SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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                                   FORM 10-K/A

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                                  AMENDMENT TO
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                    FOR THE FISCAL YEAR ENDED APRIL 30, 1997
                         COMMISSION FILE NUMBER 0-19253

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                               VIDEO UPDATE, INC.
                               ------------------
             (Exact name of registrant as specified in its charter)

          DELAWARE                                               41-1461110
          --------                                               ----------
(State or other jurisdiction                                  (I.R.S. employer
     of incorporation or                                     identification No.)
        organization)

     3100 WORLD TRADE CENTER                                       55101
      30 EAST SEVENTH STREET                                       -----
       ST. PAUL, MINNESOTA                                       (Zip Code)
     -------------------------
       (Address of principal
         executive offices)

                                 (612) 222-0006
                                 --------------
              (Registrant's telephone number, including area code)


                                 AMENDMENT NO. 1
                                 ---------------

     The undersigned  registrant  hereby amends the following  items,  financial
statements,  exhibits or other portions of its Annual Report for the fiscal year
ended April 30, 1997 on Form 10-K as set forth in the pages attached hereto:

                   (List all such items, financial statements,
                      exhibits or other portions amended.)


     1.  Part III:      Item  10 -  Directors  and  Executive  Officers  of  the
                        Registrant.

     2.  Part III:      Item 11 - Executive Compensation.

     3.  Part III:      Item  12 -  Security  Ownership  of  Certain  Beneficial
                        Owners and Management.

     4.  Part III:      Item   13   -   Certain    Relationships   and   Related
                        Transactions.






                                    SIGNATURE

     Pursuant to the  requirements  of the  Securities  Exchange Act of 1934, as
amended,  the  registrant  has duly  caused this  amendment  to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                                     VIDEO UPDATE, INC.

                                                     By: /s/ Daniel A. Potter
                                                         -----------------------
                                                         Daniel A. Potter
                                                         Chief Executive Officer

Date:  August 27, 1997



                                       2


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         BACKGROUND

                  The  Directors and  executive  officers of the Company,  their
positions held in the Company, and their ages are as follows:

NAME                        AGE                 POSITION
----                        ---                 --------

Daniel A. Potter            39         Chairman and Chief Executive Officer

John M. Bedard              39         President and Director

Daniel C. Howard            36         Chief Operations Officer and Director

Christopher J. Gondeck      42         Chief Financial Officer

Richard Bedard              43         Executive Vice President

Bruce D. Carlson            36         Vice President of Real Estate

Michael G. Schifsky         41         Vice President of Store Development

Robert E. Yager             33         Vice President of Store Operations
                                       and Director

Jana Webster Vaughn         34         Director

Paul M. Kelnberger          53         Director

Bernard Patriacca           53         Director

         Each  director  is  elected  for a period of one year at the  Company's
annual meeting of stockholders and serves until his successor is duly elected by
the stockholders.

         The following is a brief summary of the background of each Director and
executive officer of the Company:

         DANIEL A. POTTER,  CHAIRMAN AND CHIEF  EXECUTIVE  OFFICER.  Mr.  Potter
co-founded  the  Company in 1983 and has served as the  Company's  Chairman  and
Chief Executive Officer since its inception. Mr. Potter devised,  initiated, and
structured the franchising  strategy implemented by the Company and is primarily
responsible for the Company's  financial and strategic  planning.  Mr. Potter is
the  brother-in-law of Robert E. Yager, a Vice-President of Store Operations and
Director of the Company.  Mr. Potter holds a B.A.  degree from the University of
Minnesota and a J.D. degree from William Mitchell College of Law.

         JOHN M. BEDARD,  PRESIDENT AND  DIRECTOR.  Mr.  Bedard  co-founded  the
Company in 1983 with Mr. Potter and has served as the Company's President and as
a Director since its inception.  Mr. Bedard,  together with Mr. Potter,  devised
and  implemented the Company's real estate  development  program and operations.
Mr. Bedard is the brother of Richard Bedard,  an Executive Vice President of the
Company.

         DANIEL C. HOWARD, CHIEF OPERATIONS OFFICER AND DIRECTOR. Mr. Howard has
served as the Company's Chief Operations Officer since 1990, has coordinated the
Company's operations since 1983, and has served as a Director since August 1994.
He holds a B.S.  degree from the  University of Minnesota  School of Management.
Mr. Howard is a member of the audit and executive compensation committees.




                                       3



         CHRISTOPHER J. GONDECK, CHIEF FINANCIAL OFFICER. Mr. Gondeck has served
as the Company's  Chief  Financial  Officer since January 1995. From May 1994 to
September 1994, Mr. Gondeck was a financial consultant to Corning-Donahue,  Inc.
and Fire Brick Supply,  privately held brick and tile  businesses.  From 1992 to
March 1994,  Mr.  Gondeck  served as Senior Vice  President and Chief  Financial
Officer for Premier Salons  International,  Inc.  ("Premier"),  a privately held
company based in Toronto,  Ontario. Prior to December 1993, Premier was known as
MEI Salon Corp.  ("MEI Salon"),  a wholly owned  subsidiary of MEI  Diversified,
Inc. ("MEI  Diversified"),  which operated over 1,000 hair care salon  locations
throughout the United States and Canada.  While Mr. Gondeck was Chief  Financial
Officer of MEI Salon, in February 1993, MEI Salon and MEI Diversified  filed for
bankruptcy  protection  under federal law.  Prior to 1992, Mr. Gondeck served in
various  financial and management  capacities for MEI  Diversified.  Mr. Gondeck
also has served as a staff  accountant with Ernst & Young LLP. Mr. Gondeck holds
a B.S. degree from St. Cloud State  University in St. Cloud,  Minnesota and is a
certified public accountant.

