $6.77 per option.

     For the purpose of pro forma disclosures, the estimated fair value of the
     options is amortized over the option's vesting period.  Options issued in
     connection with the Reel.com acquisition totaled  958,568 and had a fair
     market value of $10.8 million at the closing date using the Black-Scholes
     option valuation model.

<PAGE>

     The Company's pro forma information is as follows:

<TABLE>
<CAPTION>

                                    December 31,
                                ----------------------
                                         1998
                                ----------------------
                                 Reported    Pro Forms
                                ---------    ---------
    <S>                         <C>          <C>
    Net loss                    $(50,464)    $(53,583)
    Earnings
    per share:
     Basic                         (1.30)       (1.38)
     Diluted                       (1.30)       (1.38)
     
</TABLE>

<TABLE>
<CAPTION>
                                         December 31,
                          --------------------------------------------
                                   1997                  1996
                          ---------------------  ---------------------
                          Reported   Pro Forma    Reported   Pro Forma
                          --------   ----------  ---------   ---------
     <S>                   <C>          <C>       <C>         <C>
     Net income            $ 4,996      $ 1,459   $20,630     $18,252
     Earnings
     per share:
      Basic                   0.14         0.04      0.60        0.53
      Diluted                 0.13         0.04      0.59        0.52
      
</TABLE>

     Options to purchase 1,196,644 shares of common stock were not included in
     the computation of pro forma diluted earnings per share for December 31,
     1998, as such shares were anti-dilutive.

     The pro forma effect on net income for 1998, 1997 and 1996 is not
     representative of the pro forma effect on net income in future years
     because it does not take into consideration pro forma compensation expense
     related to grants made prior to 1996.


<PAGE>

     A summary of the Company's stock option activity and related information
     for 1998, 1997 and 1996 is as follows (in thousands, except per share
     amounts):
     
<TABLE>
     
                                                  Weighted
                                                   Average
                                                  Exercise
                                      Shares         Price
                                      -------    ---------
<S>                                   <C>        <C>
Outstanding at December 31, 1995        2,174         6.57
 Granted                                2,858        10.24
 Exercised                              (127)         6.62
 Cancelled                              (865)        15.29
                                      -------    ---------
Outstanding at December 31, 1996        4,040         9.25
 Granted                                2,165        16.35
 Exercised                              (480)         7.74
 Cancelled                              (587)        11.79
                                      -------    ---------
Outstanding at December 31, 1997        5,138        12.09
 Granted                                5,347         8.55
 Exercised                              (633)         7.39
 Cancelled                            (2,392)        13.79
                                      -------    ---------
Outstanding at December 31, 1998        7,460         9.40
                                       =======   =========
</TABLE>
                                        
<PAGE>

     
     A summary of options outstanding and exercisable at December 31, 1998 is as
     follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                     Options Outstanding            Options Exercised
               -----------------------------------  ---------------------
                              Weighted    Weighted               Weighted
                              Average      Average               Average
                   Number    Remaining    Exercise     Number    Exercise
                Outstanding Life (years)    Price   Exercisable    Price
                ------------------------ ---------  -----------  --------
<C>               <C>            <C>       <C>         <C>       <C>
$ 0.56 - $6.50    1,803          7.52      $ 2.90        559     $  4.23
  6.84 - 9.25     1,562          7.48        8.33        272        7.65
  9.50 - 10.44    1,785          8.58       10.16         56       10.27
 10.50 - 15.00    1,541          7.54       12.60        440       12.58
 15.13 - 24.00      769          7.31       18.68        160       19.03
                  7,460          7.75      $ 9.40      1,487     $  9.14

</TABLE>
<PAGE>

14.  Earnings per Share

     A  reconciliation of the basic and diluted per share computations for 1998,
     1997 and 1996 is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
                                     ------------------------------
                                                  1998
                                     ------------------------------
                                                Weighted        Per
                                        Income   Average      Share
                                        (Loss)    Shares     Amount
                                     ---------  --------  ---------
<S>                                 <C>          <C>      <C>
Income (loss) before
extraordinary item                  $(50,464)    38,844   $ (1.30)
  Extraordinary loss, net of tax            -         -         -
Income (loss) per common
share                               $(50,464)    38,844   $ (1.30)
Effect of dilutive securities:
Stock options                               -         -          -
Income (loss) per share-
assuming  dilution                  $(50,464)    38,844   $ (1.30)
</TABLE>

<TABLE>
<CAPTI0N>                            ------------------------------
                                                  1997
                                     ------------------------------
                                                Weighted        Per
                                        Income   Average      Share
                                        (Loss)    Shares     Amount
                                     ---------  --------  ---------
<S>                                   <C>         <C>      <C> 
Income (loss) before
extraordinary item                     $ 5,559    36,659    $  0.15
  Extraordinary loss, net of tax         (563)         -     (0.01)

