<PAGE>   1
 
   
      AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1998
    
 
                                                      REGISTRATION NO. 333-47969
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ---------------------
 
                                AMENDMENT NO. 1
                                       TO
                                    FORM S-1
 
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                             ---------------------
 
                          HASTINGS ENTERTAINMENT, INC.
 
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                             <C>                             <C>
             TEXAS                           5942                         75-1386375
(State or other jurisdiction of  (Primary Standard Industrial          (I.R.S. Employer
incorporation or organization)    Classification Code Number)       Identification Number)
</TABLE>
 
                          3601 PLAINS BLVD., SUITE #1
                             AMARILLO, TEXAS 79102
                                 (806) 351-2300
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)
 
                               JOHN H. MARMADUKE
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                          HASTINGS ENTERTAINMENT, INC.
                          3601 PLAINS BLVD., SUITE #1
                             AMARILLO, TEXAS 79102
                                 (806) 351-2300
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
 
                             ---------------------
 
                                   Copies to:
 
<TABLE>
<S>                                            <C>
          M. CHARLES JENNINGS, ESQ.                       JEFFREY A. CHAPMAN, ESQ.
          LOCKE PURNELL RAIN HARRELL                       VINSON & ELKINS L.L.P.
         (A PROFESSIONAL CORPORATION)                    3700 TRAMMELL CROW CENTER
         2200 ROSS AVENUE, SUITE 2200                         2001 ROSS AVENUE
           DALLAS, TEXAS 75201-6776                       DALLAS, TEXAS 75201-2921
                (214) 740-8000                                 (214) 220-7700
</TABLE>
 
                             ---------------------
 
     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
                             ---------------------
 
     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.  [ ]
 
     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.  [ ]__________
 
     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]__________
 
     If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]__________
 
     If delivery of the Prospectus is expected to be made pursuant to Rule 434,
check the following box.  [X]
 
                        CALCULATION OF REGISTRATION FEE
 
<TABLE>
<CAPTION>
========================================================================================================
          TITLE OF EACH CLASS OF SECURITIES                PROPOSED MAXIMUM            AMOUNT OF
                  TO BE REGISTERED                     AGGREGATE OFFERING PRICE     REGISTRATION FEE
--------------------------------------------------------------------------------------------------------
<S>                                                    <C>                      <C>
Common Stock, $.01 par value.........................       $58,650,000(1)              $17,302
========================================================================================================
</TABLE>
 
(1) Estimated solely for purposes of calculating the registration fee pursuant
    to Rule 457(o) (paid upon initial filing).
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>   2
 
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
 
   
                   SUBJECT TO COMPLETION, DATED MAY 19, 1998
    
 
PROSPECTUS
 
                                3,377,333 SHARES
 
                          HASTINGS ENTERTAINMENT, INC.
 
                                  COMMON STOCK
                               ------------------
     Of the 3,377,333 shares of Common Stock, $.01 par value per share (the
"Common Stock"), offered hereby, 3,084,000 shares are being sold by Hastings
Entertainment, Inc. (the "Company"), and 293,333 shares are being sold by a
nonmanagement shareholder of the Company (the "Selling Shareholder"). See
"Principal Shareholders and Selling Shareholder." The Company will not receive
any of the proceeds from the sale of shares by the Selling Shareholder.
 
   
     Prior to this offering (the "Offering"), there has not been a public market
for the Common Stock of the Company. It is currently estimated that the initial
public offering price will be between $14 and $16 per share. See "Underwriting"
for information relating to the factors considered in determining the initial
public offering price and the reservation of shares for sale to officers,
directors and certain other persons associated with the Company. The Common
Stock has been approved for listing on The Nasdaq National Market under the
symbol "HAST," subject to official notice of issuance.
    
 
   
     SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
    
                               ------------------
  THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
 EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
   AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
                               CRIMINAL OFFENSE.
 
<TABLE>
<CAPTION>
====================================================================================================================
                                                        UNDERWRITING                                 PROCEEDS TO
                                    PRICE TO           DISCOUNTS AND           PROCEEDS TO             SELLING
                                     PUBLIC            COMMISSIONS(1)           COMPANY(2)         SHAREHOLDER(2)
--------------------------------------------------------------------------------------------------------------------
<S>                            <C>                 <C>                    <C>                    <C>
Per Share                               $                    $                      $                     $
--------------------------------------------------------------------------------------------------------------------
Total(3)                                $                    $                      $                     $
====================================================================================================================
</TABLE>
 
   (1) For information regarding indemnification of the Underwriters, see
       "Underwriting."
 
   
   (2) Before deducting expenses estimated at $1,000,000, of which $922,000 is
       payable by the Company and $78,000 is payable by the Selling Shareholder.
    
 
   
   (3) The Company has granted the Underwriters a 30-day option to purchase up
       to 506,600 additional shares of Common Stock solely to cover
       over-allotments, if any. See "Underwriting." If this option is exercised
       in full, the total Price to Public, Underwriting Discounts and
       Commissions and Proceeds to Company will be $        , $        and
       $        , respectively.
    
                               ------------------
     The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
            , 1998, at the offices of Smith Barney Inc., 333 West 34th Street,
New York, New York 10001.
                               ------------------
SALOMON SMITH BARNEY
                                 A.G. EDWARDS & SONS, INC.
 
   
                                                          FURMAN SELZ
    
 
   
         , 1998
    
<PAGE>   3
 
    [STORE SCHEMATIC; INTERIOR/EXTERIOR PHOTOGRAPHS OF STORE; PHOTOGRAPHS OF
                PRODUCT/ARTISTS; AND/OR MAP OF STORE LOCATIONS]
 
     CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENTS, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
                                        2
<PAGE>   4
 
                               PROSPECTUS SUMMARY
 
   
     The following summary is qualified in its entirety by the more detailed
information and the financial statements and the notes thereto appearing
elsewhere in this Prospectus. The information contained in this Prospectus
reflects a 5.059-for-1.000 split of the Company's outstanding Common Stock to be
effected immediately prior to the Offering. Unless otherwise indicated,
information in this Prospectus assumes no exercise of the Underwriters' option
to purchase additional Common Stock to cover over-allotments, if any. The terms
"Company" and "Hastings" refer to Hastings Entertainment, Inc. and its
predecessors, unless the context otherwise requires. The Company's fiscal year
ends on January 31 and is identified as the fiscal year for the immediately
preceding calendar year. For example, the fiscal year ended January 31, 1998 is
referred to as "fiscal 1997." This Prospectus contains certain forward-looking
statements. Actual results and the timing of certain events could differ
materially from those projected in the forward-looking statements due to a
number of factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.
    
 
                                  THE COMPANY
 
   
     Hastings is a leading multimedia entertainment retailer that combines the
sale of books, music, software, periodicals and videotapes with the rental of
videotapes and video games in a superstore format. Founded in 1968, Hastings
currently operates 120 superstores averaging 21,200 square feet in small to
medium-sized markets located throughout the Midwestern and Western United
States. Based on its 30-year operating history, the Company believes that these
small to medium-sized markets with populations ranging from 25,000 to 150,000
present an opportunity to profitably operate and expand Hastings' unique
entertainment superstore format. These markets are usually underserved by
existing book, music, software or video stores with competition generally
limited to locally owned specialty stores or single-concept entertainment
retailers. In addition, Hastings proprietary purchasing and inventory management
systems enable its superstores to typically offer the broadest range of
entertainment products in these markets at prices that are competitive with or
lower than the lowest prices charged by its competitors. The Company believes it
has significant advantages over its competitors, including its unique multimedia
retailing concept, extensive product selections, low-pricing strategy, targeted
merchandising, efficient operations, superior customer service and substantial
operating experience in small to medium-sized markets.
    
 
   
     A key element of the Company's business strategy is to continue its growth
and increase its profitability through the continued expansion of its superstore
operations. During the past five years, Hastings' revenues have increased at a
13% compound annual growth rate, growing from $218 million in fiscal 1993 to
$358 million in fiscal 1997 as a result of new store openings and comparable
store revenue increases. Over this period, the Company increased its superstore
selling square footage by 86% from approximately 1,118,000 square feet in fiscal
1993 to approximately 2,081,000 square feet at the end of fiscal 1997, while
comparable store revenue increases for fiscal 1995, 1996 and 1997 were 4%, 6%
and 7%, respectively. Hastings intends to continue this growth in the future by
opening approximately 60 superstores in the next three years and continuing its
ongoing store expansion and remodeling programs. The Company also intends to
augment its current Web site with Internet commerce capabilities during the
second quarter of fiscal 1998.
    
 
     Hastings has assembled a strong management team with substantial experience
in the retail industry led by John H. Marmaduke, who has served as the Company's
President and Chief Executive Officer for the past 22 years. The Company
believes that its success throughout its 30-year history has been due in large
part to its ability to recognize and respond to prevailing trends in retailing.
For example, in response to the growing popularity of the superstore format and
its superior profitability, Hastings redirected its resources in the early
1990's to the expansion of its superstores while profitably divesting its
mall-based stores in fiscal 1993 and fiscal 1994. Further, to address a slowdown
in its rental video business in early 1997, the Company introduced a new rental
video merchandising strategy that led to comparable store revenue increases for
rental video of over 10% in the fourth quarter of fiscal 1997 compared to the
same quarter in fiscal 1996.
 
                                        3
<PAGE>   5
 
OPERATING STRATEGY
 
     The Company's goal is to enhance its position as a leading multimedia
entertainment retailer by expanding existing stores, opening new stores in
selected markets, and offering its products through the Internet. Each element
of the Company's business strategy is designed to build consumer awareness of
the Hastings concept and achieve high levels of customer loyalty and repeat
business. The key elements of this strategy are the following:
 
   
     Superior Multimedia Concept. The Company's superstores present a wide
variety of products tailored to local preferences in a dynamic and comfortable
store atmosphere with exceptional customer service. Hastings superstores average
approximately 21,200 square feet, with the Company's new stores ranging in size
from 18,000 square feet to 35,000 square feet. The Company's superstores offer
customers an extensive product assortment of approximately 44,000 book, 27,000
music, 1,500 software, 2,000 periodical and 6,000 videotape titles and 1,500
complementary and accessory items for sale and 15,000 videotape and video game
selections for rent. The Company believes that its multimedia format reduces
Hastings' reliance on and exposure to any particular entertainment segment or
trend and enables the Company to promptly add exciting new entertainment
categories to its product line. See "Business -- Business Strategy -- Superior
Multimedia Concept."
    
 
   
     Small to Medium-Sized Market Superstore Focus. The Company targets small to
medium-sized markets with populations of 25,000 to 150,000 in which the
Company's extensive product selection, low pricing strategy, efficient
operations and superior customer service enable it to become the market's
entertainment destination store. The Company bases its merchandising strategy
for its superstores on in-depth research of its customers and understanding of
its individual markets. The Company utilizes flexible layouts that enable each
superstore to arrange its products according to local interests and to customize
the layout in response to new customer preferences and product lines, such as
the Company's growing software department. See "Business -- Business
Strategy -- Small to Medium-Sized Superstore Focus."
    
 
   
     Customer-Oriented Superstore Format. The Company designs its superstores to
provide an easy-to-shop, open store atmosphere by offering major product
categories in a "store-within-a-store" format. To encourage browsing and the
perception of Hastings as a community gathering place, the Company has
incorporated amenities in many superstores, such as chairs for reading,
complimentary gourmet coffees, music auditioning stations, interactive
information kiosks, telephones for free local calls, children's play areas and
in-store promotional events. See "Business -- Business
Strategy -- Customer-Oriented Superstore Format."
    
 
   
     Cost-Effective Operations. The Company is committed to controlling costs in
every aspect of its operations while maintaining its customer-oriented
philosophy. From 1993 to 1997, Hastings spent $12.8 million to develop and
implement proprietary information, purchasing, distribution and inventory
control systems that position the Company to continue to grow profitably. These
systems enhance profitability by enabling the Company to respond actively to
customers' changing desires and to rapid shifts in local and national market
conditions. See "Business -- Business Strategy -- Cost-Effective Operations."
    
 
     Low Pricing. Hastings' pricing strategy at its superstores is to offer
value to its customers by maintaining prices that are competitive with or lower
than the lowest prices charged by other retailers in the market. The Company
determines its prices on a market-by-market basis, depending on the level of
competition and other market-specific considerations. See "Business -- Business
Strategy -- Low Pricing."
 
EXPANSION STRATEGY
 
   
     Expanded Selling Square Footage. The Company has identified as potential
locations for future superstores over 500 underserved, small to medium-sized
markets that meet its new-market criteria. It plans to open approximately 60
superstores over the next three years in certain of those markets for a total of
approximately 170 superstores (net of closings) by the end of fiscal 2000. In
addition to opening new superstores, the Company plans to continue expanding and
remodeling its existing stores. Between new store openings and store expansions,
the Company anticipates increasing its current selling square footage of
    
 
                                        4
<PAGE>   6
 
   
approximately 2,081,000 by more than 50% by the end of fiscal 2000. See
"Business -- Expansion Strategy -- Expanded Selling Square Footage."
    
 
   
     Electronic Commerce. With the anticipated initiation of the sale of
products on its Web site in the second quarter of fiscal 1998, the Company
believes that it will be the first fully integrated, multimedia entertainment
retailer offering books, music, software, videotapes and video games through the
Internet on a single Web site. See "Business -- Business Strategy -- Electronic
Commerce."
    
 
     The Company's principal executive offices are located at 3601 Plains
Boulevard, Suite #1, Amarillo, Texas 79102, and its telephone number at such
location is (806) 351-2300.
 
                                  THE OFFERING
 
<TABLE>
<S>                                                           <C>
Common Stock offered by the Company.........................  3,084,000 shares
Common Stock offered by the Selling Shareholder.............  293,333 shares
Common Stock outstanding after the Offering(1)..............  11,549,189 shares
Use of Proceeds.............................................  To fund the opening of new
                                                              superstores and the expansion
                                                              of existing superstores; to
                                                              reduce outstanding
                                                              indebtedness under the
                                                              Company's unsecured $45.0
                                                              million revolving credit
                                                              facility; and for general
                                                              corporate purposes. See "Use
                                                              of Proceeds."
Proposed Nasdaq National Market symbol......................  HAST
</TABLE>
 
---------------
 
   
(1) Does not include 2,370,865 shares reserved for issuance under the Company's
    various stock plans. As of January 31, 1998, options for 1,797,554 shares
    have been granted under these stock plans with a weighted average exercise
    price per share of $11.72. See "Management -- Stock Plans."
    
 
                                        5
<PAGE>   7
 
                      SUMMARY FINANCIAL AND OPERATING DATA
              (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
 
   
     The summary financial and operating data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included elsewhere in this Prospectus. The income statement data set forth below
for fiscal 1995, 1996 and 1997 and the balance sheet data at January 31, 1998
are derived from the audited financial statements included elsewhere in this
Prospectus. The income statement data set forth below for fiscal 1993 and fiscal
1994 are derived from audited financial statements not included herein. See note
(4) to the table below concerning the retroactive restatement of earnings per
share data in compliance with Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS No. 128").
    
 
   
<TABLE>
<CAPTION>
                                                                                   FISCAL YEAR
                                                              -----------------------------------------------------
                                                                1993        1994       1995       1996       1997
                                                              --------    --------   --------   --------   --------
<S>                                                           <C>         <C>        <C>        <C>        <C>
INCOME STATEMENT DATA(1):
Merchandise revenue.........................................  $171,049    $197,311   $232,463   $251,934   $283,026
Video rental revenue........................................    46,674      57,603     66,449     72,357     74,739
                                                              --------    --------   --------   --------   --------
Total revenues..............................................   217,723     254,914    298,912    324,291    357,765
Gross profit(2).............................................    80,520      95,681    108,871    118,379    136,860
Selling, general and administrative expenses................    65,769      80,480     88,443    103,883    119,637
Development expenses........................................       514       2,811      2,791      2,421         --
                                                              --------    --------   --------   --------   --------
Operating income............................................    14,237      12,390     17,637     12,075     17,223
Interest expense, net.......................................      (310)       (718)    (2,588)    (3,585)    (4,228)
Gain (loss) on sale of mall stores, net(1)..................     3,836       4,080         --     (2,500)       734
Other, net..................................................     2,051(3)      148        221        126        139
                                                              --------    --------   --------   --------   --------
Income before income taxes..................................    19,814      15,900     15,270      6,116     13,868
Income taxes................................................     7,205       6,090      5,875      2,320      5,270
                                                              --------    --------   --------   --------   --------
Net income..................................................  $ 12,609    $  9,810   $  9,395   $  3,796   $  8,598
                                                              ========    ========   ========   ========   ========
Diluted earnings per share(4)...............................  $   1.46    $   1.14   $   1.09   $    .43   $    .98
Weighted average common shares outstanding -- diluted
  basis(4)..................................................     8,618       8,614      8,635      8,757      8,736
OTHER DATA:
Depreciation and amortization(5)............................  $ 19,110    $ 21,560   $ 31,175   $ 32,967   $ 36,355
Capital expenditures........................................  $ 30,247    $ 40,013   $ 48,358   $ 40,510   $ 55,753
STORE DATA(1):
  Number of Stores:
  Open at beginning of period...............................        82          91        102        108        111
  Opened during period......................................        13          13          9          4          8
  Closed during period......................................        (4)         (2)        (3)        (1)        (2)
  Open at end of period.....................................        91         102        108        111        117
Comparable store revenues increase(6).......................        17%         10%         4%         6%         7%
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                                     JANUARY 31
                                                              -------------------------
                                                                1998          1998
                                                               ACTUAL    AS ADJUSTED(7)
                                                              --------   --------------
<S>                                                           <C>        <C>
BALANCE SHEET DATA:
Working capital.............................................  $ 51,193      $ 69,293
Total assets................................................   215,298       233,398
Total debt..................................................    51,612        27,612
Total shareholders' equity..................................    71,718       121,818
</TABLE>
    
 
---------------
 
   
(1) The Company sold 26 of its mall stores in fiscal 1993 and its remaining 16
    mall stores in fiscal 1994. The operating results of these mall stores are
    included in the financial results of the Company until their sale. Store
    Data does not include these mall stores. In fiscal 1996, the Company
    established a reserve of $2.5 million ($1.6 million after-tax charge) to
    cover potential losses related to the leases covering the mall stores that
    were sold to Camelot Music, Inc., which filed for bankruptcy protection in
    August 1996. In fiscal 1997, the reserve was reduced to $1.5 million. See
    "Business -- Litigation."
    
 
   
(2) On February 1, 1996, the Company began providing for an estimated residual
    value of $5 per video and began depreciation of rental videos in their first
    full month of service. In fiscal 1994 and 1995, a full month's depreciation
    was provided in the month the rental videos were received. These changes
    resulted in an increase in fiscal 1996 net earnings and earnings per common
    share of $829,000 and $0.10 on a diluted basis, respectively.
    
 
                                        6
<PAGE>   8
 
   
(3) Includes $1,235,000 in life insurance proceeds received in fiscal 1993 from
    an insurance policy covering the life of Sam Marmaduke, founder of the
    Company.
    
 
   
(4) The Company has restated all previous earnings per share data to comply with
    SFAS No. 128, which became effective on a retroactive basis with the
    issuance of the fiscal 1997 financial statements. See "Management's
    Discussion and Analysis of Financial Condition and Results of
    Operations -- Recent Accounting Pronouncements."
    
 
   
(5) Includes total costs associated with the Company's videotape rental expense
    allocation. See "Management's Discussion and Analysis of Financial Condition
    and Results of Operations -- General -- Videotape Rental Expense
    Allocation."
    
 
   
(6) Stores open a minimum of 60 weeks.
    
 
   
(7) Adjusted to reflect the sale of the 3,084,000 shares of Common Stock offered
    by the Company hereby at an assumed initial public offering price of $15.00
    per share, application of the estimated net proceeds therefrom as set forth
    in "Use of Proceeds" and the termination of the redemption obligation of the
    Company under the Stock Redemption Agreement between the Company and the
    estate of the Company's founder. See "Certain Transactions."
    
 
                                        7
<PAGE>   9
 
                                  RISK FACTORS
 
     An investment in the Common Stock involves a high degree of risk.
Prospective purchasers of the Common Stock offered hereby should consider
carefully the risk factors set forth below, in addition to the other information
contained in this Prospectus.
 
   
     THE COMPANY'S ACCELERATING EXPANSION STRATEGY COULD ADVERSELY AFFECT FUTURE
OPERATING RESULTS. The Company intends to accelerate its growth in existing and
new markets by increasing store revenues, opening new superstores, and expanding
and remodeling existing superstores. The Company plans to open approximately 60
superstores during the next three years and will integrate its superstore retail
concept with the sale of its products through the Internet beginning in the
second quarter of fiscal 1998. See "Business -- Expansion Strategy." The Company
has identified as potential locations for future superstores over 500
underserved, small to medium-sized markets that meet its new market criteria and
plans to open approximately 60 superstores over the next three years in certain
of those markets for a total of approximately 170 superstores (net of closings)
by the end of fiscal 2000. In addition to opening new superstores, the Company
plans to continue expanding and remodeling its existing stores. The Company's
planned openings and expansions during the next three years represent an
acceleration of its current growth rate. In the past, the Company has opened
some new superstores that either did not become profitable or became profitable
only after a longer period of time than the Company had originally estimated.
There can be no assurance that the Company will be successful in completing its
planned superstore openings and expansions, that newly opened, expanded or
remodeled superstores will achieve revenue or profitability levels comparable to
the Company's existing superstores or that they will achieve such revenue or
profitability levels within the time periods estimated by the Company. The
Company's planned expansion depends upon a number of factors, including, among
others, the Company's ability to obtain adequate financing, locate suitable
superstore sites, negotiate acceptable lease terms, open and expand superstores
on a timely basis, hire, train, integrate and retain employees, and enhance,
expand and adapt its information and other operational systems. There can be no
assurance that the Company will be able to achieve its growth plans or
effectively manage such growth. The Company's failure to achieve its expansion
plans or to manage such plans effectively could have a material adverse effect
on the Company.
    
 
   
     SEASONALITY COULD RESULT IN FLUCTUATIONS IN OPERATING RESULTS. As is the
case with many retailers, a significant portion of the Company's revenues, and
an even greater portion of its operating profit, are generated in the fourth
fiscal quarter, which includes the Christmas selling season. As a result, a
substantial portion of the Company's annual earnings has been, and will continue
to be, dependent on the results of this quarter. An economic downturn during the
fourth quarter could adversely affect the Company to a greater extent than if
such downturn occurred at another time of the year. Major world or sporting
events, such as the Super Bowl, the Olympics or the World Series, also have a
temporary adverse effect on revenues. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Seasonality and Inflation."
Future operating results may be affected by many factors, including variations
in the number and timing of store openings, the amount and timing of net sales
contributed by new stores, the level of pre-opening expenses associated with new
stores, the number and release date of popular new book, music, software,
periodical and videotape titles, the cost of the new arrival titles, changes in
comparable store revenues, competition, marketing programs, weather, special or
unusual events and other factors that may affect retailers in general and the
Company in particular. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
    
 
     THE COMPANY'S EXPANSION INTO ELECTRONIC COMMERCE IS SUBJECT TO THE SUCCESS
OF INTERNET RETAILING AND MAY REQUIRE EXPANSION OF THE COMPANY'S
INFRASTRUCTURE. Beginning in the second quarter of fiscal 1998, the Company
anticipates that it will integrate its superstore retail concept with the sale
of its products through the Internet. The retail market over the Internet is
rapidly evolving and depends upon market acceptance of novel methods for
distributing products, which involves a high degree of uncertainty. There can be
no assurance that the Company's expansion into electronic commerce will be
profitable. The success of this expansion strategy depends upon the adoption of
the Internet by consumers as a widely used medium for commerce in general, as
well as the availability and functionability of the Hastings Web site in
particular. Any failure of the Internet infrastructure to support increased
demands placed on it by continued growth or system interruptions that result in
the unavailability of the Company's Web site or reduced performance in the
                                        8
<PAGE>   10
 
fulfillment of orders could reduce the volume of goods sold and the
attractiveness of the Company's electronic commerce service to customers.
Increases in the number and frequency of orders placed on the Hastings Web site
may require the Company to expand its operating infrastructure, including
information systems. There can be no assurance that Hastings will be able to
expand its technology at a rate that will accommodate the need for such
increases. The success of Internet retailing is dependent upon other factors
beyond the control of the Company, including electronic commerce security risks
and the impact of technological advances. If the Internet does not become a
viable commercial marketplace or if critical issues concerning the commercial
use of the Internet are not favorably resolved, the Company could be materially
adversely affected.
 
     A DECLINE IN CONSUMER SPENDING OR UNFORESEEN CHANGES IN CONSUMER DEMAND MAY
ADVERSELY AFFECT FUTURE RESULTS. The Company's success depends in part on its
ability to anticipate and respond to changing merchandise trends and consumer
demand in a timely manner. Accordingly, any failure by the Company to identify
and respond to emerging trends could adversely affect consumer acceptance of the
merchandise in the Company's stores, which in turn could have a material adverse
effect on the Company. The sale of books, music, software and periodicals and
the sale and rental of videotapes historically have been dependent upon
discretionary consumer spending, which may be affected by general economic
conditions, consumer confidence and other factors beyond the control of the
Company. In addition, spending on these items is affected significantly by the
timing, pricing and success of new releases, which are not within the Company's
control. A lack of popular new book, music, software, periodical, videotape or
video game selections could have a material adverse effect on the Company. Also,
a decline in consumer spending on books, music or videotapes or other
entertainment-related products could have a material adverse effect on the
Company.
 