         RICHARD BEDARD,  EXECUTIVE VICE PRESIDENT.  Mr. Bedard has served as an
Executive Vice President of the Company since September 1995. From 1986 to 1995,
he served as the Company's Vice President of Franchise  Development.  Mr. Bedard
is the brother of John M. Bedard, the Company's President and a Director.

         BRUCE D. CARLSON, VICE PRESIDENT OF REAL ESTATE. Mr. Carlson has served
as the Company's Vice President of Real Estate  Operations since 1990. From 1984
to 1990, Mr. Carlson held the positions of Director of Advertising  and Regional
Corporate Store Manager.

         MICHAEL G. SCHIFSKY, VICE PRESIDENT OF STORE DEVELOPMENT.  Mr. Schifsky
has served as Vice President of Store Development since rejoining the Company in
1990.  Mr.  Schifsky  has also served as a District  Manager of the Company from
1984 to 1988.  From 1988 to 1990, he was the principal  stockholder  of Bankshot
Investments,  Inc.,  a privately  held  company  engaged in the  development  of
billiard facilities.

         ROBERT E. YAGER,  VICE PRESIDENT OF STORE OPERATIONS AND DIRECTOR.  Mr.
Yager has served as a Vice President of Store Operations since November 1995 and
as a Director since August 1994. From September 1994 to November 1995, Mr. Yager
served as a Regional Manager of the Company. Prior to that time, since 1989, Mr.
Yager owned and operated two franchised  Company  superstores in the Twin Cities
area,  until such store  operations  were  purchased by the Company in September
1994.  From 1984 to 1989, Mr. Yager was a computer  programmer for a division of
NCR  Corporation.  Mr.  Yager  holds an  Associate's  degree  from  Northwestern
Electronic Institute in Minneapolis,  Minnesota. Mr. Yager is the brother-in-law
of Daniel A. Potter, the Company's Chairman and Chief Executive Officer.

         PAUL M. KELNBERGER,  DIRECTOR.  Mr. Kelnberger has served as a Director
since August 1994. Mr. Kelnberger has been a member of Johnson,  West & Co., PLC
("Johnson,  West & Co."), a certified public  accounting firm with its principal
offices in St. Paul, Minnesota, since 1975. In addition, since November 1995 Mr.
Kelnberger  has served as a Director of Leuthold  Funds,  a publicly held mutual
fund.  Johnson,  West & Co. performed auditing services for the Company prior to
the fiscal year ended April 30,  1993.  Since that time,  Johnson West & Co. has
provided  and  continues  to  provide  to the  Company  accounting  services  in
connection  with  the  Company's  acquisitions  and for tax  return  preparation
services. Mr. Kelnberger has significant franchise and retail company accounting
experience.  Mr.  Kelnberger  is a  certified  public  accountant  and  holds  a
Certificate  of  Accounting  from the  Academy of  Accountancy  in  Minneapolis,
Minnesota.  He  chairs  the  Board's  audit  committee  and is a  member  of the
executive compensation committee.

         JANA  WEBSTER  VAUGHN,  DIRECTOR.  Ms.  Vaughn has served as a Director
since August 1994. Ms. Vaughn has been the Director of Marketing and Development
of Adoptive Families of America, a non-profit,  national education,  legislation
and  advocacy  organization,  since June 1995.  From May 1992 to July 1995,  Ms.
Vaughn was the Executive Director of the Greater Anoka County,  Minnesota Humane
Society.  From 1989 to 1992, she served as Special  Projects Manager for KARE 11
Television,  a network television station in Minneapolis,  Minnesota. Ms. Vaughn
holds a B.A. degree from the University of Minnesota.  Ms. Vaughn is a member of
the audit and executive compensation committees.




                                       4



         BERNARD  PATRIACCA,  DIRECTOR.  Mr.  Patriacca has served as a Director
since April 1997.  Since 1994, he has served as Vice  President of Errands Etc.,
Inc., a privately held homeowner's personal service company.  From 1973 to 1991,
Mr.  Patriacca  served in various  capacities  at Dunkin'  Donuts  Incorporated,
including Chief Financial Officer and Director. From 1991 to 1994, Mr. Patriacca
held senior financial  management  positions at several  privately held consumer
services companies. He also serves as a director of Smith-Midland Corporation, a
publicly held  developer and  manufacturer  of precast  concrete  products.  Mr.
Patriacca is a certified  public  accountant  and holds  Bachelor's  and Masters
degrees in finance and accounting from Northeastern University.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), requires executive officers and Directors,  and
persons who  beneficially own more than ten percent (10%) of the Company's Class
A Common  Stock,  to file initial  reports of ownership on Form 3 and reports of
changes in ownership on Form 4 with the Securities and Exchange  Commission (the
"SEC") and any national  securities  exchange on which the Company's  securities
are registered. Executive officers, Directors and greater than ten percent (10%)
beneficial  owners are required by SEC  regulations  to furnish the Company with
copies of all Section 16(a) forms they file.