Income (loss) per common
 share                                 $ 4,996    36,659      0.14)
Effect of dilutive securities:
Stock options                                -     1,059     (0.01)
Income (loss) per share-
 assuming  dilution                   $ 4,996)    37,718    $  0.13
</TABLE>

<TABLE>
<CAPTION>
                                     ------------------------------
                                                  1996
                                     ------------------------------
                                                Weighted        Per
                                        Income   Average      Share
                                        (Loss)    Shares     Amount
                                     ---------  --------  ---------
<S>                                  <C>         <C>       <C> 
Income (loss) before
 extraordinary item                  $ 20,630    34,162     $  0.60
Extraordinary loss, net of tax              -         -           -

Income (loss) per common share       $ 20,630    34,162        0.60

Effect of dilutive securities:
Stock options                               -       997      (0.01)
Income (loss) per share-
 assuming  dilution                  $ 20,630    35,159     $  0.59

</TABLE>

Due to the Company's loss in 1998, a calculation of earnings per share assuming
dilution is not required.  In 1998 dilutive securities consisted of options
convertible into approximately  1.3 million shares of common stock using the
treasury stock method to compute dilution.

<PAGE>

15.  SPECIAL AND/OR UNUSUAL ITEMS

     The Company incurred the following special and/or unusual charges in 1998
     and 1997.
     
     In 1998, the Company recorded a $99.9 million charge related to the
     valuation of its rental inventory (see Note 4).  In addition, the Company
     wrote off $1.9 million related to purchased research and development costs
     associated with the Reel.com acquisition (see Note 7).
     
     The Company recorded a $6.8 million charge in the fourth quarter of 1997 to
     write-off obsolete video game inventory and related accessories caused by
     advancements in video game technology.  Of the $6.8 million charge, $2.3
     million was included in cost of product sales and $4.5 million was included
     in operating and selling expenses on the consolidated statements of
     operations.
     
     The Company recorded a $4.6 million charge in the fourth quarter of 1997
     for costs related to the Company's self-tender offer to acquire shares of
     its common stock at $11.00 per share, which failed because the minimum
     number of shares required for the transaction was not tendered.  This
     charge is included in general and administrative expenses on the
     consolidated statements of operations.

     In March 1997, the Company recorded a $18.9 million charge for the
     settlement of the securities litigation initiated in December 1995.  The
     charge consisted of $14.8 million in damages and $4.1 million in legal and
     professional expenses.  The Company agreed to the settlement to avoid
     further litigation expense and inconvenience and to put an end to all
     controversy and claims related to the subject of litigation.

<PAGE>

16.  COMMITMENTS AND CONTINGENCIES

     In April 1998 a complaint seeking injunctive relief and monetary damages in
     the amount of approximately $200 million was filed against the Company,
     entitled Rentrak Corporation v. Hollywood Entertainment, et al., Case No.
     98-04-02811, Circuit Court for the County of Multnomah, Portland, Oregon.
     The plaintiff, Rentrak, alleges that the Company is contractually obligated
     until December 31, 2011 to deal exclusively with Rentrak whenever the
     Company obtains videocassettes on a revenue sharing basis, and that the
     Company has violated this alleged obligation by obtaining videocassettes on
     a revenue sharing basis directly from movie studios.  In addition, Rentrak
     alleges that the Company has violated alleged audit and reporting
     obligations under contractual arrangements. The Company believes this suit
     is without merit and is vigorously defending the litigation. The Company
     does not believe the ultimate outcome of the litigation will have a
     material effect on the Company. If, however, Rentrak prevails, the results
     could have an adverse effect on the Company's relationships with revenue
     sharing studios and on the Company's financial condition and results of
     operations.

     In July 1998 a related lawsuit seeking monetary damages in the amount of at
     least $5 million was filed against the Company by Twentieth Century Fox
     Home Entertainment, Inc. ("Fox"), entitled Twentieth Century Fox Home
     Entertainment, Inc. v. Hollywood Entertainment Corporation and Does 1
     through 100, Case No. SC 053 551, Superior Court for the County of Los
     Angeles, Los Angeles, California.  Fox alleges that the Company has
     knowingly or negligently reported inaccurate transaction-related data
     concerning Fox titles to Rentrak Corporation, and that the Company either
     knew or should have known that Rentrak would report to Fox the same
     allegedly inaccurate transaction data for purposes of Fox's generation of
     invoicing to Rentrak. In March 1999, Fox filed an amended complaint against
     the Company in which it added allegations of potential misrepresentation 
     and fraud. The Comnpany believes this suit is without merit and
     is vigorously defending the litigation. The Company does not believe the
     ultimate outcome of the litigation will have a material effect on the
     Company. If, however, Fox prevails, the results could have an adverse
     effect on the Company's relationships with revenue sharing studios and on
     the Company's financial condition and results of operations.