     A CHANGE IN THE COMPANY'S ABILITY TO PURCHASE DIRECTLY FROM MANUFACTURERS
OR IN ITS SUPPLIER RELATIONSHIPS COULD ADVERSELY AFFECT THE COMPANY. The Company
purchases much of its merchandise directly from manufacturers rather than
purchasing from distributors. The inability of the Company to purchase products
directly from a manufacturer would require the Company to purchase those
products from a distributor, in all likelihood at higher prices. There can be no
assurance that the Company will be able to continue to acquire merchandise
directly from manufacturers at competitive prices or on competitive terms in the
future. The Company's top three suppliers accounted for approximately 26% of the
Company's inventory purchased during fiscal 1997. There can be no assurance that
in the event of the inability of the Company to purchase merchandise from one of
these suppliers the Company would be able to purchase the same or similar
products from another supplier at competitive prices or on competitive terms.
The inability to locate an alternate supplier with competitive prices could have
a material adverse effect on the Company. In addition, the Company's inability
to return merchandise to suppliers could have a material adverse effect on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
 
   
     INTENSE COMPETITION IN THE ENTERTAINMENT RETAIL INDUSTRY AND CHANGES IN
ENTERTAINMENT TECHNOLOGY COULD ADVERSELY AFFECT THE COMPANY'S RESULTS OF
OPERATIONS. The entertainment retail industry is highly competitive. The Company
competes with a wide variety of book, music, software and videotape retailers,
including online retailers, independent single store operators, local
multi-store operators, regional and national chains, as well as supermarkets,
pharmacies, convenience stores, bookstores, mass merchants, mail order
operations, warehouse clubs, record clubs, other retailers and various
noncommercial sources such as libraries. Many of the Company's competitors have
been expanding in both store size and number of outlets, while others have
announced their intentions to expand. Increased competition may reduce the
Company's revenues, raise store rents and operating expenses and decrease profit
margins and profits. Some of the Company's competitors have significantly
greater financial and marketing resources, market share and name recognition
than the Company. There can be no assurance that the Company will be able to
continue to compete successfully with its existing competitors or with new
competitors. The Company historically has operated in small to medium-sized
markets, and there can be no assurance that competition in these markets will
not intensify significantly.
    
 
     The Company also competes with cable, satellite and pay-per-view cable
television systems. Digital compression technology, combined with fiber optics
and other developing technologies, is expected eventually to permit cable
companies, direct broadcast satellite companies, telephone companies and other
businesses to transmit a greater number of movies to homes at more frequently
scheduled intervals throughout the day or on
                                        9
<PAGE>   11
 
demand and potentially at a lower cost than presently offered. Technological
advances or changes in the marketing of movies could make these technologies
more attractive and economical to consumers, which could have a material adverse
effect on the Company. In addition, continuing technological advances may
enhance the ability of consumers to shop at home or access, produce and print
written works or record music digitally. Such advances could have a material
adverse effect on the Company. Some of the Company's traditional competitors
have recently started to compete through the Internet, and the Company
anticipates that certain of the Company's other traditional competitors will
compete soon through the Internet as well. In addition, several of the Company's
competitors on the Internet have been operating retail Web sites longer than the
Company and may have a greater level of technological expertise, financial and
marketing resources and name recognition. There can be no assurance that the
Company will be able to compete successfully, technologically or otherwise, with
other Internet retailers or with its existing competitors on a cost-effective
and timely basis in electronic commerce. See "Business -- Competition."
 
   
     RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE OF INFORMATION TECHNOLOGY OF THE
COMPANY AND THIRD PARTIES EXIST. Many currently installed computer systems and
software products are coded to accept only two-digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates. As
a result, computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. The Company understands
exposure for Year 2000 compliance extends beyond its own systems. During
calendar years 1998 and 1999, the Company is requiring its major vendors to
validate their Year 2000 compliance and compliance process. Upon completion of
the process, each vendor is required to provide confirmation of its Year 2000
compliance. If a major vendor cannot prove its compliance, the vendor will be
removed as an authorized vendor of the Company and products will be obtained
from alternate and compliant vendors. There can be no assurance that the
Company's vendors' information technology will be Year 2000 compliant, and any
failure to be so compliant may require additional expenditures by the Company to
rectify the noncompliance and/or to identify alternate and compliant vendors.
    
 
   
     THE COMPANY'S OPERATIONS DEPEND ON ITS EXECUTIVES. The Company's success is
substantially dependent upon the efforts of its senior management and other key
personnel, including in particular John H. Marmaduke, who has served as the
President and Chief Executive Officer of the Company since 1976. The loss of Mr.
Marmaduke's services or the services of one or more of the other members of
senior management could have a material adverse effect on the Company. With the
exception of a $10 million policy on the life of Mr. Marmaduke, the Company
currently does not maintain key-man insurance on any of its executive officers.
The success of the Company depends, in part, on its ability to retain its key
management and attract other personnel to satisfy the Company's current and
future needs. The inability to retain key management personnel or to attract
additional personnel could have a material adverse effect on the Company. See
"Management."
    
 
   
     MANAGEMENT WILL HAVE BROAD DISCRETION IN APPLICATION OF PROCEEDS. The net
proceeds to the Company from the sale of the Common Stock offered by the Company
hereby at an assumed initial public offering price of $15.00 per share (the
midpoint of the range as set forth on the cover page of this Prospectus) are
estimated to be $42.1 million, after deducting the estimated underwriting
discount and Offering expenses payable by the Company. Although the Company
currently anticipates that it will use a portion of such proceeds to fund the
opening of new superstores and the expansion of existing superstores and to
reduce its outstanding indebtedness, the remainder of such proceeds are
currently allocated only for general corporate purposes. Moveover, management
will have the discretion to modify the use of net proceeds. Consequently,
management will have broad discretion over the use of the net proceeds of the
Offering. See "Use of Proceeds."
    
 
   
     EFFECTIVE CONTROL OF THE COMPANY BY EXISTING SHAREHOLDERS WILL LIMIT THE
INFLUENCE OF PUBLIC SHAREHOLDERS. Upon completion of the sale of the shares
offered hereby, approximately 51.2% of the outstanding Common Stock of the
Company will be beneficially owned by John H. Marmaduke, the Estate of Sam
Marmaduke, the John H. Marmaduke Family Limited Partnership, the Stephen S.
Marmaduke Family Limited Partnership and other members of the Marmaduke family.
The holders of a majority of the Company's Common Stock can elect all of the
directors of the Company, approve other general matters that
    
 
                                       10
<PAGE>   12
 
are to be acted upon by the shareholders and effectively veto any extraordinary
corporate action contemplated by the Company. See "Principal Shareholders and
Selling Shareholder" and "Description of Capital Stock."
 
   
     CERTAIN PROVISIONS IN THE COMPANY'S ARTICLES AND BYLAWS MAY DETER TAKEOVER
ATTEMPTS. Certain provisions of the Third Restated Articles of Incorporation
(the "Articles of Incorporation") and the Amended and Restated Bylaws (the
"Bylaws") of the Company may be deemed to have an anti-takeover effect and may
delay, discourage or prevent a tender offer or takeover attempt, including
attempts that might result in a premium being paid over the market price for the
shares held by shareholders. The Articles of Incorporation of the Company
provide for the Board of Directors to be divided into three classes of directors
serving staggered three-year terms. As a result, approximately one-third of the
Board of Directors will be elected each year. The Company's Articles of
Incorporation or Bylaws also include advance notice requirements for shareholder
proposals and nominations, prohibit the taking of shareholder action by written
consent without a meeting and provide that special meetings of shareholders of
the Company be called only by the Chairman of the Board of Directors, the Board
of Directors, the Company's President or holders of not less than 25% of the
Company's outstanding stock entitled to vote at the proposed meeting. In
addition, the Bylaws may be amended or repealed only by the Board. These
provisions may not be amended in the Company's Articles of Incorporation or
Bylaws without the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock. See "Description of Capital Stock -- Certain
Provisions of the Articles of Incorporation and Bylaws."
    
 
     The Board of Directors of the Company is authorized (without any further
action by the shareholders) to issue Preferred Stock in one or more series and
to fix the voting rights and designations, preferences, limitations and relative
rights and qualifications, limitations or restrictions and certain other rights
and preferences, of the Preferred Stock. Under certain circumstances, the
issuance of Preferred Stock may render more difficult or tend to discourage a
merger, tender offer or proxy contest, the assumption of control by a holder of
a large block of the Company's securities or the removal of incumbent
management. The Board of Directors of the Company, without shareholder approval,
may issue Preferred Stock with voting, dividend and conversion rights that could
adversely affect the holders of Common Stock. As of the date of this Prospectus,
no shares of Preferred Stock are outstanding and the Company has no present
intention to issue any shares of Preferred Stock. See "Description of Capital
Stock."
 
   
     NO ASSURANCE EXISTS THAT A PUBLIC MARKET FOR THE COMMON STOCK WILL DEVELOP
AFTER THE OFFERING; POTENTIAL VOLATILITY OF STOCK PRICE. Prior to this Offering,
there has been no public market for the Common Stock, and there can be no
assurance that an active trading market will develop or, if one does develop,
that it will be maintained. The initial public offering price, which will be
established by negotiations among the Company, the Selling Shareholder and the
Underwriters, may not be indicative of prices that will prevail in the trading
market. See "Underwriting." The stock market has from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. In addition,
factors such as fluctuations in the Company's operating results, a downturn in
the retail industry, failure to meet stock market analysts' earnings estimates,
changes in analysts' recommendations regarding the Company, other retail
companies or the retail industry in general, and general market and economic
conditions may have a material adverse effect on the market price of the Common
Stock.
    
 
   
     NEW SHAREHOLDERS WILL BE SUBJECT TO IMMEDIATE AND SUBSTANTIAL
DILUTION. Purchasers of Common Stock offered hereby will experience immediate
and substantial dilution in the net tangible book value per share of the Common
Stock from the initial public offering price as compared to the increase in the
net tangible book value per share that will accrue to existing shareholders. At
an initial public offering price of $15.00 per share, such dilution would have
been equal to $5.14 per share at January 31, 1998. In addition, the future
exercise of stock options and warrants would result in further dilution. See
"Dilution."
    
 
     SHARES ELIGIBLE FOR FUTURE SALE COULD ADVERSELY AFFECT THE MARKET PRICE FOR
THE COMMON STOCK. Sales of substantial amounts of shares in the public market
following the Offering could adversely affect the market price of the Common
Stock. Immediately following the Offering, the Company will have 11,549,189
shares of Common Stock outstanding. Of these shares, 8,465,189 shares will be
"restricted securities" as defined by
 
                                       11
<PAGE>   13
 
   
Rule 144 ("Rule 144") adopted under the Securities Act. These shares may be sold
in the future in compliance with the volume limitations and other restrictions
of Rule 144. The Company is unable to predict the effect that future sales made
under Rule 144 or otherwise will have on the market price of the Common Stock
prevailing at that time. See "Shares Eligible for Future Sale" and
"Underwriting." The Company, its officers and directors, and certain other
shareholders including the Selling Shareholder, who collectively hold 7,982,672
shares, or 94.3% of the outstanding shares of Common Stock prior to this
Offering, have agreed not to offer, sell, contract to sell, grant any option to
purchase or otherwise dispose (or publicly disclose the intention to make any
such disposition or transfer) of any shares of Common Stock for a period of 180
days after the date of this Prospectus without the prior written consent of
Smith Barney Inc. See "Underwriting."
    
 
     THE COMPANY DOES NOT EXPECT TO PAY DIVIDENDS IN THE FORESEEABLE
FUTURE. Subsequent to the Offering, the Company intends to retain its earnings
to support operations and finance its growth and does not intend to pay cash
dividends on the Common Stock for the foreseeable future. The payment of cash
dividends in the future will be at the discretion of the Board of Directors and
subject to certain limitations under the Texas Business Corporation Act and will
depend upon factors such as earnings levels, capital requirements, the Company's
financial condition and other factors deemed relevant by the Board of Directors.
The Company's unsecured revolving credit facility and the Note Purchase
Agreement (the "Note Agreement") relating to the Company's unsecured Series A
Senior Notes due 2003 (the "Notes") restrict the payment of dividends. See
"Dividend Policy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
 
                                       12
<PAGE>   14
 
                                USE OF PROCEEDS
 
   
     Assuming an initial public offering price of $15.00 per share (the midpoint
of the range set forth on the cover page of this Prospectus), the net proceeds
from the sale of the 3,084,000 shares of Common Stock offered by the Company are
estimated to be $42.1 million ($49.2 million assuming exercise in full of the
over-allotment option) after deducting estimated offering expenses and
underwriting discounts and commissions payable by the Company. The Company will
not receive any proceeds from the sale of the shares of Common Stock offered by
the Selling Shareholder. See "Underwriting" and "Principal Shareholders and
Selling Shareholder."
    
 
     The Company plans to use the net proceeds to fund its growth in new
superstores and superstore expansions and remodeling and for working capital and
general corporate purposes. At the closing of the Offering, the Company intends
to repay the outstanding balance under its unsecured $45.0 million revolving
credit facility with a group of banks (the "Revolving Credit Facility"), which
the Company anticipates will be approximately $40.0 million at the closing.
Pending such uses, the Company intends to invest the remaining net proceeds in
short-term, interest-bearing investment-grade securities. The Company's $45.0
million Revolving Credit Facility will continue to be available after completion
of the Offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" for
information regarding indebtedness under the Revolving Credit Facility.
 
                                DIVIDEND POLICY
 
     The Company intends to retain its earnings in the future to support
operations and finance its growth and does not intend to pay cash dividends on
the Common Stock for the foreseeable future. The payment of cash dividends in
the future will be at the discretion of the Board of Directors and subject to
certain limitations under the Texas Business Corporation Act and will depend
upon factors such as earnings levels, capital requirements, the Company's
financial condition and other factors deemed relevant by the Board of Directors.
The Revolving Credit Facility and the Note Agreement relating to the Company's
Notes restrict the payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." There can be no assurance that the Company will pay any
dividends in the future. During the 1995, 1996 and 1997 fiscal years, the
Company paid nominal cash dividends of $.014, $.017 and $.018 per share,
respectively.
 
                                       13
<PAGE>   15
 
                                    DILUTION
 
   
     As of January 31, 1998, the Company's net tangible book value was $71.7
million or $8.47 per share. "Net tangible book value" represents the amount of
the Company's total tangible assets less total liabilities. After giving effect
to (i) the sale by the Company of the 3,084,000 shares of Common Stock offered
by the Company hereby (at an assumed initial offering price of $15.00 per share
and after deducting estimated underwriting discounts and commissions and
expenses of the Offering) and (ii) the application of the net proceeds as set
forth under "Use of Proceeds," the net tangible book value of the Company as of
January 31, 1998 would have been approximately $113.8 million or $9.86 per share
before consideration of the termination of the redemption obligation of the
Company under the Stock Redemption Agreement between the Company and the estate
of the Company's founder, which represents an immediate increase of $1.39 per
share to existing shareholders and an immediate dilution of $5.14 per share to
persons purchasing shares in the public offering. See "Certain Transactions."
The following table illustrates this dilution per share:
    
 
   
<TABLE>
<S>                                                           <C>     <C>
Assumed initial public offering price.......................          $15.00
  Net tangible book value per share at January 31, 1998.....  $8.47
                                                              -----
  Increase attributable to new investors....................   1.39
                                                              -----
Net tangible book value per share after offering............            9.86
                                                                      ------
Dilution to new investors...................................          $ 5.14
                                                                      ======
</TABLE>
    
 
     The following table sets forth as of January 31, 1998 the number of shares
of Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by existing shareholders and the new investors
purchasing shares in the Offering at an assumed initial public offering price of
$15.00 per share (before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company):
 
   
<TABLE>
<CAPTION>
                                     SHARES PURCHASED       TOTAL CONSIDERATION      AVERAGE
                                   ---------------------    --------------------      PRICE
                                     NUMBER      PERCENT     AMOUNT     PERCENT     PER SHARE
                                   ----------    -------    --------    --------    ---------
                                                               (IN THOUSANDS)
<S>                                <C>           <C>        <C>         <C>         <C>
Existing Shareholders............   8,465,189      73.3%    $ 1,741        3.6%      $ 0.21
New Investors....................   3,084,000      26.7%     46,260       96.4%      $15.00
                                   ----------     -----     -------      -----       ------
          Total..................  11,549,189     100.0%    $48,001      100.0%      $ 4.16
                                   ==========     =====     =======      =====       ======
</TABLE>
    
 
     The foregoing assumes no exercise of stock options outstanding at January
31, 1998. At January 31, 1998, there were outstanding stock options to purchase
an aggregate of 1,797,554 shares of Common Stock at a weighted average exercise
price of $11.72 per share. To the extent these stock options are exercised,
there will be further dilution to purchasers in the Offering. See
"Management -- Stock Option Plans." See "Principal Shareholders and Selling
Shareholder" for information regarding certain existing shareholders.
 
                                       14
<PAGE>   16
 
                                 CAPITALIZATION
 
     The following table sets forth the capitalization of the Company (i) as of
January 31, 1998 and (ii) as adjusted to give effect to the issuance and sale by
the Company of the 3,084,000 shares of Common Stock being offered by the Company
at an assumed initial public offering price of $15.00 per share and the
application of the net proceeds therefrom. See "Use of Proceeds." This table
should be read in conjunction with the financial statements and the notes
thereto included elsewhere in this Prospectus.
 
   
<TABLE>
<CAPTION>
                                                                 JANUARY 31, 1998
                                                              ----------------------
                                                               ACTUAL    AS ADJUSTED
                                                              --------   -----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>
Current maturities of long-term debt and capitalized lease
  obligations...............................................  $    301    $    301
                                                              --------    --------
Long-term debt and capitalized lease obligations:
  Revolving Credit Facility(1)..............................    24,000          --
  Series A Senior Notes(2)..................................    25,000      25,000
  Other, excluding current maturities.......................     2,311       2,311
Redemption value of common stock held by estate of Company's
  founder(3)................................................     8,000          --
Shareholders' Equity:
  Preferred Stock, $.01 par value, 5,000,000 shares
     authorized; none issued................................        --          --
  Common Stock, $.01 par value, 75,000,000 shares
     authorized; 8,652,914 shares issued, 11,736,914 shares
     issued as adjusted(4)..................................        87         117
  Additional paid-in capital................................     1,654      43,724
  Retained earnings.........................................    80,168      80,168
  Less treasury stock, 187,725 shares, stated at cost.......    (2,191)     (2,191)
  Redemption value of common stock held by estate of
     Company's founder......................................    (8,000)         --
                                                              --------    --------
     Total shareholders' equity.............................    71,718     121,818
                                                              --------    --------
          Total capitalization..............................  $131,330    $149,430
                                                              ========    ========
</TABLE>
    
 
---------------
 
(1) The Company estimates that after the application of the net proceeds of the
    Offering it will have $45.0 million available under the Revolving Credit
    Facility. See "Use of Proceeds" and "Management's Discussion and Analysis of
    Financial Condition and Results of Operations -- Liquidity and Capital
    Resources" for a description of the Company's Revolving Credit Facility.
 
(2) See "Management's Discussion and Analysis of Financial Condition and Results
    of Operations -- Liquidity and Capital Resources."
 
   
(3) Represents estimated maximum potential redemption obligation of the Company
    under the Stock Redemption Agreement dated May 3, 1994, between John H.
    Marmaduke, Independent Executor of the Estate of Sam Marmaduke, Deceased,
    and the Company. The redemption obligation is limited by Section 303 of the
    Internal Revenue Code of 1986, as amended, and could be reduced based on the
    resolution of certain pending matters between the Internal Revenue Service
    and the estate of the Company's founder. The Stock Redemption Agreement will
    terminate upon consummation of this Offering.
    
 
   
(4) Excludes 2,370,865 shares reserved for issuance under the Company's various
    stock plans. As of January 31, 1998, options for an aggregate 1,797,554
    shares have been granted and are outstanding under these stock plans. See
    "Management -- Stock Plans."
    
 
                                       15
<PAGE>   17
 
                     SELECTED FINANCIAL AND OPERATING DATA
 
   
     The selected financial and operating data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included elsewhere in this Prospectus. The income statement data set forth below
for fiscal 1995, 1996 and 1997 and the balance sheet data at January 31, 1997
and 1998 are derived from the audited financial statements included elsewhere in
this Prospectus. The income statement data set forth below for fiscal 1993 and
1994 and the balance sheet data at January 31, 1994, 1995 and 1996 are derived
from audited financial statements not included herein. See note (4) to the table
below concerning the retroactive restatement of earnings per share data in
compliance with SFAS No. 128.
    
 
   
<TABLE>
<CAPTION>
                                                                                    FISCAL YEAR
                                                             ----------------------------------------------------------
                                                               1993         1994        1995        1996        1997
                                                             ---------    ---------   ---------   ---------   ---------
                                                                (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S>                                                          <C>          <C>         <C>         <C>         <C>
INCOME STATEMENT DATA(1):
Merchandise revenue........................................  $ 171,049    $ 197,311   $ 232,463   $ 251,934   $ 283,026
Video rental revenue.......................................     46,674       57,603      66,449      72,357      74,739
                                                             ---------    ---------   ---------   ---------   ---------
Total revenues.............................................    217,723      254,914     298,912     324,291     357,765
Merchandise cost of revenue................................    119,090      141,910     166,202     183,614     194,359
Rental video cost of revenue...............................     18,113       17,323      23,839      22,298      26,546
                                                             ---------    ---------   ---------   ---------   ---------
Total cost of revenues.....................................    137,203      159,233     190,041     205,912     220,905
Gross profit(2)............................................     80,520       95,681     108,871     118,379     136,860
Selling, general and administrative
  expenses.................................................     65,769       80,480      88,443     103,883     119,637
Development expenses.......................................        514        2,811       2,791       2,421          --
                                                             ---------    ---------   ---------   ---------   ---------
Operating income...........................................     14,237       12,390      17,637      12,075      17,223
Interest expense, net......................................       (310)        (718)     (2,588)     (3,585)     (4,228)
Gain (loss) on sale of mall stores, net(1).................      3,836        4,080          --      (2,500)        734
Other, net.................................................      2,051(3)       148         221         126         139
                                                             ---------    ---------   ---------   ---------   ---------
Income before income taxes.................................     19,814       15,900      15,270       6,116      13,868
Income taxes...............................................      7,205        6,090       5,875       2,320       5,270
                                                             ---------    ---------   ---------   ---------   ---------
Net income.................................................  $  12,609    $   9,810   $   9,395   $   3,796   $   8,598
                                                             =========    =========   =========   =========   =========
Diluted earnings per share(4)..............................  $    1.46    $    1.14   $    1.09   $     .43   $     .98
                                                             =========    =========   =========   =========   =========
Weighted average common shares outstanding -- diluted
  basis(4).................................................      8,618        8,614       8,635       8,757       8,736
OTHER DATA:
Depreciation and Amortization(5)...........................  $  19,110    $  21,560   $  31,175   $  32,967   $  36,355
Capital Expenditures.......................................  $  30,247    $  40,013   $  48,358   $  40,510   $  55,753
STORE DATA(1):
Number of stores:
  Open at beginning of period..............................         82           91         102         108         111
  Opened during period.....................................         13           13           9           4           8
  Closed during period.....................................         (4)          (2)         (3)         (1)         (2)
  Open at end of period....................................         91          102         108         111         117
Total selling square footage at end of
  period...................................................  1,118,049    1,452,945   1,719,867   1,831,657   2,080,668
Comparable store revenues increase(6)......................         17%          10%          4%          6%          7%
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                                               JANUARY 31,
                                                   --------------------------------------------------------------------
                                                                                                1998          1998
                                                    1994       1995       1996       1997      ACTUAL    AS ADJUSTED(7)
                                                   -------   --------   --------   --------   --------   --------------
<S>                                                <C>       <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Working capital..................................  $14,528   $ 29,391   $ 40,731   $ 57,473   $ 51,193      $ 69,293
Total assets.....................................   98,354    130,640    167,227    181,721    215,298       233,398
Total debt.......................................    7,461     23,040     38,916     51,873     51,612        27,612
Total shareholders' equity.......................   33,387     45,733     57,105     63,069     71,718       121,818
</TABLE>
    
 
---------------
 
   
(1)  The Company sold 26 of its mall stores in fiscal 1993 and its remaining 16
     mall stores in fiscal 1994. The operating results of these mall stores are
     included in the financial results of the Company until their sale. Store
     Data does not include these mall stores. In fiscal 1996, the Company
     established a reserve of $2.5 million ($1.6 million after-tax charge) to
     cover potential losses related to the
    
 
                                       16
<PAGE>   18
 
   
     leases covering the mall stores that were sold to Camelot Music, Inc.,
     which filed for bankruptcy protection in August 1996. In fiscal 1997, the
     reserve was reduced to $1.5 million. See "Business -- Litigation."
    
 
   
(2)  On February 1, 1996, the Company began providing for an estimated residual
     value of $5 per video and began depreciation of rental videos in their
     first full month of service. In fiscal 1994 and 1995, a full month's
     depreciation was provided in the month the rental videos were received.
     These changes resulted in an increase in fiscal 1996 net earnings and
     earnings per common share of $829,000 and $0.10 on a diluted basis,
     respectively.
    
 
(3)  Includes $1,235,000 in life insurance proceeds received in fiscal 1993 from
     an insurance policy covering the life of Sam Marmaduke, founder of the
     Company.
 
   
(4)  The Company has restated all previous earnings per share data to comply
     with SFAS No. 128, which became effective on a retroactive basis with the
     issuance of the fiscal 1997 financial statements. See "Management's
     Discussion and Analysis of Financial Condition and Results of
     Operations -- Recent Accounting Pronouncements."
    