         Based  solely on a review of the copies of such forms  furnished to the
Company and written  representations  from the executive  officers and Directors
that no other  reports were  required,  the Company  believes that during fiscal
1997,  its  executive  officers,  Directors  and greater than ten percent  (10%)
beneficial   owners   complied   with  all   applicable   Section  16(a)  filing
requirements.

ITEM 11. EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE

         Set  forth  below  is  a  Summary  Compensation  Table  concerning  the
compensation of the named executive officers for the last three completed fiscal
years.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                    LONG TERM
                                              ANNUAL COMPENSATION                 COMPENSATION
                                              -------------------                 ------------
                                                                                     AWARDS
                                                                                     ------
                                FISCAL                                             SECURITIES
                                YEAR                            OTHER ANNUAL       UNDERLYING          ALL OTHER
                                ENDED      SALARY (1)   BONUS COMPENSATION (2)   OPTIONS/SARS(3)    COMPENSATION(4)
NAME AND PRINCIPAL POSITION     APRIL 30       ($)       ($)         ($)               (#)                ($)
             (A)                   (B)         (C)       (D)         (E)               (G)                (I)
----------------------------   ---------   ---------  ------- ----------------   ----------------  ----------
<S>                               <C>       <C>          <C>     <C>                 <C>               <C>
Daniel A. Potter.............     1997      $300,000     $0      $      0            300,000           $26,307
Chairman and Chief                1996      $248,002     $0      $894,357            270,000           $21,122
    Executive Officer             1995      $216,671     $0      $      0                  0           $     0

John M. Bedard...............     1997      $200,000     $0      $      0            165,000           $17,952
President and Director            1996      $158,755     $0      $496,875            150,000           $18,081
                                  1995      $125,000     $0      $      0                  0           $19,200

Christopher J. Gondeck(5)....     1997      $125,000     $0      $      0             60,000           $14,033
Chief Financial Officer           1996      $114,548     $0      $      0             45,000           $ 2,854
                                  1995      $ 34,000     $0      $      0             30,000           $     0
</TABLE>

-----------------
(1)    Amounts shown indicate cash compensation earned and received by executive
       officers;  no amounts  were earned but  deferred at the election of those
       officers.  Executive  officers  participate in the Company's group health
       insurance plan.




                                       5



(2)    Amounts shown reflect the difference between the aggregate exercise price
       of the options exercised by Messrs.  Potter and Bedard during the period,
       and the aggregate fair market value of the shares of Class A Common Stock
       issued to Messrs.  Potter and Bedard upon such exercises,  as of the date
       of issuance.

(3)    Amounts shown reflect  grants of options to purchase Class A Common Stock
       pursuant to the Company's  Stock Option  Plans.  During fiscal years 1995
       through 1997, the Company made no awards of restricted  stock and did not
       have a long-term incentive plan.

(4)    Amounts shown reflect payment for automobile expenses and insurance.

(5)    Mr. Gondeck has been employed by the Company since January 2, 1995.

OPTION/SAR GRANTS TABLE

         Set forth below is an  Option/SAR  Grants Table  concerning  individual
grants of stock options and SARs made during the last  completed  fiscal year to
each of the named executive officers.

                      OPTION/SAR GRANTS IN FISCAL YEAR 1997

<TABLE>
<CAPTION>
                                         INDIVIDUAL GRANTS                                      
------------------------------------------------------------------------------------------      POTENTIAL REALIZABLE
                               NUMBER OF                                                              VALUE AT        
                              SECURITIES     PERCENT OF TOTAL                                      ASSUMED ANNUAL
                              UNDERLYING       OPTIONS/SARS                                        RATES OF STOCK
                             OPTIONS/SARS       GRANTED TO        EXERCISE OF                    PRICE APPRECIATION
                                GRANTED        EMPLOYEES IN       BASE PRICE    EXPIRATION       FOR OPTION TERM(1)
         NAME                     (#)         FISCAL YEAR(2)        ($/SH)       DATE (3)       5% ($)       10% ($)
          (A)                     (B)               (C)               (D)           (E)           (F)          (G)
        -------             -------------    ----------------    -----------    ----------    ---------    -------
<S>                            <C>                <C>                <C>        <C>            <C>         <C>
Daniel A. Potter...........    300,000            36.1%              $4.00      10/22/2006     $754,674    $1,912,491
John M. Bedard.............    165,000            19.9%              $4.00      10/22/2006     $415,070    $1,051,870
Christopher J. Gondeck.....     60,000             7.2%              $4.00      10/22/2006     $150,935    $  382,498
</TABLE>

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

(1)    The dollar gains under these columns  result from  calculations  assuming
       hypothetical  growth rates as set by the  Commission and are not intended
       to forecast future price appreciation of the Class A Common Stock.

(2)    In fiscal  1997,  options to  purchase  a total of 831,000  shares of the
       Company's  Class A Common Stock were granted to employees of the Company,
       including executive officers.