17.  SEGMENT REPORTING

     In June 1997, the Financial Accounting Standards Board (FASB) issued
     Statement No. 131, "Disclosures about Segments of an Enterprise and Related
     Information" effective for fiscal years beginning after December 15, 1997.
     The Company adopted Statement No. 131 in 1998.
          
     The Company identifies its segments based on management responsibility.  In
     1998, the Company had 2 segments.  The Hollywood Video segment consists of
     the Company's 1,260 retail stores located in 42 states and the Reel.com
     segment, which is the leading video-only store on the internet.  The
     Company measures segment profit as operating profit, which is defined as
     income before interest expense and income taxes.  Information on segments
     and a reconciliation to income before income taxes are as follows (in
     thousands):


<PAGE>
<TABLE>
<CAPTION>
                                       Year Ended December 31, 1998
                                      -------------------------------
                                      Hollywood
                                          Video   Reel.com       Total
                                      ---------   --------   ---------
<S>                                   <C>         <C>        <C>
Revenues                              $ 756,658    $ 7,250   $ 763,908
Depreciation and amortization           184,147     12,702     196,849
Unusual items (1)                        99,910      1,900     101,810
Operating income:
       Before unusual items              83,921   (20,024)      63,897
       After unusual items             (15,989)   (21,924)    (37,913)
Interest expense, net                    31,727        166      31,893
Total assets                            840,316     94,118     934,434
Purchase of property and
  equipment, net                        131,364        758     132,122

</TABLE>

(1)  Unusual items are as follows (in thousands):

<TABLE>
<CAPTION>
                                       ---------------------------------
                                        Hollywood
                                            Video   Reel.com       Total
                                       ----------  ---------   ---------
<S>                                     <C>        <C>         <C> 
Inventory valuation charge                $99,910          -     $99,910
Purchased in-process research
  and development                               -      1,900       1,900
                                        ---------  ---------   ---------
  Total                                   $99,910    $14,445    $114,355
                                        =========  =========   =========
</TABLE>

There was only one segment, Hollywood Video, in 1997 and 1996.

<PAGE>

18.  QUARTERLY FINANCIAL DATA (UNAUDITED)

     Selected quarterly financial data is as follows (in thousands, except per
     share data):
<TABLE>
<CAPTION>

                                                Quarter Ended
                               ---------------------------------------
  1998                            March      June  September  December
  ----------------------       --------  --------  ---------  --------
  <S>                          <C>       <C>        <C>       <C>
  Total revenue                $169,952  $166,731   $184,072  $243,153
  Income from operations         19,432    17,037     18,616  (92,998)
  Net income (loss)               7,663     5,654      6,082  (69,863)
  Net income (loss) per
   share (1):
     Basic                         0.21      0.15       0.16    (1.56)
     Diluted                       0.21      0.15       0.16    (1.56)
     
  1997
  ----------------------
  Total revenue                $110,475  $110,002   $124,621  $155,403
  Income from
   operations                    14,329    11,177     12,143     4,032
  Net income (loss)             (3,607)     5,481      4,572   (1,450)
  Net income (loss) per 
   share:
    Basic (2)                    (0.10)      0.15       0.12    (0.04)
    Diluted                      (0.10)      0.15       0.12    (0.04)

</TABLE>

     (1)  In 1998, the sum of the four quarters earnings per share does not 
          equal the annual amount due to the acquisition of Reel.com and 
          operating loss in the fourth quarter of 1998.
     
     (2)  In 1997, the sum of the four quarters basic earnings per share does 
          not equal the annual amount due to rounding.

<PAGE>

                                   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, thereunto duly authorized, as of  March 30, 1999.

                    Hollywood Entertainment Corporation


                    By: /S/ DAVID G. MARTIN
                       -----------------------------------------------------
                       Executive Vice President
                       and Chief Financial Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated as of  March 30, 1999.

Signatures          Title
----------          ------


MARK J. WATTLES
---------------     Chairman of the Board of Directors,
Mark J. Wattles     and Chief Executive Officer
                    (Principal Executive Officer)

DAVID G. MARTIN
---------------     Executive Vice President
David G. Martin     and Chief Financial Officer
                    (Principal Financial and Accounting Officer)

DONALD J. EKMAN
---------------     Director
Donald J. Ekman

SCOTT A.BECK
-------------       Director
Scott A. Beck

WILLIAM P. ZEBE
---------------     Director
William P. Zebe