 
   
(5)  Includes total costs associated with the Company's videotape rental expense
     allocation. See "Management's Discussion and Analysis of Financial
     Condition and Results of Operations -- General -- Videotape Rental Expense
     Allocation."
    
 
   
(6)  Stores open a minimum of 60 weeks.
    
 
   
(7)  Adjusted to reflect the sale of the 3,084,000 shares of Common Stock
     offered by the Company hereby at an assumed initial public offering price
     of $15.00 per share, application of the estimated net proceeds therefrom as
     set forth in "Use of Proceeds" and the termination of the redemption
     obligation of the Company under the Stock Redemption Agreement between the
     Company and the estate of the Company's founders. See "Certain
     Transactions."
    
 
                                       17
<PAGE>   19
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
 
   
     This Prospectus contains certain forward-looking statements. Actual results
and the timing of certain events could differ materially from those projected in
the forward-looking statements due to a number of factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus. The following
discussion and analysis should be read in conjunction with the Company's
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
    
 
GENERAL
 
   
     History. The Company was founded in 1968 as a retailing division of Western
Merchandisers, Inc. ("Western"), a book and music wholesaler. Historically, the
Company received corporate and support services from Western, including
purchasing, distribution, information systems, accounting, payroll and
advertising. In fiscal 1991, Western was acquired by Wal-Mart Stores, Inc.
("Wal-Mart"), and in connection with that transaction, the Company became an
independent entity with all shares of the Company being distributed to the
former shareholders of Western. Initially, the Company continued to rely on
Western for certain corporate and support services, which were provided pursuant
to a service agreement. In fiscal 1993, the Company determined that it was in
its best interest to operate independently of the service agreement. As a
result, the Company began to develop and expand a variety of corporate
functions, including a proprietary, fully integrated information system designed
to enhance its purchasing, inventory, personnel scheduling, distribution,
planning and accounting functions. In fiscal 1994, Western was sold to Anderson
News Corporation but continued to provide the Company with corporate and support
services under its new name, Anderson Merchandisers, Inc. ("Anderson"). In
fiscal 1995, the Company began implementing its information system and opened a
new corporate headquarters and a 100,000 square foot distribution center. The
Company reduced its use of Anderson's support services during fiscal 1995, and
utilized no further services from Anderson after the service agreement expired
effective January 31, 1996. As a result of developing and implementing its
proprietary information system and corporate infrastructure, the Company spent
an aggregate of $12.8 million in fiscal years 1993, 1994, 1995 and 1996. The
Company is committed to continually enhancing and improving its information
systems and other corporate functions. See "Business -- History."
    
 
     Superstores. In its early years, the Company focused on small markets and
offered primarily books and music. In the 1980's, the Company's internal growth
was supplemented by the acquisition of existing stores, most of which were
located in malls. During the mid-1980s, the Company added videotape sales and
rentals and complementary product categories to its selection of books and music
and developed a larger superstore format to satisfy favorable consumer response
to its multimedia retailing concept and provide a more extensive product
selection. As a result, beginning in the late 1980's the Company began focusing
on opening superstores and on expanding, relocating, selling or closing its
smaller mall-based stores. The Company accelerated its shift to a superstore
strategy by selling 26 mall stores in fiscal 1993 and its remaining 16 mall
stores in fiscal 1994. This resulted in a $2.4 million after-tax gain in fiscal
1993 and a $2.5 million after-tax gain in fiscal 1994. The operating results of
these stores were included in the Company's financial results until their sale.
While the Company believes that a significant majority of its superstores are
appropriately sized for their particular markets, the Company plans to continue
its strategy of selectively expanding and relocating existing stores in the
future. See "Business -- Expansion Strategy."
 
     Store Economics. The Company expects that the capital required to open a
new superstore will continue to generally range between $1 million and $2
million, depending upon, among other factors, the site location and condition,
amount of leasehold improvements and initial inventory requirements (net of
vendor receivables). The Company believes that the capital required to expand
its existing superstores will generally range between $500,000 and $1 million
per superstore.
 
                                       18
<PAGE>   20
 
     Set forth below is a table reflecting the number of stores (excluding mall
stores) open at the beginning of each fiscal year, the number of stores opened
and closed during such fiscal year, and the number of stores open at the end of
such fiscal year.
 
<TABLE>
<CAPTION>
                                                       STORE OPENING AND CLOSING DATA
                                                    ------------------------------------
                                                    1993    1994    1995    1996    1997
                                                    ----    ----    ----    ----    ----
<S>                                                 <C>     <C>     <C>     <C>     <C>
Open at beginning of fiscal year..................   82      91     102     108     111
Opened during fiscal year.........................   13      13       9       4       8
Closed during fiscal year.........................   (4)     (2)     (3)     (1)     (2)
Open at end of fiscal year........................   91     102     108     111     117
</TABLE>
 
   
     Videotape Rental Expense Allocation. The Company's cost of videotape
rentals is primarily video depreciation and markdowns of videotape rental
products. The Company uses an expense allocation policy for its videotape rental
inventory designed to match the cost of its videotapes to its rental revenue.
The average expense allocation periods for rental videotapes in fiscal 1995,
fiscal 1996, and fiscal 1997 were approximately nine months, 10 months, and 11
months, respectively. Under this method, all videotapes are recorded at
acquisition cost and written off at an initial depreciation rate calculated on a
straight-line basis with an 18 month useful life and with a $5 salvage value.
After an initial rental period of 20 weeks, the Company conducts a weekly profit
and loss analysis, based on the previous four weeks' rental activity, of each
videotape title using straight-line depreciation and estimated administrative
expenses. If the title does not reflect a profit based on rental revenues over
any rolling average four-week period, the superstore's inventory for the title
is reduced by the number of copies necessary to result in pro forma profit for
the period in question. Unless the reduced copies can be transferred to another
superstore, they are revalued from their current net book value to $8.96, the
Company's average sale price for previously viewed videotapes and are
transferred to the superstore's videotape sales department. This markdown
expense is taken monthly and reflected in videotape cost of rentals. Excess
copies that can be transferred to another superstore are transferred at their
current net book value, and depreciation continues in accordance with the
Company's standard policy. The Company expects the average expense allocation
period to increase as additional new superstores are opened and store-to-store
transfer opportunities increase.
    
 
     Revenues. Revenues include the sale of merchandise and the rental of
videotapes, video games and other products.
 
     Comparable Store Revenues. The Company defines comparable store revenues as
the revenues of the current period compared to the prior period of superstores
that have been open a minimum of 60 weeks. The comparable store base includes
those stores that have been expanded during the applicable period but excludes
the Company's mall-based stores.
 
     Pre-opening Costs. Pre-opening costs include labor, rent, utilities,
supplies and certain other costs incurred prior to a superstore's opening. The
Company expenses pre-opening costs as incurred.
 
   
     Store Openings. The Company opened eight new superstores during the fiscal
year ended January 31, 1998 and anticipates that it will open 12 stores during
fiscal 1998. Hastings intends to open a total of approximately 60 superstores
during the three years ending with fiscal 2000. New stores build their sales
volumes and refine their product selection gradually and, as a result, generally
have higher operating expenses as a percentage of sales than more mature stores.
The Company will continue to evaluate the profitability of all of its
superstores on an ongoing basis and may, from time to time, make decisions
regarding expanding, relocating or closing existing stores in accordance with
such evaluations. As part of this ongoing strategy, the Company expanded eight
superstores during the fiscal year ended January 31, 1998.
    
 
     System Development Expenses. The Company's development expenses, primarily
relating to the design and application stages of the Company's new operating
systems, were classified separately and expensed as incurred in fiscal 1993,
1994, 1995 and 1996. Beginning in fiscal 1997, post-implementation costs and
additional developmental charges associated with the operating system were
expensed as incurred and included in selling, general and administrative
expenses.
 
                                       19
<PAGE>   21
 
RESULTS OF OPERATIONS
 
   
     The following discussion of the Company's results of operations for fiscal
years 1995, 1996 and 1997 is based upon data derived from the statement of
earnings contained in the Company's financial statements appearing elsewhere in
this Prospectus. The following table sets forth this data as a percentage of
total revenues.
    
 
   
<TABLE>
<CAPTION>
                                                                    FISCAL YEAR
                                                              -----------------------
                                                              1995     1996     1997
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Merchandise revenue.........................................   77.8%    77.7%    79.1%
Video rental revenue........................................   22.2     22.3     20.9
                                                              -----    -----    -----
Total revenues..............................................  100.0    100.0    100.0
Cost of merchandise revenue.................................   71.5     72.9     68.7
Cost of video rental revenue................................   35.9     30.8     35.5
Total cost of revenues......................................   63.6     63.5     61.7
                                                              -----    -----    -----
Gross profit................................................   36.4     36.5     38.3
Selling, general & administrative expenses..................   29.6     32.0     33.4
Development expenses........................................    0.9      0.7       --
                                                              -----    -----    -----
Operating income............................................    5.9      3.7      4.8
Other income (expense):
Interest expense............................................   (0.9)    (1.1)    (1.2)
Gain (loss) on sale of mall stores, net.....................     --     (0.8)      .2
Other, net..................................................    0.1       --       --
                                                              -----    -----    -----
Income before income taxes..................................    5.1      1.9      3.9
Income taxes................................................    2.0      0.7      1.5
                                                              -----    -----    -----
Net income..................................................    3.1%     1.2%     2.4%
                                                              =====    =====    =====
</TABLE>
    
 
FISCAL 1997 COMPARED TO FISCAL 1996
 
   
     Revenues. Total revenues for fiscal 1997 increased by $33.5 million, or
10.3%, to $357.8 million from $324.3 million for fiscal 1996. The revenue growth
consisted of a 12.3% increase in merchandise sales and a 3.3% increase in video
rental revenues. Overall comparable store revenues increased 7% during the
twelve months ended January 31, 1998. Each significant merchandise category
exhibited growth year to year, with software products providing the largest
percentage gains. With the help of the Company's new rental marketing program,
introduced in the third quarter, video revenues in fiscal 1997 recovered from a
weak revenue performance in the first two quarters to post a $2.4 million or
3.3% increase over fiscal 1996 video revenues. In addition, the Company opened
eight new superstores and closed two superstores during fiscal 1997.
    
 
   
     Gross Profit. Gross profit as a percentage of revenues was 38.3% for fiscal
1997 as compared to 36.5% for fiscal 1996. Gross profit as a percentage of
revenues for merchandise in fiscal 1997 increased significantly to 31.3% from
27.1% in fiscal 1996 due largely to increased sales of higher margin products
and reduced retail music pricing pressures. As a result of increased video cost
allocation, rental video gross profit as a percentage of revenues decreased from
69.2% in fiscal 1996 to 64.5% in fiscal 1997. The remaining change in gross
profit as a percentage of revenues was a result of a slight increase in lower
margin merchandise sales as a percentage of overall revenue. On February 1, 1996
the Company began providing for an estimated residual value of $5 per video and
began depreciation of rental videos in their first full month of service. In
fiscal 1993, 1994 and 1995, a full month's depreciation was provided in the
month the rental videos were received. These changes resulted in an increase in
fiscal 1996 rental video gross profit of $1,336,000 or 1.8% as a percentage of
rental revenues. In the fourth quarter of fiscal 1996, the Company recorded a
charge of $3.5 million to establish a reserve for estimated costs related to
merchandise returned or to be returned to suppliers for which credit is pending.
The establishment of this reserve decreased merchandise gross profit by 1.4% as
a percentage of merchandise revenues.
    
 
                                       20
<PAGE>   22
 
   
     Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $119.6 million or 33.4% of revenues in
fiscal 1997 from $103.9 million or 32.0% of revenues in fiscal 1996. Store
operating costs as a percentage of revenues increased during fiscal 1997 to
28.7% from 27.0% for fiscal 1996, primarily as a result of higher product return
expenses which occurred because of the Company's transition to purchasing its
products primarily from manufacturers rather than distributors. The Company has
implemented a new return process in an effort to better control return-related
costs. During the second quarter of fiscal 1997, the Company re-priced certain
stock options granted to its Chief Executive Officer in fiscal 1992. The Company
recognized a one-time pre-tax charge of $1,016,800 as deferred compensation
expense as a result of this event. See "Management -- Option Grants, Exercises
and Holdings." Despite the inclusion in fiscal 1997 of the deferred compensation
charge noted above and system-related development charges noted in the
"Development Expenses" section below, general and administrative expenses
decreased from 5.0% in fiscal 1996 to 4.7% in fiscal 1997.
    
 
   
     Development Expenses. System development expenses for fiscal 1996 were 0.7%
of revenues. Development expenses were not separately classified in fiscal 1997
as most significant elements of its operating system became functional during
fiscal 1996. The Company has committed to continually enhancing and improving
its information system and other corporate functions and, as a result,
anticipates incurring additional system-related expenses in the future which
will be included under the selling, general and administrative expenses
classification.
    
 
     Interest Expense. Interest expense increased to $4.2 million for fiscal
1997 from $3.6 million for fiscal 1996 due to higher average borrowing balances.
 
   
     Gain (Loss) on Sale of Mall Stores. As a result of the sale of its 42 mall
stores to Camelot Music, Inc., the Company recorded a total pre-tax gain of $7.9
million (after-tax gain of $4.9 million) in fiscal 1993 and fiscal 1994. Camelot
Music, Inc. filed for bankruptcy in August 1996, and the Company established a
reserve of $2.5 million in fiscal 1996 to cover potential losses related to
certain mall store leases. As of January 31, 1998 expenses totalling $266,000
had been charged against the reserve. In the fourth quarter of fiscal 1997, the
reserve was reduced to $1.5 million, resulting in an increase to earnings of
$734,000. See "Business -- Litigation."
    
 
FISCAL 1996 COMPARED TO FISCAL 1995
 
     Revenues. Revenues in fiscal 1996 increased $25.4 million, or 8.5%, to
$324.3 million from $298.9 million in fiscal 1995. The revenues increase
consisted of an 8.4% growth in merchandise sales and an 8.9% increase in video
rental revenues. Comparable store revenues increased 6% in fiscal 1996, and the
Company opened four superstores and closed one superstore during fiscal 1996.
 
   
     Gross Profit. Gross profit as a percentage of revenues slightly increased
to 36.5% in fiscal 1996 from 36.4% in fiscal 1995. This improvement was
primarily a result of an increase in rental video gross margin in fiscal 1996
due primarily to lower video depreciation and reduced video pilferage. In
addition, on February 1, 1996 the Company began providing for an estimated
residual value of $5 per video and began depreciation of rental videos in their
first full month of service. In fiscal 1993, 1994 and 1995, a full month's
depreciation was provided in the month the rental videos were received. These
changes resulted in an increase in fiscal 1996 rental video gross profit of
$1,336,000, or 1.8% as a percentage of rental revenues. The lower sales
merchandise margins in fiscal 1996 were primarily a result of competitive retail
price pressures in the music industry and increased corporate return expenses.
In the fourth quarter of fiscal 1996, the Company recorded a charge of $3.5
million to establish a reserve for estimated costs related to merchandise
returned or to be returned to suppliers for which credit is pending. The
establishment of this reserve decreased merchandise gross profit by 1.4% as a
percentage of merchandise revenues.
    
 
   
     Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $103.9 million in fiscal 1996 from $88.4
million in fiscal 1995 and increased as a percentage of revenues to 32.0% from
29.6%. The Company's store expenses, which comprise the majority of this
category, increased to 27.4% of revenues in fiscal 1996 from 26.0% of revenues
in fiscal 1995 primarily as a result of increased store return expenses. The
Company has implemented a new return process in an effort to better control
return-
    
                                       21
<PAGE>   23
 
   
related costs. See "Risk Factors -- A Change in the Company's Ability to
Purchase Directly from Manufacturers or in its Supplier Relationships Could
Adversely Affect the Company."
    
 
     Development Expenses. Development expenses decreased from $2.8 million or
0.9% of revenues in fiscal 1995 to $2.4 million or 0.7% of revenues in fiscal
1996. The Company has committed to continually enhancing and improving its
information system and other corporate functions and, as a result, anticipates
incurring additional development and system integration expenses in the future.
 
     Interest Expense. Interest expense increased to $3.6 million in fiscal 1996
from $2.6 million in fiscal 1995 due to higher average borrowing balances.
 
   
     Gain (Loss) on Sale of Mall Stores. As a result of the sale of its 42 mall
stores to Camelot Music, Inc., the Company recorded a total pre-tax gain of $7.9
million (after-tax gain of $4.9 million) in fiscal 1993 and fiscal 1994. Camelot
Music, Inc. filed for bankruptcy in August 1996, and the Company established a
reserve of $2.5 million in fiscal 1996 to cover potential losses related to
certain mall store leases. See "Business -- Litigation."
    
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company's principal capital requirements arise from purchasing,
warehousing and merchandising inventory and rental videos, opening new
superstores and expanding existing superstores. The Company's primary sources of
working capital are cash flow from operations, trade credit from vendors and
borrowings from its Revolving Credit Facility. Cash flow from operations was
$33.7 million, $28.8 million and $56.3 million for fiscal 1995, fiscal 1996 and
fiscal 1997, respectively. Capital expenditures, including purchase of rental
videotapes, were $48.4 million, $40.5 million and $55.8 million for fiscal 1995,
fiscal 1996 and fiscal 1997, respectively.
 
   
     As of January 31, 1998, the Company's total debt capacity consisted of
$25.0 million of its unsecured Series A Senior Notes due 2003 with an effective
interest rate of 7.53% and its $45.0 million unsecured Revolving Credit
Facility. Total outstanding indebtedness as of January 31, 1998 under the Note
Agreement and the Revolving Credit Facility was $49.0 million. The Note
Agreement provides for annual mandatory payments of principal of $5 million
beginning June 13, 1999 and contains a number of covenants that restrict the
operations of the Company. These covenants address, among other matters, the
amount of indebtedness that the Company may incur and payments by the Company of
certain dividends or distributions. In addition, the Note Agreement grants a put
option to each noteholder in the event that after an initial public offering, a
designated control group (including management of the Company and certain of its
benefit plans and various affiliated entities) fails to own at least 33 1/3% of
the combined voting power of all then-issued and outstanding Common Stock of the
Company. This put option will remain in effect following the Offering, and the
Company does not have any reason to believe that the share ownership of the
designated control group, which will own approximately 54.2% of the outstanding
Common Stock following the Offering, will change materially in the foreseeable
future. Although not anticipated, if, following certain transactions including
future offerings and/or a combination of stock sales by individuals in the
designated control group, such control group ownership were to fall below
33 1/3%, the Company would appropriately reclassify any remaining long-term
portion of the Series A Senior Notes due 2003 as current and either repay the
Series A Senior Notes within the terms of the Note Agreement or renegotiate the
put option.
    
 
   
     The Company's $45.0 million Revolving Credit Facility has a floating
interest rate based on certain ratios related to the Company's capital
structure. The interest rate under the Revolving Credit Facility at January 31,
1998 was 7.0% per annum. This facility terminates in April 1999. The Company
estimates that upon the completion of the Offering the outstanding balance on
the Revolving Credit Facility will be approximately $40.0 million. The Credit
Agreement governing the Revolving Credit Facility contains a number of covenants
that restrict the operations of the Company. These covenants address, among
other matters, the amount of indebtedness the Company may incur and payments by
the Company of certain dividends or distributions. The Company plans to use a
portion of the net proceeds of the Offering to repay the outstanding balance on
the Revolving Credit Facility. See "Use of Proceeds." The Company's $45.0
million Revolving Credit Facility will continue to be available after completion
of the Offering until its termination in April 1999.
    
                                       22
<PAGE>   24
 
     At January 31, 1998, the Company had one other debt obligation totaling
$1.0 million. The principal on this obligation is payable quarterly until
maturity in May 2002. In addition, the Company maintains two capitalized lease
obligations with terms of fifteen years. The total amount of these obligations
is $1.6 million at January 31, 1998.
 
   
     The Company opened eight superstores through the fiscal year ended January
31, 1998 and plans to open 12 additional superstores in fiscal 1998. Hastings
intends to open a total of 60 superstores during the three years ending with
fiscal 2000. The Company invests generally between $1 million and $2 million in
a new superstore with the largest components of that amount being merchandise,
videos, fixtures and leasehold improvements. In addition, the Company expanded
eight superstores in fiscal 1997 and plans to expand approximately six
superstores in fiscal 1998. The Company generally invests between $500,000 to
$1,000,000 to expand a superstore. Total capital expenditures were $55.8 million
in fiscal 1997, of which approximately $35.4 million were used to purchase
rental videos.
    
 
   
     The Company believes that the net proceeds from this Offering, cash flow
from operations and borrowings under the Revolving Credit Facility will be
sufficient to fund the Company's ongoing operations, new superstores and
superstore expansions through fiscal 1999. In order to fund the Company's new
superstores and superstore expansions in fiscal 2000 and thereafter, the Company
believes that it may be required to increase its borrowing capacity under the
Revolving Credit Facility or otherwise obtain additional third party financing.
    
 
SEASONALITY AND INFLATION
 
   
     As is the case with many retailers, a significant portion of the Company's
revenues, and an even greater portion of its operating profit, is generated in
the fourth fiscal quarter, which includes the Christmas selling season. As a
result, a substantial portion of the Company's annual earnings has been, and
will continue to be, dependent on the results of this quarter. The Company
experiences reduced videotape rentals in the Spring because customers spend more
time outdoors. Major world or sporting events, such as the Super Bowl, the
Olympic Games or the World Series, also have a temporary adverse effect on
revenues. Future operating results may be affected by many factors, including
variations in the number and timing of store openings, the number and popularity
of new book, music and videotape titles, the cost of the new release or "best
renter" titles, changes in comparable store revenue, competition, marketing
programs, increases in the minimum wage, weather, special or unusual events and
other factors that may affect retailers in general and the Company in
particular. See "Risk Factors -- Seasonality Could Result in Fluctuations in
Operating Results." The seasonality of the Company's business is illustrated in
the following tables relating to each quarter of fiscal 1997 and fiscal 1996.
The quarterly information included in the table below has not been reviewed by
the Company's independent auditors.
    
 
   
<TABLE>
<CAPTION>
                                         Q1           Q2           Q3            Q4
                                       -------      -------      -------      --------
                                                   (DOLLARS IN THOUSANDS)
<S>                                    <C>          <C>          <C>          <C>
FISCAL 1997:
Total revenue........................  $78,436      $81,653      $80,521      $117,155
Gross profit.........................   29,146       33,047       30,417        44,250
Operating income.....................    2,419        3,084        1,282        10,438
Operating income as a percentage of
  revenue............................      3.1%         3.8%         1.6%          8.9%
Net income...........................      921        1,279           89         6,309
Net income as a percentage of
  revenue............................      1.2%         1.6%          .1%          5.4%
FISCAL 1996:
Total revenue........................  $73,875      $76,391      $73,764      $100,261
Gross profit.........................   27,599       29,248       29,825        31,707
Operating income.....................    2,104        1,560        1,789         6,622
Operating income as a percentage of
  revenue............................      2.8%         2.0%         2.4%          6.6%
Net income (loss)....................      833       (1,149)         466         3,646
Net income (loss) as a percentage of
  revenue............................      1.1%        (1.5%)        0.6%          3.6%
</TABLE>
    
 
                                       23
<PAGE>   25
 
     The Company does not believe that inflation has materially impacted net
income during the past three years. Substantial increases in costs and expenses
could have a significant impact on the Company's operating results to the extent
such increases are not passed along to customers.
 
YEAR 2000 COMPLIANCE
 
   
     Due to the recent development and implementation of its proprietary
information system corporate infrastructure, the Company has taken measures to
ensure its Year 2000 compliance. The Company believes its systems to be Year
2000 compliant and does not anticipate any material or adverse effect associated
with the transition to the new millennium. The Company understands that exposure
for Year 2000 compliance extends beyond its own systems. During calendar years
1998 and 1999, the Company is requiring its major vendors to validate their Year
2000 compliance and compliance process. Upon completion of the process, each
vendor is required to provide confirmation of its Year 2000 compliance. If a
major vendor cannot prove its compliance, the vendor will be removed as an
authorized vendor of the Company and products will be obtained from alternate
and compliant vendors. See "Risk Factors -- Risks Associated with Year 2000
Compliance of Information Technology of the Company and Third Parties Exist."
    
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
   
     The Financial Accounting Standards Board (FASB) recently issued several
Statements of Financial Accounting Standards (SFAS's) that may impact the
Company's accounting treatment and/or its disclosure obligations. The new SFAS's
impacting the Company are as follows:
    
 
   
          SFAS No. 130, "Reporting Comprehensive Income," was issued in June
     1997. The new rules establish standards for reporting and displaying
     comprehensive income and its components in a full set of general-purpose
     financial statements. SFAS No. 130 is effective for periods beginning after
     December 15, 1997. Adoption of this statement will not result in
     significant additional disclosures by the Company.
    
 
   
          SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
     Information" was issued in June 1997 and supersedes SFAS No. 14, "Financial
     Reporting for Segments of a Business Enterprise." The new rules change the
     manner in which operating segments are defined and reported externally to
     be consistent with the basis on which they are reported and evaluated
     internally. The new rules are effected for periods beginning after December
     15, 1997. Adoption of this statement will not result in significant
     additional disclosures by the Company. However, the Company considers the
     anticipated initiation of the sale of products on its Web site to be a
     separate segment and when and if such operations are material will include
     the disclosure required by the statement.
    
 
   
          The American Institute of Certified Public Accountants issued
     Statement of Position (SOP) 98-5 in April 1998. SOP 98-5 requires costs of
     start-up activities and organization costs to be expensed as incurred. The
     SOP is effective for financial statements for fiscal years beginning after
     December 15, 1998. The adoption will not have a material impact on the
     Company.
    