(3)    These  options are subject to earlier  termination  upon  certain  events
       related to termination of employment.

AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE

       Set forth below is a table  concerning each exercise of stock options (or
tandem SAR's) and  freestanding  SARs during the last  completed  fiscal year by
each  of  the  named  executive  officers  and  the  fiscal  year-end  value  of
unexercised options and SARs.






                                       6


      AGGREGATED OPTION/SAR EXERCISES FOR FISCAL YEAR ENDED APRIL 30, 1997
                          AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
                                                                            NUMBER OF
                                                                           SECURITIES                 VALUE OF
                                                                           UNDERLYING                UNEXERCISED
                                                                           UNEXERCISED              IN-THE-MONEY
                                                                          OPTIONS/SARS              OPTIONS/SARS
                                     SHARES             VALUE         AT FISCAL YEAR-END(#)     AT FISCAL YEAR-END($)
                                   ACQUIRED ON        REALIZED            EXERCISABLE/              EXERCISABLE/
         NAME                      EXERCISE(#)           ($)              UNEXERCISABLE           UNEXERCISABLE (1)
          (A)                          (B)               (C)                   (D)                       (E)
---------------------------      --------------      ---------          ---------------           -----------------
<S>                                     <C>               <C>            <C>                       <C>
Daniel A. Potter...........             0                 0              100,000/200,000           $12,500/$25,000
John M. Bedard.............             0                 0              55,000/110,000            $6,875/$13,750
Christopher J. Gondeck.....             0                 0               72,000/59,500             $2,500/$5,000
</TABLE>
--------------------------
(1)    In-the-Money options are those options for which the fair market value of
       the  underlying  Common Stock is greater  than the exercise  price of the
       option. On April 30, 1997, the fair market value of the Company's Class A
       Common Stock underlying the options (as determined by the last sale price
       quoted on the NASDAQ National Market) was $4.125.

COMPENSATION OF DIRECTORS

         Members of the Board of Directors  who are not employees of the Company
receive $1,000 for each meeting of the Board of Directors and for each committee
meeting of the Board of  Directors  attended  by such  Director,  in addition to
reimbursement of reasonable  expenses  incurred in attending such meetings,  and
receive  $2,000  for  each  quarter  of  service  as a  Director.  Additionally,
non-employee  Directors receive options under the Formula Plan, as follows:  (i)
all non-employee  directors  (currently Mr.  Patriacca,  Mr.  Kelnberger and Ms.
Vaughn) each receive options annually to purchase 1,500 shares of Class A Common
Stock,   which  vest  in  two  equal  annual   installments  on  the  first  two
anniversaries of the date of grant and which are exercisable at a price equal to
the fair market value of the Class A Common Stock on the date of grant, provided
that  each of them is a  Director  on the date of the grant and each of them has
attended at least 75% of the meetings he or she was eligible to attend, and (ii)
Mr. Patriacca  received and any non-employee  Directors  appointed in the future
will receive on the date of such  appointment,  options to purchase 3,000 shares
of Class A Common Stock,  which will vest in three equal annual  installments on
the first three anniversaries of the date of grant and which will be exercisable
at a price  equal to the fair  market  value of the Class A Common  Stock on the
date of grant.

EMPLOYMENT   CONTRACTS,   TERMINATION   OF   EMPLOYMENT,   OFFICER   LOANS   AND
CHANGE-IN-CONTROL ARRANGEMENTS

         In February 1996, the Company entered into  employment  agreements with
Daniel A. Potter,  its Chairman and Chief Executive Officer and John Bedard, its
President,  each of whom also is a Director and a principal  stockholder  of the
Company. The agreements are for three year terms, expiring in February 1999. Mr.
Potter  and Mr.  Bedard  are to  receive  salaries  of  $300,000  and  $200,000,
respectively.  Such  compensation may be increased and bonuses may be awarded at
the discretion of the Board of Directors of the Company.  Each of Messrs. Potter
and Bedard  have  agreed to devote  their full time and best  efforts to fulfill
their duties and responsibilities to the Company.  Each of them will be entitled
to participate in employee benefit plans.

         The Company has a right to terminate each of the agreements for "cause"
as defined in the agreements or as a result of the employee's disability. Except
in the case of termination for cause,  upon early  termination of the agreements
of the Company,  each of Messrs.  Potter and Bedard shall be entitled to receive
their salary plus fringe benefits for 36 months from the date of termination. In
the event of a change of control of the Company,  Messrs. Potter and Bedard have
the  option to  terminate  their  employment  subject to the  provisions  of the
employment agreements and to receive severance and fringe benefits for 36 months
subject to the provisions of their agreements. A "change in control" includes an
acquisition  of 15% of the voting power of the  securities of the Company by any
person,  certain  changes in the  composition of the Board of Directors,  and an
approval  by  the  stockholders  of  the  Company  of a


                                       7


merger, consolidation,  reorganization,  liquidation, dissolution or sale of all
or substantially all of the assets of the Company.

         Each of Messrs.  Potter and  Bedard  has  agreed  not to  disclose  any
confidential  information of the Company during the term of his employment or to
compete with the Company  during the term of his  employment  or for a period of
one year following  termination of his employment  except in accordance with the
employment agreement.

         The Company has  Recourse  Notes from its Chief  Executive  Officer and
from the President for  approximately  $1,928,000 and $1,071,000,  respectively,
including  accrued  interest  through  April 30, 1997.  The Recourse  Notes were
issued by the executives  upon their exercise in August 1995 of 420,000  options
granted to them under the Stock Option Plans in May 1995 at an exercise price of
$4.3125,  the fair  market  value of the  stock  on the  date the  options  were
granted.  The Recourse Notes  represent the total exercise price of such options
plus  amounts  advanced  by the  Company  to such  executives  to  satisfy  then
anticipated tax liabilities. The Recourse Notes, which provide for full recourse
against the respective officer's personal assets and Company stockholdings,  are
due and payable in October  1999,  and accrue  interest at 8% per annum.  In the
event that the obligors  sell shares of the  Company's  stock,  the net proceeds
thereof will be applied to payment, in part or in full, of the Recourse Notes.

         In addition,  as of April 30, 1997,  the Company has a note  receivable
from its President for $31,000 which accrues interest at 8% per annum and is due
November  1997. The note  represents  advances from the Company to the President
from January 1994 to April, 1994, together with accrued interest.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         Compensation  decisions for the Company's Chief  Executive  Officer and
President are made by the Executive Compensation Committee, comprised of Messrs.
Kelnberger and Howard and Ms. Vaughn.

         None of the executive  officers of the Company have served on the Board
of  Directors  of any other  entity that has had any of such  entity's  officers
serve either on the Company's Board of Directors or Compensation Committee.

         During fiscal 1997, the Company paid approximately $271,000 to Johnson,
West & Co. for accounting services in connection with the Company's acquisitions
and for tax return preparation services.  Mr. Kelnberger is a member of Johnson,
West & Co.  During fiscal year 1996 the Company  incurred fees of  approximately
$245,000 for accounting and tax services rendered by Johnson, West & Co.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

         Set forth below is the report of the Company's  Compensation  Committee
regarding executive compensation.

                REPORT OF THE VIDEO UPDATE COMPENSATION COMMITTEE
                            ON EXECUTIVE COMPENSATION

Overview

         The Executive Compensation Committee of the Board of Directors of Video
Update,  Inc.  is  composed  of two  non-employee  directors  and  one  employee
director.  The Executive  Compensation Committee reviews the compensation of the
Company's  Chief  Executive  Officer and its  President at least  annually.  The
Executive  Compensation Committee believes the actions of the top two executives
of  the  Company  have  a  profound  impact  on  the  short-term  and  long-term
profitability of the Company.  Therefore,  the Executive  Compensation Committee
gives significant attention to the design of the Company's  compensation package
for such individuals.




                                       8


         The  Company's  compensation  package  consists  of  two  parts  and is
relatively  simple  in  design.  The two  primary  parts are a base  salary  and
stock-based  incentive  compensation.  No  significant  perquisites  other  than
automobile expenses and insurance are provided to the two executive officers.

Base Salary

         The Executive  Compensation  Committee believes it is important for the
two executive officers of the Company to receive acceptable salaries so that the
Company  can recruit and retain the talent it needs.  In setting  salaries,  the
Executive   Compensation  Committee  takes  into  consideration  the  individual
employee's  performance,  length of service  to the  Company,  and a  subjective
judgment regarding the impact the individual has on the Company. The base salary
for each executive officer set forth in their respective  employment  agreements
was set on a subjective  basis,  bearing in mind an overall  impression  of that
executive's  relative skills,  experience and  contribution to the Company.  The
Executive Compensation Committee does not attempt to address the relative weight
assigned to the various  factors,  which are  evaluated on a subjective  overall
basis  by  each  individual  member  of the  Executive  Compensation  Committee.
Salaries of the Company's Chief Executive Officer and its President are reviewed
annually by the Executive Compensation Committee.

Stock-Based Incentives

         Stock-based   incentives   have  been  a   supplemental   component  of
compensation  for the Company's Chief Executive  Officer and its President,  and
certain other  employees,  since the Company's  initial public offering in 1994.
The Company adopted formal  incentive stock option plans in 1994, 1995 and 1996.
The Executive  Compensation  Committee  recommends grants of stock options under
the Company's option plan for the Chief Executive Officer and the President.

         Historically,  grants made by the Company  have  generally  vested at a
rate of 33% per year  beginning  one year from the date of grant.  These options
also  usually  expire  upon  termination  of  employment  or  a  limited  period
thereafter,  except in the event of disability or death,  in which case the term
of the option may continue for some time thereafter.

         The Executive  Compensation Committee believes that the Company's stock
option  program has been effective in focusing  attention on  stockholder  value
since the gain to be realized by these two  executive  officers upon exercise of
options  will  change as the stock price  changes.  The  Executive  Compensation
Committee also believes that the long-term nature of the options  encourages the
Company's top two executive  officers to remain with the Company.  The number of
shares to be granted was established  utilizing the procedure described above at
"Base Salary." The Executive Compensation Committee subjectively  determined the
number of shares to be granted  based on its  analysis  of the number that would
provide an adequate incentive to each of its top two executive officers.