 
                                       24
<PAGE>   26
 
                                    BUSINESS
 
OVERVIEW
 
   
     Hastings is a leading multimedia entertainment retailer that combines the
sale of books, music, software, periodicals and videotapes with the rental of
videotapes and video games in a superstore format. Founded in 1968, Hastings
currently operates 120 superstores averaging 21,200 square feet in small to
medium-sized markets in the Midwestern and Western United States. Based on its
30-year operating history, the Company believes that these small to medium-sized
markets with populations ranging from 25,000 to 150,000 present an opportunity
to profitably operate and expand Hastings' unique entertainment superstore
format. These markets usually are underserved by existing book, music, software
or video stores with competition generally limited to locally owned specialty
stores or single-concept entertainment retailers. In addition, Hastings'
proprietary purchasing and inventory management systems enable its superstores
to typically offer the broadest range of entertainment products in these markets
at prices that are competitive with or lower than the lowest prices charged by
its competitors. The Company believes that it has significant advantages over
its competitors, including its unique multimedia retailing concept, extensive
product selections, low-pricing strategy, targeted merchandising, efficient
operations, superior customer service and substantial operating experience in
small to medium-sized markets.
    
 
   
     A key element of the Company's business strategy is to continue its growth
and increase its profitability through the continued expansion of its superstore
operations. During the past five years, Hastings' revenues have increased at a
13% compound annual growth rate, growing from $218 million in fiscal 1993 to
$358 million in fiscal 1997 as a result of new store openings and comparable
store revenue increases. Over this period, the Company increased its superstore
selling square footage by 86% from approximately 1,118,000 square feet in fiscal
1993 to approximately 2,081,000 square feet at the end of fiscal 1997, while
comparable store revenue increases for fiscal 1995, 1996 and 1997 were 4%, 6%
and 7%, respectively. Hastings intends to continue this growth in the future by
opening approximately 60 superstores in the next three years and continuing its
ongoing store expansion and remodeling programs. The Company also intends to
augment its current Web site with Internet commerce capabilities during the
second quarter of fiscal 1998. See "Risk Factors -- The Company's Accelerating
Expansion Strategy Could Adversely Affect Future Operating Results" and "-- The
Company's Expansion into Electronic Commerce is Subject to the Success of
Internet Retailing and May Require Expansion of the Company's Infrastructure."
    
 
   
     Hastings has assembled a strong management team with substantial experience
in the retail industry led by John H. Marmaduke, who has served as the Company's
President and Chief Executive Officer for the past 22 years. See "Risk
Factors -- The Company's Operations Depend on its Executives." The Company
believes that its success throughout its 30-year history has been due in large
part to its ability to recognize and respond to prevailing trends in retailing.
For example, in response to the growing popularity of the superstore format and
its superior profitability, Hastings redirected its resources to the expansion
of its superstores while successfully divesting its mall-based stores in fiscal
1993 and fiscal 1994. Further, to address a slowdown in its rental video
business in early 1997, the Company introduced a new rental video merchandising
strategy that led to comparable store revenue increases for rental video of over
10% in the fourth quarter of fiscal 1997 compared to the same quarter in fiscal
1996.
    
 
HISTORY
 
     Hastings was founded in 1968 as a retailing division of Western, a
wholesaler of books and music. The Company's original retail concept included
the sale of books, music and periodicals in an upscale store format located
primarily in small and medium-sized markets. The Company purchased products from
Western and utilized Western's purchasing, distribution and general
administrative departments. The Company grew steadily through internal growth
and the acquisition of existing stores, most of which were located in malls.
 
     During the mid-1980's, the Company began to add videotape rental and
videotape sales to its book and music stores. Additional product lines and
higher volume resulted in the need for larger store floor plans. The synergy of
multiple product lines, increased market penetration and greater profitability
of larger stores
 
                                       25
<PAGE>   27
 
compared to mall stores caused management to revise its retail strategy.
Beginning in the late 1980's, the Company developed a superstore format with
increased emphasis on discount pricing and new product lines, including computer
software and video games. The Company accelerated its discount superstore
strategy by selling 26 of its mall stores in fiscal 1993 and its remaining 16
mall stores in fiscal 1994.
 
   
     In 1991, Western was acquired by Wal-Mart, and as a condition of the sale,
the Company became an independent entity owned with all shares of the Company
being distributed to the former shareholders of Western. Following the sale, the
Company continued to depend on Western for certain support services, including
accounting, information systems, purchasing, distribution, printing and
advertising, which were provided pursuant to a service agreement. In fiscal
1993, the Company began to develop its own information system and expand its
corporate infrastructure to improve merchandising, increase operating
efficiencies and pursue what it believed were significant expansion
opportunities. In June 1994, Western was sold by Wal-Mart to Anderson News
Corporation and renamed Anderson Merchandisers, Inc. As a result of this
transaction, the Company accelerated the development and implementation of its
own support services, which it completed by January 1996.
    
 
INDUSTRY
 
   
     As a retailer of multimedia entertainment products, the Company competes in
the music, book, periodical, software and video industries. In 1996, consumers
spent an estimated $45.8 billion on merchandise in these categories. Forecasted
spending in 2001 is estimated to grow to $62.2 billion, a compound annual growth
rate of 6.3%.
    
 
   
     According to the Veronis, Suhler & Associates Inc. Communications Industry
Forecast (the "Veronis, Suhler Forecast"), sales of recorded music, including
CD's, cassettes, LP's, singles and music videos, grew from $7.8 billion in 1991
to $12.5 billion in 1996, for a compound annual growth rate of 9.9%. The
Veronis, Suhler Forecast projects that sales of recorded music will grow to
$16.5 billion by 2001, for a compound annual growth rate of 5.7% from 1996, with
such growth anticipated to stem from annual price increases of 1.2% and annual
shipment increases of 3.8%. Sales of consumer books in the United States have
grown from $12.7 billion in 1991 to $16.3 billion in 1996, according to the
Veronis, Suhler Forecast, for a compound annual growth rate of 5.1%. The
Veronis, Suhler Forecast projects that consumer spending on books will grow to
$21.2 billion by 2001, for a compound annual growth rate of 5.4%, with the
expected growth to be comprised mainly of price increases of 4.3% and increased
shipments of 1.1%. The Veronis, Suhler Forecast states that sales and rentals of
video cassettes have grown from $10.6 billion in 1991 to $15.2 billion in 1996,
for a compound annual growth rate of 7.5%, and that consumer video spending is
projected to grow to $22.3 billion by 2001, for a compound annual growth rate of
8.0%. According to the Veronis, Suhler Forecast, growth in video spending
through 2001 will stem from increased numbers of transactions, increased average
prices of rentals and continued growth in video sales. Consumer sales of
software grew from $400 million in 1991 to $1.8 billion in 1996, according to
the Veronis, Suhler Forecast, for a compound annual growth rate of 35.1%. Due to
moderating sales of personal computers, sales of consumer software is projected
by the Veronis, Suhler Forecast to grow to $2.2 billion by 2001, for a compound
annual growth rate of 4.1%.
    
 
   
     Demographic trends in the United States support the opportunity for
continued growth in the merchandising categories within which the Company
participates. According to the 1996 U.S. Department of Commerce, Bureau of the
Census, Population Division Statistical Information Office report, there are
currently 75.7 million individuals under the age of 19, which represents the
largest portion of video rental and sales consumers, and 132.5 million
individuals between the ages of 20 and 54, the largest segment of retail music
and book consumers. These figures are projected to grow to 79.8 million and
137.5 million, respectively, by the year 2000. See "Risk Factors -- A Decline in
Consumer Spending or Unforeseen Changes in Consumer Demand May Adversely Affect
Future Results."
    
 
BUSINESS STRATEGY
 
     The Company's goal is to enhance its position as a leading multimedia
entertainment retailer by expanding existing stores, opening new stores in
selected markets, and offering its products through the
 
                                       26
<PAGE>   28
 
Internet. Each element of the Company's business strategy is designed to build
consumer awareness of the Hastings concept and achieve high levels of customer
loyalty and repeat business. The key elements of this strategy are the
following:
 
   
     Superior Multimedia Concept. The Company's superstores present a wide
variety of products tailored to local preferences in a dynamic and comfortable
store atmosphere with exceptional service. Hastings superstores average
approximately 21,200 square feet, with the Company's new stores ranging in size
from 18,000 square feet to 35,000 square feet. The Company's superstores offer
customers an extensive product assortment of approximately 44,000 book, 27,000
music, 1,500 software, 2,000 periodical and 6,000 videotape titles and 1,500
complementary and accessory items for sale and 15,000 videotape and video game
selections for rent. Although the superstores' core product assortments tend to
be similar, the merchandise mix of each Hastings superstore is tailored to
accommodate the particular demographic profile of the local market in which the
superstore operates through the utilization of the Company's proprietary
purchasing and inventory management systems. In addition, the Company offers
virtually all book, music, software, videotape and video game selections that
are available to retailers, consisting of an aggregate of over 2.5 million
titles, at its superstores through a special store order program. The Company
believes that its multimedia format reduces Hastings' reliance on and exposure
to any particular entertainment segment and enables the Company to promptly add
exciting new entertainment categories to its product line.
    
 
     Small to Medium-Sized Market Superstore Focus. The Company targets small to
medium-sized markets with populations of 25,000 to 150,000 in which the
Company's extensive product selection, low pricing strategy, efficient
operations and superior customer service enable it to become the market's
entertainment destination store. The Company believes that the small to
medium-sized markets where it operates the majority of its superstores present
an opportunity to profitably operate and expand Hastings' unique entertainment
superstore format. These markets typically are underserved by existing book,
music or video stores, and competition generally is limited to locally owned
specialty stores or single-concept entertainment retailers. The Company bases
its merchandising strategy for its superstores on an in-depth understanding of
its customers and its individual markets. Hastings strives to optimize each
superstore's merchandise selection by using its proprietary information systems
to analyze the sales history, anticipated demand and demographics of each
superstore's market. In addition, the Company utilizes flexible layouts that
enable each superstore to arrange its products according to local interests and
to customize the layout in response to new customer preferences and product
lines, such as the Company's growing software department.
 
     Customer-Oriented Superstore Format. The Company designs its superstores to
provide an easy-to-shop, open store atmosphere by offering major product
categories in a "store-within-a-store" format. Most Hastings superstores utilize
product-category boutiques positioned around a wide racetrack aisle that is
designed to allow customers to view the entire superstore. This store
configuration produces significant cross-marketing opportunities among the
various entertainment departments, which the Company believes results in higher
transaction volumes and impulse purchases. To encourage browsing and the
perception of Hastings as a community gathering place, the Company has
incorporated amenities in many superstores, such as chairs for reading,
complimentary gourmet coffees, music auditioning stations, interactive
information kiosks, telephones for free local calls, children's play areas and
in-store promotional events.
 
     Cost-Effective Operations. The Company is committed to controlling costs in
every aspect of its operations while maintaining its customer-oriented
philosophy. From 1993 to 1997, Hastings spent $12.8 million to develop and
implement proprietary information, purchasing, distribution and inventory
control systems that position the Company to continue to grow profitably. These
systems enhance profitability by enabling the Company to respond actively to
customers' changing desires and to rapid shifts in local and national market
conditions. The Company's state-of-the-art 100,000 square-foot distribution
center, which adjoins the Company's corporate offices in Amarillo, Texas,
provides Hastings with improved store in-stocks, efficient product cross-docking
and centralized returns processing.
 
     Low Pricing. Hastings' pricing strategy at its superstores is to offer
value to its customers by maintaining prices that are competitive with or lower
than the lowest prices charged by other retailers in the market. The Company
determines its prices on a market-by-market basis, depending on the level of
competition and other
 
                                       27
<PAGE>   29
 
market-specific considerations. The Company believes that its low pricing
structure results in part from (i) its ability to purchase directly from
publishers, studios and manufacturers as opposed to purchasing from
distributors, (ii) its proprietary information systems that enable management to
make more precise and targeted purchases for each superstore, and (iii) its
consistent focus on maintaining low occupancy and operating costs.
 
EXPANSION STRATEGY
 
   
     Expanded Selling Square Footage. With the relatively recent completion of
its corporate infrastructure, the Company is positioned to accelerate its growth
strategy. The Company has identified as potential locations for future
superstores over 500 underserved, small to medium-sized markets that meet its
new-market criteria. It plans to open approximately 60 superstores over the next
three years in certain of those markets for a total of approximately 170
superstores (net of closings) by the end of fiscal 2000. In addition to opening
new superstores, the Company plans to continue expanding and remodeling its
existing stores. Between new store openings and store expansions, the Company
anticipates increasing its current selling square footage of approximately
2,081,000 by greater than 50% by the end of fiscal 2000. The Company believes
that with its current information systems and distribution capabilities,
Hastings' infrastructure can support the Company's anticipated rate of growth
for at least the next five years.
    
 
   
     Electronic Commerce. With the anticipated initiation of the sale of
products on its Web site in the second quarter of fiscal 1998, the Company
believes it will be the first fully integrated, multimedia entertainment
retailer offering books, music, software, videotapes and video games through the
Internet on a single Web site. Hastings believes that it has significant
advantages that position it to succeed in electronic commerce on the Internet,
including its strong name recognition in its markets, its unique range and
assortment of multimedia products, its advanced information systems and
fulfillment capabilities, and its well-established entertainment retailing
experience and ability to respond rapidly to customers' evolving entertainment
desires.
    
 
MERCHANDISING
 
     Hastings is a leading multimedia entertainment retailer that combines the
sale of books, music, software, periodicals and videotapes with the rental of
videotapes and video games. In addition, the Company offers virtually all book,
music, software, periodical, videotape and video game selections that are
available to retailers, consisting of an aggregate of over 2.5 million titles,
at its superstores through a special store order program. By offering a broad
array of products within several distinct but complementary categories, the
Company strives to appeal to a wide range of customers and position its
superstores as destination entertainment stores in its targeted small to
medium-sized markets.
 
                                       28
<PAGE>   30
 
     The following table sets forth the approximate amount of total Company
revenues contributed by each of the following product categories for the periods
presented:
 
<TABLE>
<CAPTION>
                                                                  FISCAL YEAR
                                -------------------------------------------------------------------------------
                                      1994                 1995                 1996                 1997
                                ----------------     ----------------     ----------------     ----------------
                                                            (DOLLARS IN THOUSANDS)
<S>                             <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>
Merchandise Revenues:
  Music.......................  $ 97,585    38.3%    $112,827    37.7%    $119,474    36.8%    $131,109    36.6%
  Books.......................    64,658    25.4       76,684    25.7       85,404    26.3       93,860    26.2
  Video.......................    16,280     6.4       21,488     7.2       23,420     7.2       26,546     7.4
  Software....................     8,845     3.4       10,767     3.6       13,465     4.2       19,240     5.4
  Other.......................     9,943     3.9       10,697     3.6       10,171     3.2       12,271     3.5
                                --------   -----     --------   -----     --------   -----     --------   -----
Total Merchandise Revenue.....  $197,311    77.4     $232,463    77.8     $251,934    77.7     $283,026    79.1
Video Rental Revenue..........    57,603    22.6       66,449    22.2       72,357    22.3       74,739    20.9
                                --------   -----     --------   -----     --------   -----     --------   -----
Total Revenues................  $254,914   100.0%    $298,912   100.0%    $324,291   100.0%    $357,765   100.0%
</TABLE>
 
     Superstore Product Selection. Although all Hastings superstores carry a
similar core product assortment, the merchandise mix of book, music, software,
videotape and video game selections of each superstore is tailored continually
to accommodate the particular demographic profile of the local market in which
the superstore operates. The Company accomplishes this customization through its
proprietary purchasing and inventory management system. The purchasing system
analyzes historic consumer purchasing patterns at each individual superstore to
forecast customer demand for new releases and anticipate seasonal changes in
demand. In addition, the Company's inventory management process continually
monitors product sales and videotape rentals to identify slow-moving books,
music, software and sale videotapes for return to vendors and rental videotapes
for sale or transfer to other superstores. See "Business -- Information System."
The Company believes that this ability to customize the inventory and manage
slow-moving products in each of its superstores ensures a customer-driven
product selection that maximizes profitability.
 
     The Company's superstores offer an extensive selection of items in each of
its entertainment categories. The typical Hastings superstore offers for sale
approximately 44,000 current book titles in a variety of subject categories,
27,000 music titles in a broad range of music categories, 2,000 periodical
titles, 6,000 new and previously viewed videotape titles and 1,500 software
titles. Additionally, the typical Hastings superstore carries approximately
15,000 videotape and video game rental titles. The typical Hastings superstore
also offers approximately 1,500 complementary and accessory items, including
greeting cards, consumables and audio and video accessories. New releases and
special offerings in each entertainment product category are prominently
displayed and arranged by product category.
 
     In addition to its primary product lines, Hastings continually adds new
product offerings to better serve its customers. Products for sale in these
categories include promotional t-shirts, licensed plush toys, greeting cards,
used compact discs, audio books and consumables, including soft drinks, chips,
popcorn and candy. Accessory items for sale include blank videotapes, video
cleaning equipment and audio cassette and compact disc carrying cases. Many of
these products generate impulse purchases and produce higher margins. The rental
of video cassette players and video game players is provided as a service to
Hastings customers.
 
   
     Internet Merchandising. Since its inception, the Company's Web site has
offered information on books, music, video and software products. As an
extension of the Company's strategy of meeting its customers' desires, beginning
in the second quarter of fiscal 1998 Hastings anticipates that it will offer for
sale a full range of merchandise through its Web site. This additional sales
channel will enhance the assortment and accessibility of products for each
current and potential Hastings customer. The Company's Web site operation will
be consistent with the Hastings philosophy of offering a full range of
multimedia merchandise at competitive prices with a high degree of customer
service. Hastings believes that it has significant advantages that position it
to succeed in electronic commerce on the Internet, including Hastings' strong
name recognition in its markets, its unique range and assortment of multimedia
products, advanced information system and fulfillment capabilities and the
Company's well-established entertainment retailing experience and ability to
respond to customers' evolving entertainment desires. See "Risk
Factors -- Intense Competition in
    
 
                                       29
<PAGE>   31
 
   
the Entertainment Retail Industry and Changes in Entertainment Technology Could
Adversely Affect the Company's Results of Operations."
    
 
STORE LAYOUT
 
     The Company designs its superstores to provide an easy-to-shop, open store
atmosphere by offering major product categories in a "store-within-a-store"
format. Most Hastings superstores utilize product-category boutiques positioned
around a wide racetrack aisle which is designed to allow customers a view
throughout the entire superstore. This store configuration produces significant
cross-marketing opportunities among the various entertainment departments, which
the Company believes results in higher transaction volumes and impulse
purchases.
 
[Store Layout]
 
                                       30
<PAGE>   32
 
     The book department offers an extensive selection of titles arranged
alphabetically by category in attractive, well-signed displays. The music
department also is organized alphabetically within music categories and
incorporates boutiques with lower height fixtures that allow visibility and
promote an open atmosphere. Additionally, the video rental department is
arranged by prominently displaying new release, "best renter" and video game
selections and organizing other titles by category. The Company also offers a
selection of software titles organized by applications and utilities in a
separate section of the store. In addition, the Company dedicates areas of its
superstores to children's products and customer service stations.
 
     At the superstore's checkout counters, impulse products and higher margin
products are displayed on line dividers and register stands. Chips, popcorn,
candy, soft drinks and other packaged consumables also are available near the
checkout areas. In addition, some superstores have overhead video monitors
designed to entertain the customer with movie and book previews interspersed
with Hastings promotional messages.
 
   
     Hastings superstores average approximately 21,200 square feet, which
typically includes retail selling space, receiving and stocking areas and
offices. The size of the Company's enhanced store format ranges from 18,000 to
35,000 selling square feet, depending on the size of the market and the real
estate available. The store format is flexible and enables the Company to adjust
the size and merchandising mix of each superstore to the particular demographic
profile of a specific market.
    
 
MARKETING
 
     Low Pricing. Hastings' pricing strategy at its superstores is to offer
value to its customers by maintaining prices that are competitive with or lower
than the lowest prices charged by other retailers in the market. The Company
determines its prices on a market-by-market basis, depending on the level of
competition and other market-specific considerations. The Company believes that
its low pricing structure results in part from (i) its ability to purchase
directly from publishers, studios and manufacturers as opposed to purchasing
from distributors, (ii) its proprietary information systems that enable
management to make more precise and targeted purchases for each superstore, and
(iii) its consistent focus on maintaining low occupancy and operating costs.
 
     Customer Service. The Company is committed to providing the highest level
of customer service to increase customer loyalty. Hastings devotes significant
resources to associate training and measuring customer satisfaction. All
Hastings superstore associates undergo training when hired and are required to
participate in frequent training programs. The Company's ongoing customer
service program, "Quality Service Everytime," empowers every superstore
associate to utilize the Company's flexible return and refund policies to
resolve any customer problem. The Company believes that these programs, together
with the Company's low pricing strategy and superstore amenities, such as
reading chairs, complimentary coffees, and free local telephone calls to permit
customers to confirm their entertainment selections with family and friends, are
important components of the customer service Hastings provides.
 
     Advertising/Promotion. The Company participates in cooperative advertising
programs and merchandise display allowance programs offered by its vendors.
Hastings advertising programs are market-focused and emphasize the price
competitiveness, extensive product assortment and comfortable atmosphere of the
Company's superstores. The Company benefits from market display allowances
provided by vendors because of its superstores' high traffic volume and its
effective display implementation. The Company utilizes radio, television,
newspaper and direct mail advertising and in-store point-of-sale promotional
materials.
 
INFORMATION SYSTEM
 
     The Company believes that its proprietary purchasing and information
management system provides a significant competitive advantage over other
entertainment retailers by enabling it to manage its inventory at every stage,
from the shipment of products to their placement in superstores and, if
appropriate, to their transfer to other superstores or return to vendors. The
Company's information system, which the Company believes to be Year 2000
compliant, also is designed to provide operating and cost efficiencies and
furnish flexibly formatted, timely financial information.
 
                                       31
<PAGE>   33
 
     The Company's expert information system is built upon a multi-tiered,
distributed processing architecture and was designed with the latest in
client/server tools. All locations are connected using a wide area network which
allows interchange of current information. The primary components of the
information system are as follows:
 
     New Release Allocation. Hastings' buyers use the new release allocation
system to purchase new release products for the superstores. Buyers have the
ability within the system to utilize up to 15 different methods of forecasting
demand. By using store-specific sales history, factoring in specific market
traits, applying sales curves for similar titles or groups of products and
minimizing subjectivity and human emotion for a transaction, the system
customizes purchases for each individual superstore to satisfy customer demand.
The process provides the flexibility to allow store management to anticipate
customer needs, including tracking missed sales and factoring in regional
influences. The Company believes that the new release allocation system enables
Hastings to increase revenues by having the optimum levels and selection of
products available in each superstore at the appropriate time to satisfy
customers' entertainment needs.
 
     Rental Videotape Purchasing System. The Company's rental videotape
purchasing system uses store specific performance on individual rental videotape
titles to anticipate customer demand for new release rental videotapes. The
primary method of purchasing analyzes the first eight weeks' performance of a
similar title and factors in the effect of such influences as seasonal trends,
box office draw and prominence of the movie's cast to customize an optimum
inventory for each individual superstore. The system also allows for the
customized purchasing of other catalog rental videotapes on an individual store
basis. The Company believes that its rental videotape purchasing system allows
Hastings to efficiently plan and stock each superstore's rental videotape
inventory, thereby improving performance and reducing exposure from excess
inventory.
 
     Store Replenishment. Store replenishment covers three main areas for
controlling a superstore's inventory.
 
          Selection Management. Selection management constantly analyzes
     store-specific sales, traits and seasonal trends to determine title
     selection and inventory levels for each individual superstore. By
     forecasting annual sales of products and consolidating recommendations from
     store management, the system enables the Company to identify overstocked or
     understocked items to prompt required store actions and optimize inventory
     levels. The system tailors each store's individual inventory to the market
     utilizing over 2,000 product categories.
 
          Model Stock Calculation/Ordering. Model stock calculation uses
     store-specific sales, seasonal trends and sophisticated curve fitting to
     forecast orders. It also accounts for turnaround time from a vendor or the
     Hastings distribution center and tracks historical missed sales to adjust
     orders to adequately fulfill sales potential. Orders are currently
     calculated on a weekly basis and transmitted by all superstores to the
     corporate office to establish a source vendor for the product. Currently,
     over 85% of both new and replenishment orders are transmitted
     electronically to vendors, thus providing speed and immediate order
     acknowledgment on each purchase order.
 
          Inventory Management. Inventory management systems interface with
     other store systems and accommodate electronic receiving and returns to
     maintain accurate perpetual inventory information. Cycle counting
     procedures allow the Company to perform all physical inventory functions,
     with the Company counting each superstore's inventory up to four times per
     year. The system provides immediate feedback on any variances, and the
     system provides several research tools to assist in controlling inventory.
 
     Store Systems. Each superstore has a dedicated server within the store for
processing information connected through a wide area network. This connectivity
provides consolidation of individual transactions and allows store management
and corporate office associates easy access to the information needed to make
informed decisions. Transactions at the store are summarized and used to assist
in staff scheduling, loss prevention and inventory control. All point of sale
transactions utilize scanning technology allowing for maximum customer
efficiency at checkout. The Company also utilizes an automated system for
scheduling store management and sales associates. This system was developed to
assist in controlling personnel costs
                                       32
<PAGE>   34
 
while maintaining desired levels of customer service by preventing
overscheduling or underscheduling sales, stocking and customer service
associates.
 