         In general, the granting of stock-based incentives is considered by the
Committee to be justified when the Company's revenues and earnings, coupled with
the individual  executive's  performance,  warrant supplemental  compensation in
addition  to the  salary and bonus paid with  respect to a given  year.  Each of
these  factors is  weighed  subjectively  by  Committee  members in  determining
whether or not a stock-based  incentive  should be granted,  and such incentives
are not  granted  routinely.  As a result,  stock  options for shares of Class A
Common  Stock were  granted to the  Company's  Chief  Executive  Officer and its
President for their continued outstanding performance and for making substantial
contributions to the Company's increased revenues.

Compensation Of The Chief Executive Officer

         The Compensation  Committee has reviewed and approved the annual salary
of Daniel A. Potter,  Chief  Executive  Officer of the Company,  which is set at
$300,000.  This exhibits the philosophy of the Executive  Compensation Committee
as set forth at "Base Salary" above.  This salary was reflected in Mr.  Potter's
employment agreement entered into in February 1996. Mr. Potter's compensation is
subject  to annual  review by the Board of  Directors.  The Board  believes  the
compensation of Mr. Potter,  a founder of the Company,  reflects the Committee's
subjective  opinion that Mr.  Potter has  provided  superlative  leadership  and
fulfilled  the  functions of an executive  officer of the Company at the highest
level.





                                       9


Conclusion

         The Executive  Compensation  Committee  believes that its mix of a cash
salary and a long-term stock incentive compensation program represents a balance
that has motivated and will continue to motivate the Company's  management  team
to produce the best results possible given overall  economic  conditions and the
difficulty of predicting the Company's performance in the short term.

Executive Compensation Committee:                         Board of Directors:

PAUL M. KELNBERGER                                        DANIEL A. POTTER
JANA WEBSTER VAUGHN                                       JOHN M. BEDARD
DANIEL C. HOWARD                                          DANIEL C. HOWARD
                                                          ROBERT E. YAGER
                                                          PAUL M. KELNBERGER
                                                          JANA WEBSTER VAUGHN
                                                          BERNARD PATRIACCA


PERFORMANCE GRAPH

         Set forth below is a line-graph  presentation  comparing the cumulative
stockholder  return on the Company's  Class A Common Stock, on an indexed basis,
against cumulative total returns of the Nasdaq Stock Market (U.S. Companies) and
a "peer group"  selected by Management of the Company.  The peer group  selected
for  inclusion  in this  report  includes  Hollywood  Entertainment  Corporation
("Hollywood"),  Movie Gallery,  Inc.  ("MGI"),  Moovies,  Inc. ("MOOV") and West
Coast  Entertainment  Corp.  ("West  Coast")  (collectively,   the  "Peer  Group
Companies").  Hollywood,  MGI, MOOV and West Coast have securities traded on the
Nasdaq Stock Market.  The Peer Group  Companies  were selected  because they are
frequently  utilized  as a basis for  comparison  with the Company in reports by
analysts. Viacom, Inc. ("Viacom"),  which operates "Blockbuster" video specialty
stores,  is not  included  in the peer  group.  Viacom is a large  entertainment
conglomerate  with only a small portion of its business in the retail  videotape
industry,  and its stock is traded on the American Stock  Exchange.  The returns
for  the  peer  group  were   weighted   according  to  each   issuer's   market
capitalization.  The Performance  Graph shows total return on investment for the
period  beginning  July 20,  1994  (the  date of the  Company's  initial  public
offering) and ending April 30, 1997.


                               [INSERT GRAPH HERE]


VALUE OF $100 INVESTED ON JULY 20, 1994 AT:

<TABLE>
<CAPTION>
                                        7/29/94             4/30/95            4/30/96          4/30/97
                                        -------             -------            -------          -------
                  <S>                    <C>                <C>                <C>              <C>
                  VIDEO UPDATE           $100               $ 87.50            $162.50          $ 82.50
                  PEER GROUP(1)          $100               $166.71            $155.91          $117.86
                  NASDAQ MARKET          $100               $108.27            $151.13          $161.09
</TABLE>

Total return assumes reinvestment of dividends.

(1) West Coast  Entertainment  Corp.  is  included  in the Peer Group only as of
April 30, 1997; West Coast's stock began trading publicly in May 1996.




                                       10


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following  table sets forth,  as of August 26, 1997, the number and
approximate  percentage  of  shares  of Class A Common  Stock and Class B Common
Stock  beneficially  owned by (i) all  persons  known by the  Company  to be the
beneficial  owner of more  than five  percent  (5%) of the  outstanding  Class A
Common Stock or Class B Common Stock,  (ii) "each named  executive  officer" (as
defined  in Item 402 to  Regulation  S-K under the  Securities  Act of 1933,  as
amended) and Director,  and (iii) all  Directors  and executive  officers of the
Company as a group.