     Accounting. The Company's financial accounting software has a flexible,
open-systems architecture. The Company prepares a variety of daily management
reports covering store and corporate performance. Detailed financial information
for each superstore, as well as for the distribution center and the corporate
office, are generated on a monthly basis. The Company's payroll, accounts
payable, cash control and tax functions are performed in-house.
 
     Warehouse Management. The Company's warehouse management systems provide
support for high-volume retail transactions, including shipments, receipts and
returns to vendors. Software to perform these functions was customized through a
joint effort of the Company's purchasing, distribution and information systems
departments. The warehouse system incorporates exact cube sizes of product
containers, utilizing flow-through racks and technologically advanced conveyor
systems.
 
SITE SELECTION
 
     As of January 31, 1998, the Company operated 117 superstores in 16 states
located as indicated in the following table:
 
<TABLE>
<CAPTION>
                       NAME OF STATE                          NUMBER OF STORES
                       -------------                          ----------------
<S>                                                           <C>
Arkansas....................................................          7
Arizona.....................................................          7
Colorado....................................................          3
Iowa........................................................          1
Idaho.......................................................          7
Kansas......................................................          6
Missouri....................................................          8
Montana.....................................................          5
Nebraska....................................................          2
New Mexico..................................................         13
Oklahoma....................................................         11
Tennessee...................................................          1
Texas.......................................................         35
Utah........................................................          3
Washington..................................................          6
Wyoming.....................................................          2
                                                                    ---
          Total.............................................        117
</TABLE>
 
     The Company leases sites for all of its superstores. These sites typically
are located in pre-existing, stand-alone buildings or strip shopping centers.
The Company's primary market areas are small and medium-sized communities with
populations typically ranging from 25,000 to 150,000. The Company has developed
a systematic approach using its site selection criteria to evaluate and identify
potential sites for new superstores. Key demographic criteria for Company
superstores include community population, community and regional retail sales,
personal and household disposable income levels, education levels, median age
and proximity of colleges or universities. Other site selection factors include
current competition in the community, visibility, available parking, ease of
access and other neighbor tenants. To maintain its low occupancy costs, Hastings
typically concentrates on leasing existing locations that have been operated
previously by other retailers.
 
     The Company typically is able to open a superstore within 120 days after
entering into a lease by utilizing cross-functional, in-house teams to manage
the individual new superstore development process. These teams provide
assistance in space planning, construction management, fixture procurement and
installation, product merchandising, information systems installation and
initial store operations. The Company operates its own fixture manufacturing
facility that produces approximately 80% of a new superstore's display fixturing
and prototypical fixture designs.
 
                                       33
<PAGE>   35
 
     The Company actively manages its existing stores and from time to time
considers closing stores. Over the last three years, the Company has closed one
to three stores each year.
 
     The terms of the Company's superstore leases vary considerably. The Company
strives to maintain maximum location flexibility by entering into leases with
short initial terms and multiple short-term extension options. The Company has
been able to enter into leases with these terms in part because Hastings
generally bears a substantial portion of the cost of preparing the site for a
superstore. The following table sets forth as of January 31, 1998 the number of
superstores that have current lease terms that will expire during each of the
following fiscal years and the associated number of superstores for which the
Company has options to extend the lease term:
 
<TABLE>
<CAPTION>
                                                              NUMBER OF STORES    OPTIONS
                                                              ----------------    -------
<S>                                                           <C>                 <C>
Fiscal Year 1998............................................         10               9
Fiscal Year 1999............................................         11              10
Fiscal Year 2000............................................         15              13
Fiscal Year 2001............................................          7               7
Fiscal Year 2002............................................         19              17
Thereafter..................................................         55              54
                                                                    ---             ---
Total.......................................................        117             110
                                                                    ===             ===
</TABLE>
 
     The Company has not experienced any significant difficulty renewing or
extending leases on a satisfactory basis.
 
     The Company's headquarters and distribution center are located in Amarillo,
Texas in a leased facility consisting of approximately 48,000 square feet for
office space and 100,000 square feet for the distribution center. The lease for
this property terminates in September 2003, and the Company has the option to
renew this lease through March 2008.
 
DISTRIBUTION AND SUPPLIERS
 
   
     The Company's distribution center is strategically located in a 100,000
square foot facility adjacent to Hastings' corporate headquarters in Amarillo,
Texas. This central location and the local labor pool enable Hastings to realize
relatively low transportation and labor costs. The distribution center is
utilized primarily for receiving, storing and distributing approximately 14,000
products offered in substantially every Hastings superstore. The distribution
center also is used in distributing large purchases, including forward buys,
close-outs and other bulk purchases. In addition, the distribution facility is
used to receive, process and ship items to be returned to manufacturers and
distributors as well as to transfer and redistribute videotapes among the
Company's superstores. This facility currently provides inventory to all
Hastings superstores and is designed to be capable of providing distribution to
over 250 superstores without significant additional investment. The Company
ships products weekly to each Hastings superstore, facilitating quick and
responsive inventory replenishment. Approximately 15% of the Company's total
product, based on store receipts, is distributed through the distribution
center. Approximately 85% of the Company's total product is shipped directly
from the vendors to the superstores. The Company outsources all product
transportation from its distribution center to various freight companies.
    
 
   
     Hastings' information systems and corporate infrastructure facilitate the
Company's ability to purchase products directly from manufacturers, which
contributes to its low pricing structure. In fiscal 1997, the Company purchased
the majority of its products directly from manufacturers rather than through
distributors. The Company's top three suppliers accounted for approximately 26%
of the Company's total products purchased during fiscal 1997. While selections
from a particular artist or author generally are produced by a single
manufacturer, the Company strives to maintain supplier relationships that can
provide an alternate source of supply. In general, the Company's products are
returnable to the supplying vendor, in some cases with the payment of a return
fee. See "Risk Factors -- A Change in the Company's Ability to Purchase Directly
from Manufacturers or in its Supplier Relationships Could Adversely Affect the
Company."
    
 
                                       34
<PAGE>   36
 
STORE OPERATIONS
 
     Each Hastings superstore employs one store manager and one or more
assistant store managers. Store managers and assistant store managers are
responsible for the execution of all operational, merchandising and marketing
strategies for the superstore in which they work. Superstores also generally
have department managers, who are individually responsible for their respective
book, music, software, video, customer service and stocking departments within
each superstore.
 
     Hastings superstores are generally open daily from 10:00 a.m. to 11:00 p.m.
However, several superstores are open 9:00 a.m. to 11:00 p.m. or 10:00 a.m. to
10:00 p.m. The only days that Hastings' superstores are closed are Thanksgiving
and Christmas.
 
ASSOCIATES
 
     The Company refers to its employees as associates because of the critical
role they play in the success of each Hastings superstore and the Company as a
whole. As of January 31, 1998, the Company employed approximately 5,330
associates. Of this number, approximately 4,950 were employed at retail
superstores, 140 were employed at the Company's distribution center and 240 were
employed at the Company's corporate offices. None of the Company's associates
are represented by a labor union or are subject to a collective bargaining
agreement. The Company believes that its relations with its associates are good.
 
COMPETITION
 
   
     The entertainment retail industry is highly competitive. The Company
competes with a wide variety of book retailers, music retailers, software
retailers and videotape retailers that rent or sell videotapes, including
independent single store operations, local multi-store operators, regional and
national chains, as well as supermarkets, pharmacies, convenience stores,
bookstores, mass merchants, mail order operations, warehouse clubs, record
clubs, other retailers and various noncommercial sources such as libraries. With
regard to its videotape sales and rental products in particular, the Company
competes with cable, satellite and pay-per-view cable television systems. In
addition, continuing technological advances that enhance the ability of
consumers by home computer through the Internet or telephonic transmission to
shop at home or access, produce and print written works or record music
digitally could provide competition to the Company in the future. See "Risk
Factors -- Intense Competition in the Entertainment Retail Industry and Changes
in Entertainment Technology Could Adversely Affect the Company's Results of
Operations."
    
 
     The Company competes in most of its markets with either national
entertainment retailers or significant retailers of general merchandise or both.
Hastings competes in its sale of books with retailers such as Barnes & Noble,
Inc., Borders Group, Inc., Walden Books and B. Dalton Bookseller. The Company
competes in its sale of music with music retailers, such as Blockbuster Music,
Camelot Music, Inc., Trans World Entertainment and Musicland Stores Corporation,
and consumer electronics stores, including Best Buy and Circuit City. The
Company's principal competitors in the sale and rental of videotapes are
Blockbuster Video and Hollywood Entertainment Corp. In addition, the Company
competes in the sale of books, music and videotapes and the rental of videotapes
and video games with local entertainment retailers and significant retailers of
general merchandise, such as Wal-Mart. In the past year, retailers such as
Amazon.com, Inc., Barnes & Noble, Inc. and N2K, Inc., have begun retail sales of
entertainment products, such as books and music, via the Internet, and the
Company anticipates that additional traditional competitors of the Company will
compete soon via the Internet as well. The Company competes with other
entertainment retailers on the basis of title selection, the number of copies of
popular selections available, store location, visibility and pricing.
 
TRADEMARKS AND SERVICEMARKS
 
     The Company believes its trademarks and servicemarks, including the
servicemarks "Hastings Books Music Video," "Hastings, Your Entertainment
Superstore" and "Hastings Entertainment," have significant value and are
important to its marketing efforts. The Company has registered "Hastings Books
Music Video" and "Hastings, Your Entertainment Superstore" as servicemarks with
the United States Patent and
 
                                       35
<PAGE>   37
 
Trademark Office and is in the process of registering "Hastings Entertainment."
The Company maintains a policy of pursuing registration of its principal marks
and opposing any infringement of its marks.
 
   
LITIGATION
    
 
     From time to time, the Company is party to certain legal proceedings
arising in the ordinary course of business. Although the amount of any liability
that could arise with respect to these proceedings cannot be predicted
accurately, in the opinion of the Company any liability that might result from
any pending claims will not have a material adverse effect on the Company.
 
   
     In fiscal 1993 and fiscal 1994, the Company sold its remaining 42 mall
stores to Camelot Music, Inc. In connection with such sales, the Company
assigned the underlying leases on such stores to Camelot Music, Inc. Camelot
Music, Inc. commenced a proceeding under Chapter 11 of the Bankruptcy Code on
August 9, 1996, and the Bankruptcy Court approved its plan of reorganization on
December 12, 1997. The Company may be contingently liable for certain of the
leases that have not yet expired or been amended, or where the Company has not
otherwise been released by the lessors. As of January 31, 1998, 20 of such
leases remained in effect where the Company may have contingent liability.
Various lessors have alleged that Camelot Music, Inc. has defaulted on certain
of its obligations under such leases. In fiscal 1996 the Company established a
reserve of $2.5 million for amounts payable by Hastings in connection with these
leases. As of January 31, 1998 expenses totalling $266,000 had been charged
against the reserve. In the fourth quarter of fiscal 1997 the reserve was
reduced to $1.5 million, resulting in an increase to earnings of $734,000.
Management believes that the existing reserve is adequate for any amounts that
may be payable by the Company in connection with these leases. The Company
cannot predict the extent to which lessors under the leases assigned to Camelot
Music, Inc. will allege defaults thereunder on the part of Camelot Music, Inc.
and look to the Company for payment under such leases, or the extent of the
Company's total liability on such leases. However, in the opinion of the Company
any liability resulting from such leases will not have a material adverse effect
on the Company.
    
 
                                       36
<PAGE>   38
 
                                   MANAGEMENT
 
DIRECTORS AND EXECUTIVE OFFICERS
 
     Set forth below is information concerning the executive officers and
directors of the Company:
 
   
<TABLE>
<CAPTION>
                   NAME                        AGE                        POSITION
                   ----                        ---                        --------
<S>                                            <C>    <C>
John H. Marmaduke(1).......................    51     Chairman of the Board, President and Chief
                                                      Executive Officer
Phillip G. Hill............................    35     Senior Vice President, Chief Operating Officer
                                                      and Director
Dennis McGill..............................    49     Vice President of Finance, Chief Financial
                                                      Officer, Treasurer and Secretary
Robert A. Berman...........................    49     Vice President of Store Operations
Michael Woods..............................    36     Vice President of Information Systems
Leonard L. Berry(2)........................    55     Director
Peter A. Dallas(3).........................    62     Director
Gaines L. Godfrey(1)(3)....................    64     Director
Craig R. Lentzsch(2).......................    49     Director
Stephen S. Marmaduke.......................    47     Director
Jeffrey G. Shrader(1)(2)...................    47     Director
Ron G. Stegall(1)(3).......................    50     Director
</TABLE>
    
 
---------------
 
(1) Member of the Executive Committee.
 
(2) Member of the Compensation Committee.
 
(3) Member of the Audit Committee.
 
     The Company's Articles of Incorporation provide that the Board of Directors
is divided into three classes, designated by the Company as Class I, Class II
and Class III. Each class of directors consists of three directors who serve for
a one, two or three year period or until their successors are elected and
qualified. Thereafter, directors serve staggered three-year terms. Accordingly,
Phillip Hill, Stephen S. Marmaduke and Leonard L. Berry presently hold office as
Class II Directors until the 1998 annual shareholders meeting; Ron G. Stegall,
Peter A. Dallas and Craig R. Lentzsch presently hold office as Class III
Directors until the 1999 annual shareholders meeting; and John H. Marmaduke,
Gaines L. Godfrey and Jeffrey G. Shrader presently hold office as Class I
Directors until the 2000 annual shareholders meeting.
 
     All executive officers are chosen by the Board of Directors and serve at
the Board's discretion.
 
     JOHN H. MARMADUKE has served as President and Chief Executive Officer of
the Company since July 1976 and as Chairman of the Board since October 1993. Mr.
Marmaduke served as President of Hastings' former parent company, Western, from
1982 through June 1994, including the years 1991 through 1994 when Western was a
division of Wal-Mart. Mr. Marmaduke also serves as a director of Cross-Continent
Auto Retailers, Inc. Mr. Marmaduke has been active in the entertainment
retailing industry with the Company and its predecessor company for over 28
years.
 
     PHILLIP G. HILL has served as Chief Operating Officer of the Company since
December 1996 and as Chief Operating Officer -- Systems and Support of the
Company from May 1996 through December 1996 and as Senior Vice President of the
Company since October 1992. Mr. Hill was elected a Director of the Company in
December 1996. From January 1990 to October 1992, Mr. Hill served as Vice
President of Store Operations of the Company. From January 1988 to January 1990,
Mr. Hill served as Director of Administration of the Company. From April 1986 to
January 1988, Mr. Hill served as a District Manager of the Company. Prior to
joining the Company, Mr. Hill served as Director of Operations for Gateway Books
Inc., a 120-store chain of bookstores, and Director of Store Operations of
Hallmark Card Shops based in Knoxville, Tennessee.
 
                                       37
<PAGE>   39
 
     DENNIS MCGILL has served as Vice President of Finance, Chief Financial
Officer, Treasurer and Secretary of the Company since November 1995. From March
1994 to October 1995 Mr. McGill served as a financial consultant to the toy
manufacturing, bedding and waste management industries. From December 1989 to
February 1994, Mr. McGill served as President and Chief Executive Officer of the
Bed Outlet, an 18-store bedroom furniture retailer in California. From August
1986 to December 1989, Mr. McGill served as the Senior Vice President -- Finance
and Chief Financial Officer of San Francisco-based Lewis Galoob Toys, Inc., a
New York Stock Exchange-listed, international toy manufacturing company.
 
     ROBERT A. BERMAN has served the Company as Vice President of Store
Operations since January 1997. From June 1995 to January 1997, Mr. Berman was
self-employed in the financial services industry. From January 1989 to June
1995, Mr. Berman served as Vice President and Senior Vice President of Store
Operations for Builders Square, Inc., a chain of 185 building material
superstores. At Builders Square, Inc., Mr. Berman was responsible for store
operations, store planning and design, purchasing and construction.
 
     MICHAEL WOODS has served as Vice President of Information Systems of the
Company since October 1992. From August 1990 to October 1992, Mr. Woods served
as Director of Microsystems for the Company, focusing on store systems
development. From October 1989 to August 1990, Mr. Woods served as a programming
specialist and analyst for the Company.
 
   
     LEONARD L. BERRY has served as a director of the Company since March 1994.
Dr. Berry has served as a Professor of Marketing and the Director of the Center
for Retailing Studies in the College of Business Administration at Texas A&M
University since January 1982. Dr. Berry holds the J.C. Penney Chair of
Retailing Studies at Texas A&M, a position awarded in January 1991. From July
1986 to July 1987, Dr. Berry served as the National President of the American
Marketing Association. Dr. Berry also serves as a director of CompUSA and of
Lowe's Companies, Inc. and as a public member of the Council of Better Business
Bureaus.
    
 
   
     PETER A. DALLAS has served as a director of the Company since October 1991
and its predecessor since 1970. Mr. Dallas is a Banking Principal with
NationsBank, N.A., a position held since January 1991. Mr. Dallas has served as
an officer of NationsBank, N.A. and its predecessors, Boatmen's First National
Bank of Amarillo and The First National Bank of Amarillo, since 1965.
    
 
     GAINES L. GODFREY has served as a director of the Company since October
1991. Mr. Godfrey has been associated with Godfrey Ventures in the field of
financial consulting, including evaluations, financings, underwritings,
purchases and sales in a wide range of industries, since 1982 . From 1973 to
1982, Mr. Godfrey was Vice President, Finance for Mesa Petroleum Co.
 
     CRAIG R. LENTZSCH has served as a director of the Company since April 1994.
Mr. Lentzsch is President and Chief Executive Officer of Greyhound Lines, Inc. a
position held since November 1994. Mr. Lentzsch has served as a director of
Greyhound since August 1994. From November 1994 to April 1995, Mr. Lentzsch also
served as Chief Financial Officer of Greyhound. From August 1992 to November
1994, Mr. Lentzsch was employed by Motor Coach Industries International, Inc.,
where he served as Executive Vice President and Chief Financial Officer. Mr.
Lentzsch is a member of the Board of Directors of the American Bus Association,
the Intermodal Transportation Institute and Enginetech, Inc.
 
     STEPHEN S. MARMADUKE has served as a director of the Company since October
1991. From 1978 to September 1992, Mr. Marmaduke served as Vice President of
Purchasing for Western. Mr. Marmaduke is the brother of the President and Chief
Executive Officer of the Company, John H. Marmaduke, and a son of the late
founder of Western, Sam Marmaduke.
 
     JEFFREY G. SHRADER has served as a director of the Company since October
1992. Mr. Shrader has served as a shareholder in the law firm of Sprouse, Smith
& Rowley, P.C. in Amarillo, Texas since January 1993.
 
     RON G. STEGALL has served as a director of the Company since May 1996. Mr.
Stegall is the founder and has served as the Chief Executive Officer of
Arlington Equity Partners, Inc. since January 1992. Mr. Stegall is also the
founder of BizMart, Inc. and from October 1987 to December 1991 served as Chief
Executive Officer of Bizmart. For more than 16 years prior to 1987, Mr. Stegall
was employed by Tandy Corporation/Radio Shack Division serving as Senior Vice
President from 1983 to 1987 and Vice President from 1979 to 1983.
 
                                       38
<PAGE>   40
 
Mr. Stegall currently serves as Chairman of the Board of InterTAN, Inc. and as a
director of O'Sullivan Industries, Inc.
 
     The Company has an Executive Committee, an Audit Committee and a
Compensation Committee. The Audit Committee and the Compensation Committee
consist solely of independent directors. The Executive Committee has the
authority, between meetings of the Board of Directors, to take all actions with
respect to the management of the Company's business that require action by the
Board of Directors, except with respect to certain specified matters that by law
must be approved by the entire Board of Directors. The Audit Committee is
responsible for (i) reviewing the scope of, and the fees for, the annual audit,
(ii) reviewing with the independent auditors the corporate accounting practices
and policies and recommending to whom reports should be submitted within the
Company, (iii) reviewing with the independent auditors their final report, (iv)
reviewing with internal and independent auditors overall accounting and
financial controls and (v) being available to the independent auditors during
the year for consultation purposes. The Compensation Committee recommends the
compensation of the officers of the Company and performs other similar functions
and recommends grants of options under the Company's stock option plans for
consideration by the Board of Directors. See "Management -- Stock Plans."
Messrs. J. Marmaduke, Godfrey, Shrader and Stegall serve on the Executive
Committee; Messrs. Godfrey, Dallas and Stegall serve on the Audit Committee; and
Messrs. Berry, Lentzsch and Shrader serve on the Compensation Committee.
 
EXECUTIVE COMPENSATION
 
     Summary Compensation Table. The following table sets forth certain
information for fiscal 1997 regarding the compensation awarded to, earned by or
paid to the Company's Chief Executive Officer and the four other most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers") for services rendered in all capacities to the Company
during fiscal 1997.
 
<TABLE>
<CAPTION>
                                                                               LONG TERM
                                                                              COMPENSATION
                                                                                 AWARDS
                                                ANNUAL COMPENSATION(1)    --------------------
                   NAME AND                     -----------------------   NUMBER OF SECURITIES
              PRINCIPAL POSITION                  SALARY       BONUS       UNDERLYING OPTIONS
              ------------------                ----------   ----------   --------------------
<S>                                             <C>          <C>          <C>
John H. Marmaduke.............................   $156,991     $239,085          470,487(2)
  Chairman of the Board, President and
  Chief Executive Officer
Phillip Hill..................................     97,355      108,727          111,298
  Senior Vice President,
  Chief Operating Officer and Director
Dennis McGill.................................     91,748       83,835           50,590
  Vice President of Finance, Chief Financial
  Officer, Treasurer and Secretary
Robert A. Berman..............................     86,550       27,752           55,649
  Vice President of Store Operations
Michael Woods.................................     74,418       45,333           15,177
  Vice President of Information Systems
</TABLE>
 
---------------
 
(1) In accordance with the rules of the Securities and Exchange Commission (the
    "Commission"), the compensation described in this table does not include
    medical, group life insurance or other benefits received by the Named
    Executive Officers that are available generally to all salaried employees of
    the Company, and certain perquisites and other personal benefits received by
    the Named Executive Officers that do not exceed the lesser of $50,000 or 10%
    of any such officer's salary and bonus disclosed in the table.
 
(2) Includes 404,720 shares subject to an option granted in fiscal 1993 with
    fixed annual increases in the exercise price, which option was amended in
    fiscal 1997 to fix the exercise price at $11.07 for the term of the option.
 
                                       39
<PAGE>   41
 
OPTION GRANTS, EXERCISES AND HOLDINGS
 
     Fiscal 1997 Option Grants. The following table sets forth certain
information regarding options granted during fiscal 1997 to the Named Executive
Officers.
 
<TABLE>
<CAPTION>
                                  INDIVIDUAL GRANTS
                       ---------------------------------------                  POTENTIAL REALIZABLE
                                      PERCENT OF                                  VALUE AT ASSUMED
                       NUMBER OF         TOTAL                                 ANNUAL RATES OF STOCK
                       SECURITIES       OPTIONS                                PRICE APPRECIATION FOR
                       UNDERLYING       GRANTED      EXERCISE                      OPTION TERM(4)
                        OPTIONS     TO EMPLOYEES IN  PRICE PER    EXPIRATION  ------------------------
                       GRANTED(#)   FISCAL YEAR(1)   SHARE(2)      DATE(3)        5%           10%
                       ----------   ---------------  ---------    ----------  ----------   -----------
<S>                    <C>          <C>              <C>          <C>         <C>          <C>
John H. Marmaduke....    25,118          2.8%         $15.00(6)     08/28/02  $  104,115   $   230,067
                         40,649          4.6%          13.64        08/28/07     348,669       883,595
                        404,720(5)       45.9%         11.07(5)     01/31/07   4,833,598    14,234,072
Phillip Hill.........    25,295          2.9%          13.64        05/22/07     216,969       549,841
                         35,413          4.0%          13.64        08/28/07     303,756       769,778
                         50,590          5.7%          14.03(7)     01/31/10     766,039     2,255,846
Dennis McGill........    10,118          1.1%          13.64        05/22/07      86,787       219,936
                         20,236          2.3%          13.64        08/28/07     173,575       439,873
                         20,236          2.3%          14.03(7)     01/31/10     306,416       902,338
Robert A. Berman.....    30,354          3.4%          13.64        05/22/07     260,362       659,809
                         25,295          2.9%          14.03(7)     01/31/12     383,020     1,127,923
Michael Woods........    15,177          1.7%          13.64        08/28/07     130,181       329,905
</TABLE>
 
---------------
 
(1) The Company granted options to other associates to purchase an aggregate of
    128,236 shares of Common Stock during fiscal 1997.
 
(2) All options were granted at the fair market value of the Common Stock on the
    date of grant and a term of 10 years, unless otherwise noted. Fair market
    value is based upon an appraisal performed by an independent investment
    banking firm engaged by the Company.
 
(3) Options may terminate before their expiration date if the optionee's status
    as an employee is terminated or upon the optionee's death.
 
(4) In accordance with the rules of the Commission, shown are the gains or
    "option spreads" that would exist for the respective options granted. These
    gains are based on the assumed rates of annual compound stock price
    appreciation of 5% and 10% from the date the option was granted over the
    full option term. These assumed annual compound rates of stock price
    appreciation are mandated by the rules of the Commission and do not
    represent the Company's estimate or projection of future Common Stock
    prices.
 
(5) Option granted in fiscal 1993 with fixed annual increases in the exercise
    price, which option was amended in fiscal 1997 to fix the exercise price at
    $11.07 for the term of the option. For a description of the deferred
    compensation expense recognized in connection with this repricing, see
    "Management's Discussion and Analysis of Financial Condition and Results of
    Operations -- Fiscal Year Ended January 31, 1998 Compared to Fiscal Year
    Ended January 31, 1997."
 