<TABLE>
<CAPTION>
                                     NUMBER OF      PERCENTAGE         NUMBER OF         PERCENTAGE
                                      CLASS A       OF CLASS A          CLASS B          OF CLASS B
                                       SHARES         SHARES            SHARES             SHARES
NAME AND ADDRESS OF                 BENEFICIALLY   OUTSTANDING       BENEFICIALLY       OUTSTANDING
BENEFICIAL OWNER(1)                 OWNED (2)(3)      (2)(3)      OWNED (15)(16)(17)    (15)(16)(17)
-------------------                 ------------      ------      ------------------    ------------
<S>                                   <C>              <C>           <C>                    <C>
Daniel A. Potter, Chairman and Chief
Executive Officer (3)(4)              370,000            2.0%        1,086,759              54.3%

John M. Bedard, President
and Director (3)(5)                   205,000            1.1%          878,117              43.9%

Daniel C. Howard, Chief Operating
Officer and Director (6)               61,375           *%              35,124               1.8%

Christopher J. Gondeck,
Chief Financial Officer (7)            76,000           *%                   -               -

Richard Bedard, Executive
Vice President (8)                     34,000           *%                   -               -

Bruce D. Carlson, Vice
President of Real Estate (9)           61,375           *%                   -               -

Michael G. Schifsky,
Vice President of Store
Development (10)                       61,200           *%                   -               -

Robert E. Yager, Vice President of
Store Operations and Director (11)     93,250           *%                   -               -
                                       

Paul M. Kelnberger,
Director (12)                           4,500           *%                   -               -

Jana Webster Vaughn,
Director (12)                           3,000           *%                   -               -

Bernard Patriacca,                          
Director (13)                               -            -                   -               - 

Investment Advisors, Inc. (14a)     1,956,400           10.8%                -               -

Stein Roe & Farnham,
Incorporated (14b)                    908,000            5.0%                -               -

All Directors and executive officers
as a group (11 persons)               969,700            5.2%        2,000,000             100%


</TABLE>

                                       11



* Less than one percent (1%) of the outstanding shares of Class A Common Stock.


(1)      The address of Messrs.  Potter, John Bedard, Howard,  Gondeck,  Richard
         Bedard, Carlson,  Schifsky, Yager and Kelnberger and Ms. Vaughn and Mr.
         Patriacca is c/o Video Update,  Inc.  3100 World Trade Center,  30 East
         Seventh Street,  St. Paul,  Minnesota  55101. The address of Investment
         Advisors,  Inc.  is  3700  First  Bank  Place,  Box  357,  Minneapolis,
         Minnesota 55440.  The address of Stein Roe & Farnham, Inc. is One South
         Wacker Drive, 35th Floor, Chicago, Illinois 60606.

(2)      For the  purposes of this table,  shares of Class A Common Stock which,
         to the  Company's  knowledge,  an  individual  or group  has a right to
         acquire  within  sixty  (60)  days  upon the  exercise  of  options  or
         warrants,  are deemed  outstanding  for the purposes of  computing  the
         number and percentage of shares  beneficially  owned by such individual
         or group.  Such shares are not deemed to be outstanding for the purpose
         of computing the percentage of shares  beneficially  owned by any other
         individual  or group  shown  in the  table.  There  are no  options  or
         warrants  outstanding  for Class B Common  Stock.  This  table does not
         include  an  approximate  aggregate  amount of 2,600  shares of Class A
         Common Stock held by the executive  officers of the Company through the
         Company's 401(k) plan.

(3)      Messrs.  Potter and Bedard hold  270,000 and 150,000  shares of Class A
         Common Stock, respectively.

(4)      Includes  an  aggregate  of  100,000  shares  of Class A  Common  Stock
         issuable on exercise of various stock options. Excludes an aggregate of
         200,000  shares of Class A Common Stock  issuable  upon the exercise of
         various stock options that have not yet vested. Does not include 26,250
         shares of Class A Common Stock owned by Mr. Potter's  father,  in which
         Mr. Potter disclaims beneficial ownership.

(5)      Includes an aggregate of 55,000 shares of Class A Common Stock issuable
         on exercise of various stock options.  Excludes an aggregate of 110,000
         shares of Class A Common  Stock  issuable  upon the  exercise  of stock
         options that have not yet vested.

(6)      Includes an aggregate of 61,375 shares of Class A Common Stock issuable
         upon the exercise of various  stock  options.  Excludes an aggregate of
         32,125  shares of Class A Common  Stock  issuable  upon the exercise of
         various stock options that have not yet vested.

(7)      Includes an aggregate of 72,000 shares of Class A Common Stock issuable
         upon the exercise of various  stock  options.  Excludes an aggregate of
         59,500  shares of Class A Common  Stock  issuable  upon the exercise of
         various stock options that have not yet vested.

(8)      Includes an aggregate of 34,000 shares of Class A Common Stock issuable
         upon the exercise of various stock  options that have vested.  Excludes
         an aggregate of 56,000 shares of Class A Common Stock issuable upon the
         exercise of stock options that have not vested.

(9)      Includes an aggregate of 61,375 shares of Class A Common Stock issuable
         upon the exercise of various stock  options that have vested.  Excludes
         an aggregate of 32,125 shares of Class A Common Stock issuable upon the
         exercise of stock options that have not vested.

(10)     Includes an aggregate of 61,200 shares of Class A Common Stock issuable
         upon the exercise of various stock  options that have vested.  Excludes
         an aggregate of 31,800 shares of Class A Common Stock issuable upon the
         exercise of stock options that have not vested.

(11)     Includes an aggregate of 14,500 shares of Class A Common Stock issuable
         upon the exercise of various stock  options that have vested.  Excludes
         an aggregate of 17,000 shares of Class A Common Stock issuable upon the
         exercise of stock options that have not vested.


                                       12




(12)     Includes an aggregate of 3,000 shares of Class A Common Stock  issuable
         upon the exercise of various stock  options that have vested.  Excludes
         an aggregate of 1,500 shares of Class A Common Stock  issuable upon the
         exercise of stock options that have not vested.

(13)     Excludes an aggregate of 3,000 shares of Class A Common Stock  issuable
         upon the exercise of stock options that have not vested.

(14a)    Includes  1,475,400  shares  of  Class A  Common  Stock  of  which  the
         beneficial owner has sole voting power and sole  dispositive  power and
         481,000  shares of Class A Common Stock of which the  beneficial  owner
         has shared voting power and shared  dispositive  power. The information
         with respect to the beneficial owner has been taken from the beneficial
         owner's Form 13G filed with the Commission on August 8, 1997.

(14b)    Includes 908,000 shares of Class A Common Stock of which the beneficial
         owner has sole  dispositive  power. The information with respect to the
         beneficial  owner has been taken from the  beneficial  owner's Form 13G
         filed with the Commission on February 12, 1997.

(15)     Includes  the  approximately  65% of the shares of Class B Common Stock
         beneficially  owned by Messrs.  Potter,  Bedard and Howard, or 706,394,
         570,776,  and  22,830  shares,   respectively,   held  in  escrow.  The
         beneficial owner may vote, but not dispose of such shares.

(16)     Includes an aggregate of 39,515  shares of Class B Common Stock held in
         custodial accounts for Mr. Potter's children.

(17)     Includes  39,515  shares of Class B Common  Stock held by Mr.  Bedard's
         mother, but subject to a voting trust of which Mr. Bedard is the voting
         trustee.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         On September 2, 1994 the Company  entered into an Agreement and Plan of
Merger  with  Koonrod,  Inc.  ("KRI")  and the  stockholders  of KRI.  Under the
Agreement,  the Company acquired all of the outstanding stock of KRI in exchange
for $75,000 cash and 105,000 shares of the Company's  Class A Common Stock which
were valued at approximately  $496,000, and KRI was merged into the Company. The
two  stockholders of KRI who owned all of the  outstanding  stock of KRI are the
father and  brother-in-law  of Daniel A. Potter,  the Company's  Chief Executive
Officer and Director.

         Effective  August  31,  1995,  the  Company  entered  into  a  Purchase
Agreement with Bedard Entertainment,  Inc. ("BEI"), and the stockholders of BEI.
Under the Purchase  Agreement,  the Company  acquired  substantially  all of the
assets of BEI in  exchange  for  15,000  shares of Class A Common  Stock and the
assumption of indebtedness of BEI in the amount of approximately  $275,000.  The
two  stockholders of BEI who owned all of the  outstanding  stock of BEI are the
brother and sister-in-law of the Company's President and Director, John Bedard.

         Craig  Belisle,  the  brother-in-law  of  John  Bedard,  the  Company's
President  and a  Director,  owned a  majority  interest  in one,  one,  and two
franchise stores as of April 30, 1995, 1996 and 1997,  respectively.  The amount
of service fees earned from these franchisees was approximately $18,000, $20,000
and $25,000 for the years ended April 30, 1995, 1996 and 1997, respectively. The
amount due from Mr.  Belisle,  as a franchisee at April 30, 1995,  1996 and 1997
approximated $2,000, $2,500 and $2,850, respectively.

         During the years  ended  April 30,  1995,  1996 and 1997,  the  Company
incurred  approximately  $48,000,  $245,000,  and  $271,000,   respectively,  in
expenses from Johnson,  West & Co., PLC  ("Johnson,  West & Co.") for accounting
and tax services.  Paul  Kelnberger,  a director of the Company,  is a member of
Johnson, West & Co.




                                       13



         The Company believes that the above arrangements were on terms at least
as favorable as could be obtained from unaffiliated parties.

         The Company has  Recourse  Notes from its Chief  Executive  Officer and
from the President for  approximately  $1,928,000 and $1,071,000,  respectively,
including  accrued  interest  through  April 30, 1997.  The Recourse  Notes were
issued by the executives  upon their exercise in August 1995 of 420,000  options
granted to them under the Stock Option Plans in May 1995 at an exercise price of
$4.3125,  the fair  market  value of the  stock  on the  date the  options  were
granted.  The Recourse Notes  represent the total exercise price of such options
plus  amounts  advanced  by the  Company  to such  executives  to  satisfy  then
anticipated tax liabilities. The Recourse Notes, which provide for full recourse
against the respective officer's personal assets and Company stockholdings,  are
due and payable in October  1999,  and accrue  interest at 8% per annum.  In the
event that the obligors  sell shares of the  Company's  stock,  the net proceeds
thereof will be applied to payment, in part or in full, of the Recourse Notes.

         In addition,  as of April 30, 1997,  the Company has a note  receivable
from the  President  of the  Company for  approximately  $31,000  which  accrues
interest at 8% per annum and is due November 1997. The note represents  advances
from the Company to him from January 1994 to April 1994,  together  with accrued
interest.