   
(6) Option granted with exercise price of $15.00 or 110% of the fair market
    value of the Common Stock on the date of the grant. Term is five years.
    
 
(7) Option granted with fixed annual increases in the exercise price and a term
    of 15 years. The option was amended in fiscal 1997 to fix the exercise price
    for the term of the option.
 
                                       40
<PAGE>   42
 
     Fiscal 1997 Option Holdings. The following table sets forth certain
information regarding options held at January 31, 1998. There were no options
exercised during fiscal 1997 by the Named Executive Officers.
 
<TABLE>
<CAPTION>
                                        NUMBER OF SECURITIES
                                       UNDERLYING UNEXERCISED       VALUE OF UNEXERCISED IN THE
                                         OPTIONS AT FISCAL                MONEY OPTIONS AT
                                              YEAR-END                    FISCAL YEAR-END
                                    ----------------------------    ----------------------------
               NAME                 EXERCISABLE    UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
               ----                 -----------    -------------    -----------    -------------
<S>                                 <C>            <C>              <C>            <C>
John H. Marmaduke.................    485,462         177,060       $1,495,130       $404,948
Phillip Hill......................     48,991         176,033          335,728        168,432
Dennis McGill.....................      2,530          83,474               --         31,500
Robert A. Berman..................          0          55,649               --              0
Michael Woods.....................     10,917          58,487           36,193         84,030
</TABLE>
 
STOCK PLANS
 
  1996 Incentive Stock Plan
 
     Scope. The Board of Directors and shareholders of the Company have approved
the Company's Amended 1996 Incentive Stock Plan (the "1996 Plan"). The 1996 Plan
authorizes the granting of stock options to purchase Common Stock, stock
appreciation rights, restricted stock, dividend equivalent rights, stock awards
and other stock-based awards to officers, other associates, directors and
consultants of the Company. The purpose of the 1996 Plan is to attract, retain
and provide incentives to officers, other associates, directors and consultants
of the Company and to thereby increase overall shareholder value.
 
     The 1996 Plan authorizes the award of 632,375 shares of Common Stock,
representing 5.5% of outstanding shares of Common Stock after the Offering, to
be used for stock options, stock appreciation rights or restricted or
unrestricted stock. If an award made under the 1996 Plan expires, terminates or
is forfeited, canceled or settled in cash without issuance of shares of Common
Stock covered by the award, those shares will be available for future awards
under the 1996 Plan. The 1996 Plan will terminate on May 18, 2006. As of January
31, 1998, options for 411,676 shares of Common Stock were outstanding under the
1996 Plan.
 
     Administration. The 1996 Plan is administered by the Board of Directors or,
if directed by the Board of Directors, the Compensation Committee of the Board
of Directors or another committee designated by the Board of Directors (in each
event, the "Compensation Committee"). The Compensation Committee makes
determinations with respect to the participation of employees, officers,
directors and consultants in the 1996 Plan and, except as otherwise required by
law or the 1996 Plan, the grant terms of awards, including vesting schedules,
retirement and termination rights, payment alternatives such as cash, stock,
contingent award or other means of payment consistent with the purposes of the
1996 Plan, and such other terms and conditions as the Board or the Compensation
Committee deems appropriate. The Compensation Committee has the authority at any
time to provide for the conditions and circumstances under which awards shall be
forfeited. The Compensation Committee has the authority to accelerate the
vesting of any award and the time at which any award becomes exercisable.
 
     Eligibility. Officers, other associates, directors and consultants of the
Company may be selected by the Compensation Committee to receive awards under
the 1996 Plan. In the discretion of the Compensation Committee, an eligible
person may receive an award in the form of a stock option, stock appreciation
right, restricted stock award, dividend equivalent right, stock award or other
stock-based award, or any combination thereof, and more than one award may be
granted to an eligible employee.
 
     Stock Options. The 1996 Plan authorizes the award of both non-qualified and
incentive stock options ("ISO's"). Under the 1996 Plan and pursuant to awards
made thereunder, Common Stock may be purchased at a fixed exercise price during
a specified time. Unless otherwise provided in the award agreement, the exercise
price of each share of Common Stock covered by a stock option shall not be less
than the fair market value of the Common Stock on the date of the grant of such
stock option, and 20% of the shares covered by the stock option shall become
exercisable on the first anniversary of its grant and an additional 20% of such
shares shall become exercisable on each of the second, third, fourth and fifth
anniversaries of its grant.
 
                                       41
<PAGE>   43
 
     Under the 1996 Plan, an ISO may be exercised at any time during the
exercise period established by the Compensation Committee, except that (i) no
ISO may be exercised prior to the expiration of six months from the date of
grant; (ii) no ISO may be exercised more than three months after employment with
the Company terminates by reason other than death or disability; and (iii) no
ISO may be exercised more than one year after employment with the Company
terminates by reason of death or disability. The aggregate fair market value
(determined at the time of the award) of the Common Stock with respect to which
ISO's are exercisable for the first time by any employee during any calendar
year may not exceed $100,000. The term of each ISO is determined by the
Compensation Committee, but in no event may such term exceed 10 years from the
date of grant (or five years in the case of ISO's granted to shareholders owning
10% or more of the Company's outstanding shares of Common Stock). The exercise
price of options is determined by the Compensation Committee, but the exercise
price of ISO's cannot be less than the fair market value of the Common Stock on
the date of the grant (or 110% of the fair market value of the Common Stock on
the date of grant in the case of ISO's granted to shareholders owning 10% or
more of the Company's outstanding shares of Common Stock). The exercise price of
options may be paid in cash, in shares of Common Stock through a cashless
exercise program with previously owned Common Stock or by such other methods as
the Compensation Committee deems appropriate.
 
     Stock Appreciation Rights. The 1996 Plan authorizes the grant of stock
appreciation rights ("SAR's"). The SARs may be granted either separately or in
tandem with options. An SAR entitles the holder to receive an amount equal to
the excess of the fair market value of a share of Common Stock at the time of
exercise of the SAR over the option exercise price or other specified amount (or
deemed option price in the event of an SAR that is not granted in tandem with an
option), multiplied by the number of shares of Common Stock subject to the
option or deemed option as to which the SAR is being exercised (subject to the
terms and conditions of the option or deemed option). An SAR may be exercised at
any time when the option or deemed option to which it related may be exercised
and will terminate no later than the date on which the right to exercise the
tandem option (or deemed option) terminates (or is deemed to terminate).
 
     Restricted Stock. Restricted stock awards are grants of Common Stock made
to eligible persons subject to restrictions, terms and conditions as established
by the Compensation Committee. An eligible person will become the holder of
shares of restricted stock free of all restrictions if he or she complies with
all restrictions, terms and conditions. Otherwise, the shares will be forfeited.
The eligible persons will not have the right to vote the shares of restricted
stock until all restrictions, terms and conditions are satisfied.
 
     Other Stock Based Awards. The Compensation Committee may allow a director,
officer or other associate to elect to exchange annual retainers, fees or
compensation for stock options. The Compensation Committee also may award rights
to receive dividends or the equivalent. Additionally, the Compensation Committee
may make an unrestricted transfer of ownership of Common Stock. Furthermore, the
Compensation Committee may make other stock-based awards that are related to or
serve a similar function as other awards.
 
     Adjustments. In the event of any changes in the outstanding shares of
Common Stock by reason of any stock dividend, split, spinoff, recapitalization,
merger, consolidation, combination, exchange of shares or other similar change,
the aggregate number of shares with respect to which awards may be made under
the 1996 Plan, and the terms and the number of shares of any outstanding option,
restricted stock or other stock-based award, may be equitably adjusted by the
Compensation Committee in its sole discretion.
 
     Change of Control. Upon a Change in Control, which is defined in the 1996
Plan to include certain third-party acquisitions of 30% or more of the then
outstanding Company Common Stock or the combined voting power of the then
outstanding Common Stock entitled to vote generally in the election of
directors, changes in the composition of the Board of Directors, shareholder
approval of certain significant corporate transactions such as a reorganization,
merger, consolidation, sale of assets or the liquidation or dissolution of the
Company, all outstanding awards vest and become immediately exercisable and
cease to be subject to the risk of forfeiture.
 
     Termination and Amendment. The 1996 Plan may be terminated, modified or
amended by the affirmative vote of the holders of a majority of the outstanding
shares of the capital stock of the Company
                                       42
<PAGE>   44
 
present or represented and entitled to vote at a duly held meeting of the
Company's shareholders. The Board may at any time terminate the 1996 Plan or
from time to time make such modifications or amendments of the 1996 Plan as it
may deem advisable; provided, however, that the Board shall not make any
material amendments to the 1996 Plan which require shareholder approval under
applicable law, rule or regulation unless approved by the requisite vote of the
Company's shareholders. No termination, modification or amendment of the 1996
Plan may adversely affect the rights conferred by an award without the consent
of the recipient thereof.
 
  1991 and 1994 Stock Option Plans
 
     Scope. The Board of Directors and shareholders of the Company have approved
the Company's 1991 Stock Option Plan (the "1991 Plan") and 1994 Stock Option
Plan (the "1994 Plan") (collectively, the "Plans"). The Plans are substantially
identical and authorize the granting of ISO's and non-qualified stock options to
purchase Common Stock. Options may be granted to officers, other associates and
directors of the Company.
 
     Each of the Plans authorizes the issuance of 505,900 shares of Common
Stock, each representing 4.4% of outstanding shares of Common Stock after the
Offering, under stock option agreements. Shares of Common Stock issued under the
Plans shall be authorized and unissued or treasury shares of Common Stock of the
Company. The 1991 Plan will terminate on October 21, 2001, and the 1994 Plan
will terminate on April 20, 2004. As of January 31, 1998, 476,457 of the shares
authorized for issuance under the 1991 Plan were subject to options and 465,200
of the shares authorized for issuance under the 1994 Plan were subject to
options.
 
     Administration. The Plans are administered by the Board of Directors or
another committee designated by the Board of Directors of the Company (in each
event, the "Compensation Committee"). Subject to the provisions of the Plans,
the Compensation Committee has the authority to select eligible persons to
receive awards, determine the time or times of receipt and determine the types
of awards and the number of shares covered by the awards. The Compensation
Committee is authorized to interpret the Plans, establish, amend and rescind any
rules and regulations relating to the Plans, determine the terms and provisions
of any agreements made pursuant to the Plans and make all other determinations
that may be necessary or advisable for the administration of the Plans.
 
     Eligibility. Executive officers, directors and other key employees of the
Company may be selected by the Compensation Committee to receive awards under
the Plans. In the discretion of the Compensation Committee, an eligible person
may receive an award in the form of ISO's or non-qualified stock options. More
than one award may be made to eligible persons.
 
     Stock Options. The Plans authorize the award of non-qualified stock
options. Under the Plans and pursuant to awards made thereunder, an option may
be exercised at any time during the exercise period established by the
Compensation Committee. Generally, the exercise period is ten years from the
date of grant. The Compensation Committee determines the exercise price of
options per share of Common Stock and whether the exercise price may be paid in
cash or previously owned shares of Common Stock.
 
     Incentive Stock Options. The Plans authorize the award of ISO's. Under the
Plans and pursuant to awards made thereunder, an ISO may be exercised at any
time during the exercise period established by the Compensation Committee except
that (i) no ISO may be exercised after employment with the Company terminates by
reason other than retirement, death or disability; (ii) no ISO may be exercised
more than one year after employment with the Company terminates by reason of
death or disability; and (iii) no option may be exercised more than three months
after retirement from the Company. The term of each option is determined by the
Compensation Committee. Generally, the term will not exceed 10 years from the
date of grant and may not exceed five years in the case of ISO's granted to
shareholders owning 10% or more of the Company's outstanding shares of Common
Stock. The aggregate fair market value (determined at the time of the award) of
the Common Stock with respect to which ISO's are exercisable for the first time
by an employee during any calendar year may not exceed $100,000. The exercise
price of options as determined by the Compensation Committee shall be 100% of
the fair market value of a share of Common Stock on the date the ISO is granted,
provided the ISO granted to any owner of 10% or more of the total combined
voting power
                                       43
<PAGE>   45
 
of the Company shall be 110% of the fair market value of the share of Common
Stock on the date of grant. The exercise price of options may be paid in cash or
in shares of previously owned Common Stock.
 
     Adjustments. In the event of any changes in the outstanding shares of
Common Stock by reason of any stock dividend, split-up, recapitalization,
merger, consolidation, combination, exchange of shares or other similar change,
the aggregate number of shares with respect to which awards may be made under
the Plans, and the terms and the number of shares of any outstanding option may
be equitably adjusted by the Compensation Committee in its sole discretion.
 
     Change of Control. All options granted under the Plans are immediately
exercisable upon a Change of Control, which is deemed to occur upon any merger,
transfer of assets or transfer of voting shares of the Company resulting in
members of the Marmaduke family owning, directly or indirectly, less than 50% of
the voting shares of the Company.
 
     Termination and Amendment. The Compensation Committee may, without approval
by the shareholders and without receiving further consideration from the
participants, amend, condition or modify awards under the Plans except for
amendments which under applicable law or regulation require such approval by the
shareholders.
 
  401(k) Savings Plan
 
     The Company presently sponsors a retirement plan called the Hastings
Entertainment, Inc. Associates' 401(k) Plan and Trust (the "401(k) Plan"). The
total 401(k) Plan assets as of January 31, 1998 were valued at approximately
$8.1 million. The trustee for the 401(k) Plan is Amarillo National Bank.
Amarillo National Bank became the trustee for the 401(k) Plan on August 1, 1996
at which time associates were permitted to direct investments of their accounts
among a selection of investments, including the Common Stock of the Company.
Associates, including members of management, are eligible to make voluntary
contributions of up to twelve percent (12%) of their annual compensation under
the 401(k) Plan. The Company is permitted to make a discretionary contribution
to the 401(k) Plan each fiscal year which will be calculated as a percentage
(determined prior to the beginning of the plan year) of Elective Deferrals (as
defined in the 401(k) Plan) made during the plan year by each participant
eligible to receive a matching contribution. Contributions in excess of 6% of
compensation shall not be included in this calculation. If the Company does not
change the percentage rate that may be contributed for a plan year, the rate
determined for the prior year shall remain in effect.
 
     The Company also is permitted to make discretionary profit sharing
contributions to the 401(k) Plan each fiscal year which shall be credited to
each eligible participant's account in the same proportion that the
participant's salary and wage compensation bears to the total salary and wage
compensation of all participants.
 
     The 401(k) Plan is intended to qualify as a profit sharing plan under
Sections 401(a) and 401(k) of the Internal Revenue Code.
 
  Associate Stock Ownership Plan
 
     The Company maintains an Associate Stock Ownership Plan (the "ASOP") for
associates completing one year of service (defined as 1,000 hours in a
consecutive twelve-month period) under which contributions are made by the
Company in amounts determined annually by the Board of Directors. The trustee
for the ASOP is Amarillo National Bank. At January 31, 1998, approximately 2,845
associates were eligible to participate and were participating in the ASOP.
Company contributions may be made in cash, in shares of Common Stock or other
property. Allocation among participants of the Company's contributions to the
ASOP is based upon the employee's compensation. Participants vest in their ASOP
accounts at 20%, 40%, 60%, 80% and 100% after the completion of three, four,
five, six and seven years of service, respectively, with the Company.
Participants become fully vested upon retirement, death or disability.
 
     As soon as practicable after a participant's retirement, death, disability
or termination of employment for any other reason, such participant's vested
accrued benefit will be distributed to the participant or the participant's
beneficiary in shares of the Company's Common Stock or cash at the election of
the participant.
                                       44
<PAGE>   46
 
The ASOP permits participants to direct the voting of shares allocated to their
account and permits current distribution to participants of cash dividends paid
on Common Stock allocated to their accounts. During the last fiscal year,
Company contributions to the ASOP for the accounts of the Named Executive
Officers, and all executive officers as a group, the distribution or
unconditional vesting of which are not subject to future events, was $4,398 and
$5,300, respectively.
 
  Chief Executive Officer Stock Option
 
     In April 1993, the Board of Directors and shareholders approved a
non-qualified stock option for 404,720 shares of Common Stock for John H.
Marmaduke, Chief Executive Officer and President of the Company. The stock
option grants Mr. Marmaduke the right to purchase 404,720 shares of Common Stock
and terminates by its terms on January 31, 2007. The option is fully
exercisable. The option was granted at the initial price of $7.75 per share of
Common Stock and was to increase at a rate of 12% per annum. As amended in
fiscal 1997, the exercise price per share of the option was fixed at $11.07 for
the life of the option. Payment for shares received upon exercise of the option
must be made in cash at the time of exercise.
 
  Corporate Officer Incentive Plan, Management Incentive Plan and Salary
Incentive Plan
 
     Scope. The Board of Directors and shareholders of the Company have approved
the Company's Corporate Officer Incentive Plan, the Management Incentive Plan
and the Salary Incentive Plan (each an "Incentive Plan" and collectively the
"Incentive Plans"). The Incentive Plans authorize the award of incentive cash
payments to eligible employees if certain performance goals are met.
 
   
     Administration. The Incentive Plans are administered by the Chief Executive
Officer and the Associate Resources Department of the Company, with final
approval for all performance goals and award targets resting with the
Compensation Committee or, with respect to participants other than the Chief
Executive Officer of the Company, the Chief Executive Officer or, in the case of
the Salary Incentive Plan, the Chief Executive Officer or the Corporate
Compensation Team. After the size of any award has been determined based upon
performance achievement, the Chief Executive Officer has the authority to reduce
an award by no more than 30% based upon individual performance contributions.
    
 
     Eligibility. Award eligibility is determined by the Chief Executive Officer
at the beginning of each performance period. Participants in the Incentive Plans
are selected from corporate employees who are primarily responsible for the
annual growth and profitability of the Company. A participant must be an
employee of the Company on the day the Incentive Plan award is finalized and
approved for payment in order to receive such award.
 
     Awards. The Incentive Plans provide for incentive cash payments based on
incentive targets expressed as a percentage of a participant's base salary if
certain performance goals are met. Each fiscal year is divided into two separate
six month performance periods. Awards are made for each performance period.
 
     At the beginning of each performance period, each participant in the
Incentive Plans is assigned an incentive target amount expressed as a percentage
of base salary. The incentive target for a performance period can then be
increased to not more than 125% of the targeted amount or decreased to not less
than 50% of the targeted amount based upon performance achievement. At the
beginning of each performance period, the Compensation Committee or, in the case
of the Management Incentive Plan, the Chief Executive Officer, establishes in
writing the performance goals that will determine the size of the Incentive Plan
awards. As of January 31, 1998, the performance measures for all Incentive Plan
participants are based upon sales and return on equity as defined in the
Company's annual business plan. Return on equity is defined as the after-tax
rate of return on beginning shareholders' equity for the performance period.
 
     Within 90 days after the end of each performance period, each participant's
base salary rate will be multiplied by the earned Incentive Plan award
percentage to determine the dollar value of the award for the performance period
in question. The maximum award payable under the Corporate Officer Incentive
Plan is the lesser of 250% of the participant's most recent annualized base
salary or $1,000,000.
 
                                       45
<PAGE>   47
 
     Adjustments and Amendments. The Board of Directors and the Compensation
Committee retain the right to adjust, amend or suspend any current payments in
the Corporate Officer Incentive Plan and the Management Incentive Plan for any
given performance period if, in the good faith determination of the Board of
Directors or the Compensation Committee, the payments of amounts thereunder
would result in a material adverse change to or a material decline in the
financial condition or prospects of the Company.
 
     Form and Payment of Awards. Award calculations under the Incentive Plans
are finalized and paid within 90 days after the end of each performance period.
A participant may elect to voluntarily defer a portion of an award.
Additionally, participants under the Corporate Officer Incentive Plan and the
Management Incentive Plan may elect to apply a portion of an award to purchase
discounted Common Stock of the Company pursuant to the Management Stock Purchase
Plan (see "Management Stock Purchase Plan").
 
  Management Stock Purchase Plan
 
     Scope. The Board of Directors and shareholders of the Company have approved
the Management Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan
authorizes the issuance of up to 227,655 shares of Common Stock, representing
2.0% of outstanding shares of Common Stock after the Offering, pursuant to
agreements providing for the purchase of Restricted Stock Units ("RSU's"). The
cost of each RSU is equal to 75% of the fair market value of the Common Stock of
the Company on the date the RSU is awarded. Shares of stock underlying any
cancelled RSU's are added back to the shares of Common Stock available for
issuance under the Purchase Plan. As of January 31, 1998, no RSU's had been
awarded under the Purchase Plan.
 
     Administration. The Purchase Plan is administered by the Board of Directors
or the Compensation Committee (in each event, the "Compensation Committee").
 
     Eligibility. The Compensation Committee designates the management employees
of the Company that are eligible to participate in the Purchase Plan.
 
     Participation. Each participant in the Purchase Plan may elect to purchase
RSU's. Each RSU awarded to a participant is credited to a bookkeeping account
established and maintained for that participant.
 
     Each participant may elect to receive an award of RSU's by completing a
subscription agreement. A subscription agreement provides that the participant
may elect to receive RSU's in lieu of a specified portion of any incentive bonus
paid to such participant. During each performance period, a participant may
elect to use the lesser of 50% of the actual bonus amount for such performance
period or $50,000 to purchase RSU's.
 
     A participant is fully vested in each RSU three years after the RSU is
awarded. Once vested, the Company will issue to the participant one share of
Common Stock at the end of each deferral period specified in the subscription
agreement pertaining to each RSU, or upon the participant's termination of
employment or the termination of the Purchase Plan, if sooner.
 
     If a participant voluntarily terminates his employment with the Company for
reasons other than death or permanent disability, the participant's nonvested
RSU's shall be canceled and he shall receive a cash payment pursuant to the
terms of the Purchase Plan. If a participant's employment is terminated by the
Company, or if the participant's employment terminates as a result of death or
permanent disability, the participant's nonvested RSU's shall be canceled and he
shall receive RSU's pursuant to the terms of the Purchase Plan.
 
     Whenever dividends (other than dividends payable only in shares of stock)
are paid with respect to Common Stock, each participant shall be paid an amount
in cash equal to the number of his vested RSU's multiplied by the dividend value
per share. In addition, each participant's account shall be credited with an
amount equal to the number of such participant's nonvested RSU's multiplied by
the dividend value per share. Amounts credited with respect to each nonvested
RSU shall be paid, without interest, on the date the participant becomes vested
in such RSU, or when the participant receives payment of his nonvested RSU's.
 
     Adjustments. In the event of a stock dividend, stock split or similar
change in capital structure of the Company, the Compensation Committee shall
make appropriate adjustments in the number and kinds of shares of Common Stock
with respect to which RSU's will thereafter be granted, the number and kinds
                                       46
<PAGE>   48
 
of shares remaining subject to the outstanding RSU's, the number of RSU's
credited to each participant's account, and the method of determining the cost
of RSU's. In the event of any proposed merger, consolidation, dissolution or
liquidation of the Company, all nonvested RSU's shall become fully vested on the
effective date of such merger, consolidation, sale, dissolution or liquidation
and the Compensation Committee in its sole discretion may, as to any outstanding
RSU's, make such substitution or adjustment in the aggregate number of shares to
reserve for issuance under the Purchase Plan and the number of shares subject to
each RSU as it may determine on an equitable basis and as may be permitted by
the terms of such transaction, or terminate such RSU's upon such terms and
conditions as it shall provide.
 
     Amendment or Termination. The Company reserves the right to amend or
terminate the Purchase Plan at any time, by action of its Board of Directors,
provided that no such action shall adversely affect a participant's right under
the Purchase Plan with respect to RSU's awarded and vested before the date of
such action.
 
   
EMPLOYMENT AGREEMENTS
    
 
   
     The Company is a party to employment agreements with each of Messrs.
Marmaduke, Hill, McGill, Woods and Berman (each, an "Executive"). Each
employment agreement provides that the Executive's salary shall be determined by
the Board of Directors and that the Executive's employment shall continue until
terminated by either the Executive or the Company. Either the Company or the
Executive has the right to terminate the employment at any time with or without
cause (as defined in each agreement) by delivering written notice of termination
to the other party. Each agreement provides for a severance payment if the
agreement is terminated by the Company without cause. Under such circumstances,
Mr. Marmaduke would receive his base annual salary and bonus for a period of 36
months, Messrs. Hill and McGill each would receive their base annual salary and
bonus for a period of 24 months and Messrs. Woods and Berman each would receive
their base annual salary and bonus for a period of 18 months following the date
of termination, payable over such period at such times as executives of the
Company receive their regular salary and bonus payments, and any benefits under
any plans of the Company in which the Executive is a participant to the full
extent of such Executive's rights under such plans. If the agreements are
terminated either voluntarily by the Executive or by the Company with cause, or
by reason of death or disability, then the Executive will not be entitled to
payments under his employment agreement.
    
 
   
     Upon a change in control of the Company, each Executive will receive a
payment to compensate him for the loss of long-term capital gains treatment of
certain options granted to him. Each employment agreement provides that, in the
event the Executive terminates his employment with the Company, he may not, for
a period of 18 months following termination, work for or assist a competitor of
the Company, use certain information obtained from the Company, or induce any
other employees of the Company to terminate their relationship with the Company.
    
 
DIRECTOR COMPENSATION
 
   
     The Company reimburses all directors for expenses incurred in connection
with their activities as directors. Non-employee directors of the Company
receive an annual cash retainer of $15,000 and a grant of shares of Common Stock
valued at $5,000 for service as directors, and a fee of $750 for each director
meeting and $500 for each committee meeting attended in person or by telephone.
The Company has adopted a Stock Option Plan for Outside Directors (the
"Directors Option Plan") for its non-employee directors and has reserved 101,180
shares of Common Stock for issuance thereunder and in February 1998 adopted a
Stock Grant Plan for its non-employee directors and has reserved 25,295 shares
of Common Stock for issuance thereunder. The Directors Option Plan provides that
each non-employee director receives an initial option for 2,530 shares of Common
Stock upon election as a director, and an annual grant of 2,530 shares
thereafter. Each option is granted at the fair market value of the Common Stock
of the Company at the time of the grant. All initial and annual stock options
granted pursuant to the Directors Option Plan are nonqualified stock options and
are generally exercisable for a period of 10 years from the date of grant or one
year after the optionee ceases to be a director of the Company. As of January
31, 1998, options covering 35,413 shares have been granted under the Directors
Option Plan. The Stock Grant Plan for Outside Directors provides for a
    
                                       47
<PAGE>   49
 
   
grant as of May 1 of each year to each non-employee director of Common Stock
with a fair market value of $5,000 on the date of grant. As of the date of this
Prospectus, 2,550 shares of Common Stock have been granted to non-employee
directors under the Stock Grant Plan for Outside Directors. The Company also
granted options covering 7,811 shares under a previous director compensation
plan that was terminated in fiscal 1997, of which options covering 4,088 shares
remain outstanding.
    
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     Messrs. Berry, Lentzsch and Shrader presently serve as the members of the
Compensation Committee. See "Certain Transactions." Mr. Shrader is a shareholder
in the law firm of Sprouse, Smith & Rowley, P.C. in Amarillo, Texas, which has
provided legal services to the Company since 1993.
 
                              CERTAIN TRANSACTIONS
 
     Gaines Godfrey, a director of the Company, is a limited partner in certain
limited partnerships that lease land and improvements to the Company under
triple net leases. During fiscal years 1995, 1996 and 1997, the Company made
aggregate lease payments of $479,392, $480,019 and $500,256 respectively, to
such limited partnerships. The Company believes that these leases are on terms
as favorable as those which the Company could have obtained from a
non-affiliated third party.
 
   
     Jeffrey G. Shrader, a director of the Company, is a shareholder in the law
firm of Sprouse, Smith & Rowley, P.C., Amarillo, Texas, which has provided legal
services to the Company since 1993. The Company believes that these services
have been provided on terms as favorable as those which the Company could have
obtained from a non-affiliated third party.
    
 
   
     In May 1994, the Company and the Estate of Sam Marmaduke (the "Estate"),
entered into a Stock Redemption Agreement whereby the Estate has the opportunity
on an annual basis to tender for purchase by the Company Common Stock owned by
the Estate. John H. Marmaduke is named as the Independent Executor of the
Estate. The Estate did not tender for purchase any of its shares of Common Stock
in fiscal years 1994 through 1996. In fiscal 1997 the Estate tendered and the
Company redeemed 108,460 shares of Common Stock for $1,479,291 paid in cash. The
per share redemption price was based upon the then most-recent annual valuation
of the Company's Common Stock performed by A.G. Edwards & Sons, Inc. for the
ASOP. The Estate has not tendered for purchase any shares of Common Stock during
fiscal 1998, and the Estate has informed the Company that it does not intend to
tender any shares of Common Stock to the Company prior to the consummation of
this Offering. The Stock Redemption Agreement will terminate upon consummation
of this Offering.
    
 
                                       48
<PAGE>   50
 
                 PRINCIPAL SHAREHOLDERS AND SELLING SHAREHOLDER
 
     The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 31, 1998 and as adjusted
to reflect the sale of shares in the Offering by (i) each person known by the
Company to own beneficially more than 5% of the outstanding Common Stock, (ii)
each of the Company's directors, (iii) each executive officer named in the
Summary Compensation Table set forth under the heading "Management," and (iv)
all directors and executive officers of the Company as a group. The Company
believes that each of such persons has the sole voting and dispositive power
over the shares held by him except as otherwise indicated.
 
   
<TABLE>
<CAPTION>
                                     SHARES OWNED          SHARES           SHARES OWNED
                                 BEFORE THE OFFERING     TO BE SOLD      AFTER THE OFFERING
                                ----------------------   ----------    ----------------------
     NAME AND ADDRESS(1)         NUMBER     PERCENT(2)                  NUMBER     PERCENT(2)
     -------------------        ---------   ----------                 ---------   ----------
<S>                             <C>         <C>          <C>           <C>         <C>
John H. Marmaduke(3)(4).......  4,609,427     54.5%       293,333(5)   4,316,094(4)   37.4%
Estate of Sam Marmaduke(4)....  1,367,736     16.2%       293,333      1,074,403       9.3%
  P.O. Box 33251
  Amarillo, Texas 79120
Robert Schneider(6)...........    588,357      7.0%            --        588,357       5.1%
  P.O. Box 32270
  Amarillo, Texas 79120
Stephen S. Marmaduke(7).......  1,449,398     17.1%            --      1,449,398      12.5%
Phillip Hill..................     66,698        *             --         66,698         *
Dennis McGill.................      9,450        *             --          9,450         *
Robert A. Berman..............        506        *             --            506         *
Mike Woods....................     12,344        *             --         12,344         *
Leonard L. Berry..............     12,324        *             --         12,324         *
Peter A. Dallas...............     17,221        *             --         17,221         *
Gaines L. Godfrey.............     20,742        *             --         20,742         *
Craig R. Lentzsch(8)..........     13,811        *             --         13,811         *
Jeffrey G. Shrader(9).........     26,514        *             --         26,514         *
Ron G. Stegall(10)............      7,943        *             --          7,943         *
All directors and executive
  officers as a group (12
  persons)(2).................  6,246,378     73.8%            --      5,953,045      51.5%
</TABLE>
    
 
---------------
 
* Less than 1%.
 
 (1) Unless otherwise indicated, the address for each of the beneficial owners
     identified is c/o the Company, 3601 Plains Blvd., Suite #1, Amarillo, Texas
     79102.
 
   
 (2) Based on 8,465,189 shares of Common Stock outstanding prior to the Offering
     and 11,549,189 shares outstanding upon completion of the Offering and
     includes 570,706 shares subject to options exercisable within sixty (60)
     days.
    
 
   
 (3) Includes 1,367,736 shares held by the Estate of Sam Marmaduke, of which
     John H. Marmaduke is the Independent Executor, and 2,255,525 shares held by
     the John H. Marmaduke Family Limited Partnership, the managing general
     partner of which is John H. Marmaduke Management, Inc., of which John H.
     Marmaduke is president, 55,128 shares held by Martha A. Marmaduke, Mr. John
     H. Marmaduke's wife, 8,651 shares held by Margaret Hart Marmaduke, John H.
     Marmaduke's daughter, 10,118 shares held by Owen M. Marmaduke, Mr.
     Marmaduke's son, and 485,462 shares subject to stock options exercisable
     within 60 days, and excludes shares held in trusts for John H. Marmaduke's
     children of which NationsBank, N.A. is trustee.
    
 
 (4) John H. Marmaduke is the executor of the Estate of Sam Marmaduke and a son
     of the late Sam Marmaduke. John H. Marmaduke and Stephen S. Marmaduke are
     brothers. The Estate of Sam Marmaduke is to sell 293,333 shares as a
     Selling Shareholder in this Offering.
 
   
 (5) Based on Mr. Marmaduke's beneficial ownership of shares held by the Estate
     of San Marmaduke, of which John H. Marmaduke is the Independent Executor.
    
 
                                       49
<PAGE>   51
 
   
 (6) Includes 30,354 shares held by trusts for the benefit of Mr. Schneider's
     children for which Mr. Schneider is trustee, and excludes 12,040 shares
     held by other trusts for the benefit of Mr. Schneider's children.
    
 
   
 (7) Includes 1,381,785 shares held by the Stephen S. Marmaduke Family Limited
     Partnership, the managing general partner of which is Stephen S. Marmaduke
     Management, Inc., of which Stephen S. Marmaduke is president, 60,840 shares
     held by Shelley R. Marmaduke, Stephen S. Marmaduke's wife, and 4,128 shares
     subject to options exercisable within 60 days. Excludes shares held
     directly by Stephen S. Marmaduke's adult children and shares held in trusts
     for Stephen S. Marmaduke's children, of which NationsBank, N.A. is trustee.
     Excludes any interest attributable to Stephen S. Marmaduke in the Estate of
     Sam Marmaduke, of which Stephen S. Marmaduke is a beneficiary. Stephen S.
     Marmaduke is the brother of John H. Marmaduke and a son of the late Sam
     Marmaduke.
    
 
   
 (8) Includes 3,541 shares held by the Lentzsch Special Trust 1, of which Craig
     R. Lentzsch is a co-trustee.
    
 
   
 (9) Includes 19,857 shares held in an individual retirement account for the
     benefit of Mr. Shrader and 3,086 shares held in a defined benefit plan for
     the account of Mr. Shrader.
    
 
   
(10) Includes 7,083 shares held by the Stegall Family Limited Partnership.
    
 
                          DESCRIPTION OF CAPITAL STOCK
 
     The authorized capital stock of the Company consists of 75,000,000 shares
of Common Stock, $.01 par value per share, and 5,000,000 shares of Preferred
Stock, $.01 par value per share. As of January 31, 1998, there were
approximately 226 record holders of Common Stock.
 
COMMON STOCK
 
     The holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of shareholders. Cumulative voting in the
election of directors is not permitted, and the holders of a majority of the
number of outstanding shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election.
 
     Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally available
therefor, subject to any preferential dividend rights of outstanding Preferred
Stock. Upon a liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to receive ratably the net assets of the Company
available after the payment of all debts and other liabilities and subject to
the prior rights of any outstanding Preferred Stock. The holders of Common Stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of Common Stock are, and the shares offered by the Company in
this Offering, will be, when issued and paid for, duly authorized, fully paid,
validly issued and nonassessable.
 
PREFERRED STOCK
 
   
     The Board of Directors of the Company is authorized (without any further
action by the shareholders) to issue Preferred Stock in one or more series and
to fix the voting rights and designations, preferences, limitations and relative
rights and qualifications, limitations or restrictions and certain other rights
and preferences of the Preferred Stock. Satisfaction of any dividend preferences
of outstanding Preferred Stock would reduce the amount of funds available for
the payment of dividends on Common Stock. Also, holders of Preferred Stock would
normally be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of the Company before any payment is made
to the holders of Common Stock. In addition, under certain circumstances, the
issuance of Preferred Stock may render more difficult or tend to discourage a
merger, tender offer or proxy contest, the assumption of control by a holder of
a large block of the Company's securities, or the removal of incumbent
management. See "Risk Factors -- Certain Provisions in the Company's Articles
and Bylaws May Deter Takeover Attempts." The Board of Directors of the Company,
without shareholder approval, may issue Preferred Stock with voting and
conversion rights which could adversely affect the holders of Common Stock. On
the date of this Prospectus, none of the 5,000,000
    
 
                                       50
<PAGE>   52
 
authorized shares of Preferred Stock will be outstanding and the Company has no
present intention to issue any shares of Preferred Stock.
 
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
 
   
     Certain provisions of the Articles of Incorporation and Bylaws of the
Company summarized in the following paragraphs may be deemed to have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt, including attempts that might result in a premium being paid over the
market price for the shares held by shareholders prevailing at that time. See
"Risk Factors -- Effective Control of the Company by Existing Shareholders Will
Limit the Influence of Public Shareholders; Certain Provisions in the Company's
Articles of Incorporation and Bylaws May Deter Takeover Attempts." The following
provisions may not be amended in the Company's Articles of Incorporation without
the affirmative vote of the holders of a majority of the outstanding shares of
Common Stock.
    
 
     Classified Board of Directors. The Articles of Incorporation of the Company
provide for the Board of Directors to be divided into three classes of directors
serving staggered three-year terms. As a result, approximately one-third of the
Board of Directors will be elected each year. See "Management."
 
   
     Special Meetings of Shareholders; Prohibition of Action by Unanimous
Consent. The Company's Articles of Incorporation prohibit the taking of
shareholder action by written consent without a meeting and the Company's Bylaws
provide that special meetings of shareholders of the Company be called only by
the Chairman of the Board of Directors, the Board of Directors, the Company's
President or holders of not less than 25% of the Company's outstanding stock
entitled to vote at the proposed meeting.
    
 
     Amendment of Bylaws. The Bylaws may only be amended or repealed by the
Board.
 
EXCULPATORY CHARTER PROVISIONS; LIABILITY AND INDEMNIFICATION OF OFFICERS AND
DIRECTORS
 
     The Articles of Incorporation of the Company provide that a director will
not be liable to a corporation or its shareholders for monetary damages arising
from acts or omissions in the director's capacity as a director, except for (i)
a breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) an act or omission not in good faith that constitutes a
breach of duty of the director to the corporation or an act or omission that
involves intentional misconduct or a knowing violation of law, (iii) a
transaction from which the director received an improper benefit, whether or not
the benefit resulted from an action taken within the scope of the director's
office, or (iv) an act or omission for which the liability of a director is
expressly provided (or for which indemnification is expressly prohibited) by an
applicable statute. In addition, the Company's Articles of Incorporation and
Bylaws require it to indemnify its directors and officers against any and all
liability and reasonable expense that may be incurred by them in connection with
or resulting from (i) any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, arbitrative or
investigative, (ii) an appeal on such an action, suit or proceeding, or (iii) an
inquiry or investigation that could lead to such an action, suit or proceeding,
all to the fullest extent permitted by Texas law.
 
     The Company's Bylaws allow the Company to purchase and maintain liability,
indemnification or similar insurance. Such insurance is currently in place. The
Company has entered into indemnification agreements with each of its directors
and executive officers providing indemnification to the fullest extent permitted
by applicable law.
 
TEXAS BUSINESS COMBINATION LAW
 
     The Company is subject to Part Thirteen of the Texas Business Corporation
Act, which took effect September 1, 1997 (the "Business Combination Law"). In
general, the Business Combination Law prevents an "affiliated shareholder"
(defined generally as a person that is or was within the preceding three-year
period the beneficial owner of 20% or more of the corporation's outstanding
voting shares) or its affiliates or associates from entering into or engaging in
a "business combination" (defined generally to include (i) mergers or share
exchanges, (ii) dispositions of assets having an aggregate value equal to 10% or
more of
 
                                       51
<PAGE>   53
 
the market value of the assets or of the outstanding common stock or
representing 10% or more of the earning power or net income of the corporation,
(iii) certain issuances or transactions by the corporation that would increase
the affiliated shareholder's proportionate ownership of shares of the
corporation, (iv) certain liquidations or dissolutions, and (v) the receipt of
tax, guarantee, loan or other financial benefits by an affiliated shareholder
other than proportionately as a shareholder of the corporation) with an "issuing
public corporation" (which would include the Company) during the three-year
period immediately following the affiliated shareholder's acquisition of shares
unless (a) before the date such person became an affiliated shareholder, the
board of directors of the issuing public corporation approves the business
combination or the acquisition of shares made by the affiliated shareholder on
such date or (b) not less than six months after the date such person became an
affiliated shareholder, the business combination is approved by the affirmative
vote of holders of at least two-thirds of the issuing public corporation's
outstanding voting shares not beneficially owned by the affiliated shareholder
or its affiliates or associates. The Business Combination Law does not apply to
a business combination with an affiliated shareholder that was the beneficial
owner of 20% or more of the outstanding voting shares of the issuing public
corporation on December 31, 1996, and continuously until the announcement date
of the business combination; as a result, the restrictions of the Business
Combination Act would not apply to Mr. John H. Marmaduke, who has been the
beneficial owner of more than 20% of the outstanding Common Stock continuously
since prior to December 31, 1996.
 
TRADING MARKET AND TRANSFER AGENT
 
   
     No established trading market for the Common Stock existed prior to the
Offering. The Common Stock has been approved for listing on The Nasdaq National
Market under the symbol "HAST," subject to official notice of issuance. The
transfer agent and registrar for the Common Stock is Chase Mellon Shareholder
Services, and its address is 2323 Bryan Street, Suite 2370, Dallas, Texas 75201.
    
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Prior to the Offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that market sales
of shares of Common Stock or the availability of shares of Common Stock for sale
will have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of substantial shares of Common Stock of the Company in the
public market could adversely affect prevailing market prices and could impair
the Company's future ability to raise capital through the sale of its equity
securities.
 
   
     Upon completion of the Offering, the Company will have 11,549,189 shares of
Common Stock outstanding (12,055,789 shares if the Underwriters exercise their
over-allotment option in full). The shares of Common Stock sold in the Offering
will be freely tradable without restriction or further registration under the
Securities Act, except for any shares purchased by "affiliates" of the Company,
which will be subject to the resale limitations of Rule 144. All of the
remaining outstanding shares, which were issued by the Company in reliance on
exemptions from the registration requirements of the Securities Act, are
"restricted securities" within the meaning of Rule 144. Those shares may not be
sold publicly unless they are registered under the Securities Act, sold in
compliance with Rule 144, or sold in a transaction exempt from registration.
Following the expiration or release from the 180-day lock-up agreements with the
representatives of the Underwriters, approximately 6,500,000 additional shares
of Common Stock will be eligible for sale in accordance with the requirements of
Rule 144, subject to compliance with certain volume and other limitations. See
"Underwriting." In addition, options covering 1,797,554 shares of Common Stock
are outstanding. See "Management -- Option Grants, Exercises and Holdings."
    
 
     In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year, including an "affiliate" as that term is defined under the Securities Act,
is entitled to sell, within any three-month period commencing 90 days after the
Offering in broker's transactions or to market makers, a number of "restricted"
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of Common Stock of the Company (11,549,189 shares immediately following this
Offering) or (ii) the average weekly trading volume of the Company's outstanding
Common
 
                                       52
<PAGE>   54
 
   
Stock during the four calendar weeks preceding the date on which notice of the
sale is filed with the Commission, provided that certain manner of sale
requirements and requirements as to the availability of current public
information about the Company are satisfied. A person who has not been an
"affiliate" of the Company at any time within three months preceding a sale and
who has beneficially owned shares for at least two years is entitled to sell
such shares under Rule 144(k) without regard to the manner of sale, notice,
availability of current public information and volume limitations described
above. Subject to compliance with the terms of the applicable 180-day lock-up
agreements, the Company believes that approximately 6,500,000 shares of its
currently outstanding Common Stock will be eligible for sale under Rule 144
immediately following the completion of the Offering.
    
 
     Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 under the Securities Act may be
relied upon for the resale of securities originally issued by the Company prior
to the date of the Prospectus to its employees, directors, officers, consultants
or advisers under written compensatory benefit plans or contracts relating to
the compensation of such persons. Securities issued in reliance on Rule 701 are
"restricted" shares and beginning 90 days after the date of this Prospectus may
be sold by non-affiliates subject only to the manner of sale provisions of Rule
144 and by affiliates under Rule 144 without compliance with the one-year
holding period, in each case subject to the lock-up agreements discussed above.
 
   
     The Company intends to register all shares reserved for issuance under the
1996 Plan, the 1994 Plan, the 1991 Plan, the ASOP, the 401(k) Plan, the
Incentive Plans, the Purchase Plan and the Directors Option Plan. At January 31,
1998, awards covering 2,370,865 shares of Common Stock have been issued and are
outstanding under these plans. All shares purchased in the future under these
plans will be available for resale in the public market without restriction,
except that "affiliates" must comply with the applicable provisions of Rule 144.
    
 
     The Company is unable to estimate the number of shares that may be sold in
the future by its shareholders since this will depend on the market price for
the Common Stock, the personal circumstances of the shareholders, and other
factors. Any sale of substantial amounts of shares of Common Stock in the open
market may significantly reduce the market price of the Common Stock offered
hereby.
 
                                  UNDERWRITING
 
     Upon the terms and subject to the conditions stated in the Underwriting
Agreement (the "Underwriting Agreement"), each Underwriter named below
(collectively, the "Underwriters"), has severally agreed to purchase, and the
Company and the Selling Shareholder have agreed to sell to such Underwriter, the
number of shares of Common Stock set forth opposite the name of such
Underwriter:
 
<TABLE>
<CAPTION>
                                                               NUMBER
                        UNDERWRITER                           OF SHARES
                        -----------                           ---------
<S>                                                           <C>
Smith Barney Inc............................................
A.G. Edwards & Sons, Inc....................................
Furman Selz LLC.............................................
 
                                                                -----
          Total.............................................
                                                                =====
</TABLE>
 
     The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all shares
 
                                       53
<PAGE>   55
 
of Common Stock offered hereby (other than those shares covered by the
over-allotment option described below) if any such shares are taken.
 
     The Underwriters, for whom Smith Barney Inc., A.G. Edwards & Sons, Inc. and
Furman Selz LLC are acting as the representatives (the "Representatives"),
propose to offer part of the shares of Common Stock directly to the public at
the public offering price set forth on the cover page of this Prospectus and
part of the shares to certain dealers at a price which represents a concession
not in excess of $  per share under the public offering price. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $  per
share to certain other dealers. After the initial offering of the shares to the
public, the public offering price and such concessions may be changed by the
Representatives. The Representatives of the Underwriters have advised the
Company that the Underwriters do not intend to confirm any shares of Common
Stock to any accounts over which they exercise discretionary authority.
 
   
     The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase, in whole or in part, up to
506,600 additional shares of Common Stock at the price to public set forth on
the cover page of this Prospectus minus the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, in connection with the offering of the shares
of Common Stock offered hereby. To the extent such option is exercised, each
Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares of Common Stock set forth opposite each Underwriter's name in the
preceding table bears to the total number of shares of Common Stock listed in
such table.
    
 
     The Company, the Selling Shareholder, and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act of 1933.
 
   
     Each of the Company, its officers and directors, and certain other
shareholders of the Company (including the Selling Shareholder) who will
collectively own 7,982,672 shares of Common Stock immediately after the
Offering, has agreed not to (i) issue (in the case of the Company), sell, offer
or agree to sell, pledge, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase, or
otherwise dispose of or transfer, directly or indirectly, any shares of Common
Stock or other capital stock of the Company (or any securities convertible into
or exercisable or exchangeable for shares of Common Stock or such other capital
stock) or publicly disclose the intention to make any such disposition or
transfer or (ii) enter into any hedging, swap or other arrangements that
transfers all or a portion of the economic consequences associated with the
ownership of any Common Stock or other capital stock of the Company for a period
of 180 days after the date of this Prospectus without the prior written consent
of Smith Barney Inc., except that the Company may issue shares of Common Stock
upon the exercise of an option outstanding as of the date of this Prospectus.
    
 
     Prior to the Offering, there has not been any public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
shares of Common Stock included in the Offering has been determined by
negotiations among the Company, the Selling Shareholder, and the
Representatives. Among the factors considered in determining such price were the
history of and prospects for the Company's business and the industry in which it
competes, an assessment of the Company's management and the present state of the
Company's development, the past and present revenues and earnings of the
Company, the prospects for growth of the Company's revenues and earnings, the
current state of the economy in the United States, the current level of economic
activity in the industry in which the Company competes and in related or
comparable industries, and currently prevailing conditions in the securities
markets, including current market valuations of publicly traded companies which
are comparable to the Company.
 
   
     The Common Stock has been approved for issuance on The Nasdaq National
Market under the symbol "HAST," subject to official notice of issuance.
    
 
   
     At the request of the Company, the Underwriters have reserved up to 253,300
shares for sale to officers, directors, employees and certain other persons
associated with the Company at the initial public offering price. The number of
shares of Common Stock available for sale to the general public will be reduced
to the extent
    
 
                                       54
<PAGE>   56
 
such persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the Underwriters to the general public on the same terms and
conditions as the other shares offered hereby.
 
     In connection with the Offering and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more shares of Common Stock than the
total amounts shown on the list of Underwriters and participations that appears
above) and may effect transactions that stabilize, maintain or otherwise affect
the market price of the Common Stock at levels above those that might otherwise
prevail in the open market. Such transactions may include placing bids for the
Common Stock or effecting purchases of the Common Stock for the purpose of
pegging, fixing or maintaining the prices of the Common Stock or for the purpose
of reducing a syndicate short position created in connection with the Offering.
A syndicate short position may be covered by exercise of the option described
above rather than by open market purchases. In addition, the contractual
arrangements among the Underwriters include a provision whereby, if Smith Barney
Inc. purchases Common Stock in the open market for the account of the
underwriting syndicate and the Common Stock purchased can be traced to a
particular Underwriter or member of the selling group, the underwriting
syndicate may require the Underwriter or selling group member in question to
purchase the Common Stock in question at the cost price to the syndicate or may
recover from (or decline to pay) the concession applicable to the Common Stock
in question. The Underwriters are not required to engage in any of these
activities and any such activities, if commenced, may be discontinued at any
time.
 
   
     A.G. Edwards & Sons, Inc. has performed certain investment banking
services, including annual valuations of the Company's Common Stock for the
Company's ASOP, on behalf of the Company during the past five years.
    
 
                                 LEGAL MATTERS
 
     Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by Locke Purnell Rain
Harrell (A Professional Corporation), Dallas, Texas. Certain legal matters will
be passed upon for the Underwriters by Vinson & Elkins L.L.P., Dallas, Texas.
 
                                    EXPERTS
 
   
     The financial statements and financial statement schedule of Hastings
Entertainment, Inc. as of January 31, 1997 and 1998, and for each of the years
in the three-year period ended January 31, 1998, have been included herein and
elsewhere in the Registration Statement in reliance upon the reports of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon authority of said firm as experts in auditing and accounting.
    
 
                                       55
<PAGE>   57
 
                             AVAILABLE INFORMATION
 
     The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus constitutes a part of the
Registration Statement and does not contain all the information set forth in the
Registration Statement, certain portions of which are omitted from this
Prospectus as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the shares of Common Stock
offered by this Prospectus, reference is made to the Registration Statement,
including the exhibits and schedules filed therewith. Statements contained in
this Prospectus regarding the contents of any agreement, contract or other
document are not necessarily complete, but contain a summary of the material
terms of such agreements, contracts or other documents, and in each instance
reference is made to the copy of such agreement, contract or other document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in all respects by such reference. The Registration Statement and
accompanying exhibits and schedules may be inspected and copies may be obtained
(at prescribed rates) at the public reference facilities of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
Copies of the Registration Statement may also be inspected at the Commission's
regional offices at 7 World Trade Center, Suite 1300, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2551. In addition, the Common Stock will be listed on the Nasdaq National
Market, 1735 K Street, N.W., Washington, D.C. 20006-1500, where such material
may also be inspected and copied.
 
     As a result of the Offering, the Company will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, as amended, and in accordance therewith, will file periodic reports,
proxy statements and other information with the Commission. Such periodic
reports, proxy statements and other information will be available for inspection
and copying at the public reference facilities and regional offices referred to
above. In addition, these reports, proxy statements and other information may
also be obtained from the web site that the Commission maintains at
http://www.sec.gov.
 
     The Company intends to furnish its shareholders annual reports containing
consolidated financial statements certified by its independent auditors and
quarterly reports for each of the first three quarters of each fiscal year
containing unaudited financial information.
 
                                       56
<PAGE>   58
 
                         INDEX TO FINANCIAL STATEMENTS
 
   
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................  F-2
Balance Sheets as of January 31, 1997 and 1998..............  F-3
Statements of Income for the years ended January 31, 1996,
  1997 and 1998.............................................  F-4
Statements of Shareholders' Equity for the years ended
  January 31, 1996, 1997 and 1998...........................  F-5
Statements of Cash Flows for the years ended January 31,
  1996, 1997 and 1998.......................................  F-6
Notes to Financial Statements...............................  F-7
</TABLE>
    
 
                                       F-1
<PAGE>   59
 
   
WHEN THE TRANSACTION REFERRED TO IN NOTE 12 OF THE NOTES TO FINANCIAL STATEMENTS
HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER THE FOLLOWING REPORT.
    
 
   
                                            KPMG Peat Marwick LLP
    
 
   
                          INDEPENDENT AUDITORS' REPORT
    
 
   
The Board of Directors
    
   
Hastings Entertainment, Inc.:
    
 
   
     We have audited the accompanying balance sheets of Hastings Entertainment,
Inc. as of January 31, 1997 and 1998, and the related statements of income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended January 31, 1998. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
    
 
   
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hastings Entertainment, Inc.
as of January 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended January 31, 1998, in
conformity with generally accepted accounting principles.
    
 
   
Dallas, Texas
    
   
March 20, 1998, except as to note 12,
    
   
  which is as of             , 1998
    
 
                                       F-2
<PAGE>   60
 
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                                 BALANCE SHEETS
    
   
                           JANUARY 31, 1997 AND 1998
    
   
                    (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
    
 
   
                                     ASSETS
    
 
   
<TABLE>
<CAPTION>
                                                                     FISCAL
                                                              --------------------
                                                                1996        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Current assets:
  Cash......................................................  $  4,972    $  3,840
  Merchandise inventories...................................   105,185     126,835
  Other current assets......................................     3,396       3,889
                                                              --------    --------
          Total current assets..............................   113,553     134,564
Property and equipment, net.................................    67,165      80,703
Deferred income taxes.......................................       976          --
Other assets................................................        27          31
                                                              --------    --------
                                                              $181,721    $215,298
                                                              ========    ========
                       LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current maturities of long-term debt......................  $    301    $    301
  Trade accounts payable....................................    41,388      60,747
  Accrued expenses and other liabilities....................    11,120      17,590
  Deferred income taxes.....................................     3,158       1,305
                                                              --------    --------
  Income taxes payable......................................       113       3,428
                                                              --------    --------
          Total current liabilities.........................    56,080      83,371
Long-term debt, excluding current maturities................    51,572      51,311
Deferred income taxes.......................................        --         898
Other long-term liability...................................     1,500          --
Redemption value of common stock held by estate of Company's
  founder...................................................     9,500       8,000
                                                              --------    --------
Shareholders' equity:
  Preferred stock, $.01 par value; 5,000,000 shares
     authorized; none issued................................        --          --
  Common stock, $.01 par value; 75,000,000 shares
     authorized; 8,652,914 shares issued; 8,557,135 shares
     in 1996, and 8,465,189 shares in 1997 outstanding......        87          87
  Additional paid-in capital................................     1,584       1,654
  Retained earnings.........................................    71,721      80,168
  Treasury stock, at cost...................................      (823)     (2,191)
  Redemption value of common stock held by estate of
     Company's founder......................................    (9,500)     (8,000)
                                                              --------    --------
                                                                63,069      71,718
Commitments and contingencies
                                                              --------    --------
                                                              $181,721    $215,298
                                                              ========    ========
</TABLE>
    
 
   
                See accompanying notes to financial statements.
    
 
                                       F-3
<PAGE>   61
 
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                              STATEMENTS OF INCOME
    
   
                  YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
    
   
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
    
 
   
<TABLE>
<CAPTION>
                                                                   FOR THE FISCAL YEAR
                                                             --------------------------------
                                                               1995        1996        1997
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Merchandise revenue........................................  $232,463    $251,934    $283,026
Video rental revenue.......................................    66,449      72,357      74,739
                                                             --------    --------    --------
          Total revenues...................................   298,912     324,291     357,765
Merchandise cost of revenue................................   166,202     183,614     194,359
Rental video cost of revenue...............................    23,839      22,298      26,546
                                                             --------    --------    --------
          Total cost of revenues...........................   190,041     205,912     220,905
                                                             --------    --------    --------
          Gross profit.....................................   108,871     118,379     136,860
                                                             --------    --------    --------
Selling, general and administrative expenses...............    88,443     103,883     119,637
Development expenses.......................................     2,791       2,421           -
                                                             --------    --------    --------
                                                               91,234     106,304     119,637
                                                             --------    --------    --------
          Operating income.................................    17,637      12,075      17,223
                                                             --------    --------    --------
Other income (expenses):
  Interest expense.........................................    (2,588)     (3,585)     (4,228)
  Gain (loss) on sale of mall stores.......................         -      (2,500)        734
  Other, net...............................................       221         126         139
                                                             --------    --------    --------
                                                               (2,367)     (5,959)     (3,355)
                                                             --------    --------    --------
          Income before income taxes.......................    15,270       6,116      13,868
Income taxes...............................................     5,875       2,320       5,270
                                                             --------    --------    --------
          Net income.......................................  $  9,395    $  3,796    $  8,598
                                                             ========    ========    ========
Basic earnings per share...................................  $   1.10    $    .44    $   1.01
                                                             ========    ========    ========
Diluted earnings per share.................................  $   1.09    $    .43    $    .98
                                                             ========    ========    ========
Weighted-average common shares outstanding -- basic........     8,528       8,552       8,520
Dilutive effect of stock options...........................       107         205         216
                                                             --------    --------    --------
Weighted-average common shares outstanding -- diluted......     8,635       8,757       8,736
                                                             ========    ========    ========
</TABLE>
    
 
   
                See accompanying notes to financial statements.
    
 
                                       F-4
<PAGE>   62
 
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                       STATEMENTS OF SHAREHOLDERS' EQUITY
    
   
                  YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
    
   
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
    
 
   
<TABLE>
<CAPTION>
                                                                                                    REDEMPTION
                                                                                                     VALUE OF
                                                                                                   COMMON STOCK
                                    COMMON STOCK      ADDITIONAL               TREASURY STOCK     HELD BY ESTATE       TOTAL
                                 ------------------    PAID-IN     RETAINED   -----------------    OF COMPANY'S    SHAREHOLDERS'
                                  SHARES     AMOUNT    CAPITAL     EARNINGS   SHARES    AMOUNT       FOUNDER          EQUITY
                                 ---------   ------   ----------   --------   -------   -------   --------------   -------------
<S>                              <C>         <C>      <C>          <C>        <C>       <C>       <C>              <C>
Balances at January 31, 1995...  8,652,914    $87       $1,395     $58,790    126,880   $(1,039)     $(13,500)        $45,733
Purchase of treasury stock.....         --     --           --          --     15,733      (186)           --            (186)
Sale of treasury stock.........         --     --           24          --     (6,683)       56            --              80
Exercise of stock options......         --     --            3          --     (1,098)        9            --              12
Shares transferred to fund
  ASOP.........................         --     --           59          --    (15,637)      133            --             192
Change in redemption value.....         --     --           --          --         --        --         2,000           2,000
Dividends ($.014 per share)....         --     --           --        (121)        --        --            --            (121)
Net income.....................         --     --           --       9,395         --        --            --           9,395
                                 ---------    ---       ------     -------    -------   -------      --------         -------
Balances at January 31, 1996...  8,652,914     87        1,481      68,064    119,195    (1,027)      (11,500)         57,105
Exercise of stock options......         --     --            9          --     (6,425)       55            --              64
Shares transferred to fund
  ASOP.........................         --     --           94          --    (17,292)      149            --             243
Change in redemption value.....         --     --           --          --         --        --         2,000           2,000
Dividends ($.017 per share)....         --     --           --        (139)        --        --            --            (139)
Net income.....................         --     --           --       3,796         --        --            --           3,796
                                 ---------    ---       ------     -------    -------   -------      --------         -------
Balances at January 31, 1997...  8,652,914     87        1,584      71,721     95,478      (823)       (9,500)         63,069
Purchase of treasury stock.....         --     --           --          --     11,035      (182)           --            (182)
Sale of treasury stock.........         --     --            2          --    (10,544)       13            --              15
Exercise of stock options......         --     --            5          --     (6,612)      160            --             165
Shares transferred to fund
  ASOP.........................         --     --           63          --    (10,092)      120            --             183
Redemption of common stock held
  by estate of Company's
  founder......................         --     --           --          --    108,460    (1,479)        1,500              21
Dividends ($.018 per share)....         --     --           --        (151)        --        --            --            (151)
Net income.....................         --     --           --       8,598         --        --            --           8,598
                                 ---------    ---       ------     -------    -------   -------      --------         -------
Balances at January 31, 1998...  8,652,914    $87       $1,654     $80,168    187,724   $(2,191)     $ (8,000)        $71,718
                                 =========    ===       ======     =======    =======   =======      ========         =======
</TABLE>
    
 
   
                See accompanying notes to financial statements.
    
 
                                       F-5
<PAGE>   63
 
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                            STATEMENTS OF CASH FLOWS
    
   
                  YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
    
   
                             (DOLLARS IN THOUSANDS)
    
 
   
<TABLE>
<CAPTION>
                                                                   FOR THE FISCAL YEAR
                                                            ---------------------------------
                                                              1995        1996         1997
                                                            --------    ---------    --------
<S>                                                         <C>         <C>          <C>
Cash flows from operating activities:
  Net income..............................................  $  9,395    $   3,796    $  8,598
  Adjustments to reconcile net earnings to net cash
     provided by operations:
     Depreciation and amortization........................    23,661       24,939      28,944
     (Gain) loss on sale of mall stores, net..............         -        2,500        (734)
     Loss on rental videos transferred to inventory.......     3,337        3,596       4,632
     Loss on rental videos lost, stolen and defective.....     3,281        4,066       2,035
     Loss on disposal of assets...........................       896          366         744
     Deferred income tax..................................     1,149          741          21
     Changes in operating assets and liabilities:
       Merchandise inventories............................   (18,183)      (6,521)    (15,822)
       Other current assets...............................      (353)         996        (493)
       Trade accounts payable and accrued expenses........     9,782       (3,678)     25,095
       Income taxes payable...............................       726       (1,953)      3,315
                                                            --------    ---------    --------
          Net cash provided by operations.................    33,691       28,848      56,335
                                                            --------    ---------    --------
Cash flows from investing activities:
  Purchases of property and equipment.....................   (48,358)     (40,510)    (55,753)
  (Increase) decrease in other assets.....................       (93)         771          (4)
                                                            --------    ---------    --------
          Net cash used in investing activities...........   (48,451)     (39,739)    (55,757)
                                                            --------    ---------    --------
Cash flows from financing activities:
  Borrowings under revolving credit facility..............        --      287,550      22,100
  Repayments under revolving credit facility..............        --     (299,300)    (22,000)
  Advances under long-term debt and capital lease
     obligations..........................................    11,600       25,000          --
  Principal payments under long-term debt and capital
     lease obligations....................................      (174)        (293)       (361)
  Payments of dividends...................................      (121)        (139)       (151)
  Purchase of treasury stock..............................      (186)          --      (1,661)
  Proceeds from sale of treasury stock....................       284          307         363
                                                            --------    ---------    --------
          Net cash provided by (used in) financing
            activities....................................    15,853       13,125      (1,710)
                                                            --------    ---------    --------
Net increase (decrease) in cash and cash equivalents......     1,093        2,234      (1,132)
Cash and cash equivalents at beginning of year............     1,645        2,738       4,972
Cash at end of year.......................................  $  2,738    $   4,972    $  3,840
                                                            ========    =========    ========
</TABLE>
    
 
   
                See accompanying notes to financial statements.
    
 
                                       F-6
<PAGE>   64
 
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                         NOTES TO FINANCIAL STATEMENTS
    
   
                           JANUARY 31, 1997 AND 1998
    
 
   
 (1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    
 
   
      (a) General
    
 
   
     Hastings Entertainment, Inc. (the "Company") operates a chain of retail
     stores located in 16 states, primarily in the southwestern and Rocky
     Mountain portions of the United States, with revenues originating primarily
     from music, books and video sales and video rentals. In fiscal 1996, the
     Company changed its name from Hastings Books, Music & Video, Inc. to
     Hastings Entertainment, Inc.
    
 
   
     The Company's fiscal years ended January 31, 1996, 1997 and 1998 are
     referred to as fiscal 1995, 1996 and 1997, respectively.
    
 
   
      (b) Basis of Presentation
    
 
   
     Certain prior year amounts have been reclassified to conform with fiscal
     1997 presentation.
    
 
   
      (c) Cash and Cash Equivalents
    
 
   
     The Company considers all cash and short-term investments with original
     maturities of three months or less (primarily money market mutual funds) to
     be cash equivalents.
    
 
   
      (d) Merchandise Inventories
    
 
   
     Merchandise inventories (music, books and videos) have been restated for
     all periods presented and are recorded at the lower of cost (using standard
     cost which approximates the first-in, first-out ("FIFO") method) or market.
     These inventories were previously recorded at the lower of cost (using the
     last-in, first-out ("LIFO") method) or market. Management believes that the
     FIFO method is preferable in the circumstances because it more
     appropriately matches the costs and revenues from merchandise inventories.
    
 
   
      (e) Store Preopening Costs
    
 
   
     Preopening costs represent the costs of hiring and training personnel and
     other costs incurred in connection with the opening of a new store.
     Preopening costs are expensed as incurred.
    
 
   
      (f) Property and Equipment
    
 
   
     Property and equipment are recorded at cost and depreciated using the
     straight-line method. Furniture and fixtures are depreciated over their
     estimated useful lives of 3 to 12 years. Leasehold improvements are
     amortized over the shorter of the related lease term or their estimated
     useful lives.
    
 
   
     Property recorded pursuant to capital lease obligations is stated at the
     present value of the minimum lease payments at the inception of each lease,
     not in excess of fair value, and amortized on a straight-line basis over
     the shorter of the related lease term or estimated useful life.
    
 
   
     The depreciation and video markdown policies described below combine to
     provide an average cost allocation period of 8 to 13 months. The Company
     initially depreciates the video cost using the straight line method over an
     18 month period. After an introductory rental period of twenty weeks, the
     Company conducts weekly evaluations to identify, on a video by video basis,
     those videos that are not performing at a defined profitability level.
     Underperforming videos are either transferred to another store at their
     carrying value or written down to their estimated selling price and
     retained in that store's merchandise inventory for sale as previewed
     videos.
    
 
                                       F-7
<PAGE>   65
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     On February 1, 1996, the Company began providing for an estimated residual
     value of $5 per video and began depreciation of rental videos in their
     first full month of service. In fiscal 1995, a full month's depreciation
     and no residual value was provided in the month the rental videos were
     received. These changes resulted in an increase in fiscal 1996 net income
     of $829,000 and an increase in basic and diluted earnings per share of
     $.10.
    
 
   
     The Company reviews long-lived assets and certain identifiable intangibles
     for impairment whenever events or changes in circumstances indicate that
     the carrying amount of an asset may not be recoverable. Recoverability of
     assets to be held and used is measured by a comparison of the carrying
     amount of the asset to future net cash flows expected to be generated by
     the asset. If such assets are considered to be impaired, the impairment to
     be recognized is measured by the amount by which the carrying amount of the
     assets exceeds the fair value of the assets. Assets to be disposed of are
     reported at the lower of the carrying amount or fair value less costs to
     sell.
    
 
   
      (g) Income Taxes
    
 
   
     Income taxes are accounted for under the asset and liability method.
     Deferred tax assets and liabilities are recognized for the future tax
     consequences attributable to differences between the financial statement
     carrying amounts of existing assets and liabilities and their respective
     tax bases and operating loss and tax credit carryforwards. Deferred tax
     assets and liabilities are measured using enacted tax rates expected to
     apply to taxable income in the years in which those temporary differences
     are expected to be recovered or settled. The effect on deferred tax assets
     and liabilities of a change in tax rates is recognized in income in the
     period that includes the enactment date.
    
 
   
      (h) Financial Instruments
    
 
   
     Long-term debt of the Company has been stated at values which approximate
     fair value as of January 31, 1997 and 1998 due to the instruments bearing
     interest at market rates. The carrying amount of accounts payable
     approximates fair value because of the short maturity of the instruments.
    
 
   
      (i) Derivative Financial Instruments
    
 
   
     The Company's only derivative position is a nonleveraged off-balance-sheet
     interest rate swap. The interest rate swap is accounted for by recording
     the net interest received or paid as an adjustment to interest expense on a
     current basis. Gains or losses resulting from market movements are not
     recognized.
    
 
   
      (j) Stock Option Plans
    
 
   
     The Company accounts for its stock option plans in accordance with the
     provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
     Accounting for Stock Issued to Employees, and related interpretations.
     Compensation expense is recorded on the date of grant only if the market
     price of the underlying stock exceeds the exercise price. On February 1,
     1996, the Company adopted Statement of Financial Accounting Standards No.
     123, Accounting for Stock-Based Compensation ("SFAS 123"). Under SFAS 123,
     the Company may elect to recognize expense for stock-based compensation
     based on the fair value of the awards, or continue to account for
     stock-based compensation under APB 25 and disclose in the financial
     statements the effects of SFAS 123 as if the recognition provisions were
     adopted. The Company has elected to continue to apply the provisions of APB
     25 and provide the pro forma disclosure provisions of SFAS 123.
    
 
                                       F-8
<PAGE>   66
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
      (k) Advertising Costs
    
 
   
     Advertising costs for newspaper, television and other media are expensed as
     incurred. Advertising expenses for the years ended January 31, 1996, 1997
     and 1998 were $1.7 million, $1.5 million and $1.8 million, respectively.
    
 
   
      (l) Development Expenses
    
 
   
     Development expenses include costs to develop various information and other
     systems for buying, distribution, finance, inventory, and store operations.
    
 
   
      (m) Earnings Per Share
    
 
   
     The Company adopted Statement of Financial Accounting Standards No. 128,
     Earnings Per Share (SFAS No. 128), which became effective on a retroactive
     basis with the issuance of the Company's financial statements for fiscal
     1997. The Company has restated its prior years earnings per share data to
     conform with the provisions of SFAS No. 128. Basic earnings per share are
     computed by dividing net income by the weighted average number of common
     shares outstanding during the period. Diluted earnings per share include
     additional shares that would have resulted from potentially dilutive
     securities. For purposes of computing dilution of securities under the
     treasury stock method, the price of the Company's stock is based upon
     annual appraisals of the value of the Company.
    
 
   
     Options to purchase 688,656 shares of common stock at exercise prices
     ranging from $13.64 per share to $19.29 per share were outstanding at
     January 31, 1998 but were not included in the computation of diluted EPS
     because the option's exercise price was greater than or equal to the
     appraised price of the common shares.
    
 
   
      (n) Use of Management Estimates
    
 
   
     The preparation of the financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenues and expenses
     during the reporting period. Actual results could differ from those
     estimates.
    
 
   
 (2) MERCHANDISE INVENTORIES
    
 
   
     Merchandise inventories consisted of the following (dollars in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                                1996        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Merchandise inventories:
  Music.....................................................  $ 39,538    $ 46,283
  Books.....................................................    40,785      51,494
  Videos....................................................    10,408      15,890
  Other.....................................................    18,354      18,300
                                                              --------    --------
                                                               109,085     131,967
Less allowance for inventory returns and shrinkage..........     3,900       5,132
                                                              --------    --------
                                                              $105,185    $126,835
                                                              ========    ========
</TABLE>
    
 
                                       F-9
<PAGE>   67
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     During fiscal 1996 and 1997, the Company purchased approximately 32% and
     26%, respectively, of all products (defined herein as merchandise
     inventories and rental videos) from three suppliers. During fiscal 1995,
     the Company purchased approximately 18% of all products from Anderson
     Merchandisers, Inc., ("Anderson"), successor to Western Merchandisers,
     Inc., a former affiliate of the Company. Management of the Company believes
     that all transactions with Anderson were conducted on an arms length basis.
    
 
   
     Merchandise inventories that are not sold can normally be returned to the
     suppliers. At January 31, 1998, the allowance for inventory returns and
     shrinkage includes a reserve for estimated costs related to merchandise
     returned or to be returned to suppliers for which credit is pending.
     Because the amount of credit to be received requires estimates, it is
     reasonably possible that the Company's estimate of the ultimate settlement
     with its suppliers may change in the near term.
    
 
   
 (3) PROPERTY AND EQUIPMENT
    
 
   
     Property and equipment consist of the following (dollars in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                                1996        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Rental videos...............................................  $ 57,940    $ 64,289
Furniture and equipment.....................................    49,257      58,595
Leasehold improvements......................................    28,983      35,985
Property under capital lease................................     1,948       1,948
                                                              --------    --------
                                                               138,128     160,817
Less accumulated depreciation and amortization..............   (70,963)    (80,114)
                                                              --------    --------
                                                              $ 67,165    $ 80,703
                                                              ========    ========
</TABLE>
    
 
   
     Accumulated depreciation and amortization of property and equipment
     includes $582,000 and $706,000 of accumulated amortization of equipment
     under capital lease at January 31, 1997 and 1998, respectively.
    
 
   
 (4) LONG-TERM DEBT
    
 
   
     Long-term debt and capitalized lease obligations consisted of the following
     (dollars in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                               1996       1997
                                                              -------    -------
<S>                                                           <C>        <C>
Revolving credit facility...................................  $23,900    $24,000
Series A senior notes.......................................   25,000     25,000
Capitalized lease obligations (note 5)......................    1,714      1,637
Other.......................................................    1,259        975
                                                              -------    -------
                                                               51,873     51,612
Less current maturities.....................................      301        301
                                                              -------    -------
                                                              $51,572    $51,311
                                                              =======    =======
</TABLE>
    
 
   
     At January 31, 1997 and 1998, the Company had borrowing outstanding of
     $23.9 million and $24.0 million, respectively, under an unsecured credit
     agreement with a group of banks. As amended, the unsecured credit agreement
     provides for a $45 million revolving credit facility which bears interest
     at variable rates based on the lender's base rate and LIBOR (7.2% and 7.0%
     at January 31, 1997 and 1998, respectively) and expires on April 30, 1999.
     The unsecured credit agreement includes provisions which, among other
     things, require the maintenance of specified financial ratios and net worth
     requirements.
    
 
                                      F-10
<PAGE>   68
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     Further, the unsecured credit agreement imposes certain restrictions with
     respect to additional indebtedness, transactions with related parties,
     investments, and capital expenditures.
    
 
   
     The Company selectively uses off-balance-sheet derivative instruments to
     manage its interest rate risk. The Company's only derivative portion is an
     interest rate swap agreement with a notional amount of $15 million, which
     effectively converts a portion of the floating rate debt to a fixed rate of
     7%. The swap terminates in June 1998. The counterparty to this contract is
     a high credit quality commercial bank. Consequently, credit risk, which is
     inherent in all swaps, has been minimized to a large extent. The fair value
     of the interest rate swap agreement is the estimated amount that the
     Company would pay or receive to terminate the agreement at January 31,
     1998, taking into consideration current interest rates and assuming the
     creditworthiness of the counterparties. The fair value of the agreement at
     January 31, 1998 was immaterial.
    
 
   
     During fiscal 1996, the Company entered into an unsecured credit agreement
     with a financial institution which provides for Series A senior notes with
     an aggregate principal amount of $25 million. The notes are due June 13,
     2003, require quarterly interest payments through May 1999, and have an
     interest rate of 7.75%. Beginning in June 1999, the Company will be
     required to make annual principal payments of $5 million. The credit
     agreement includes provisions which, among other things, require the
     maintenance of specified financial ratios and net worth requirements.
     Further, the credit agreement imposes certain restrictions with respect to
     additional indebtedness, transactions with related parties, investments and
     capital expenditures.
    
 
   
     The capitalized lease obligations represent two leases on certain retail
     space with terms of fifteen years.
    
 
   
     The aggregate maturities of long-term debt and capitalized lease
     obligations for years subsequent to fiscal 1997 are as follows (dollars in
     thousands):
    
 
   
<TABLE>
<S>                                                             <C>
1998........................................................    $   301
1999........................................................     29,341
2000........................................................      5,354
2001........................................................      5,370
2002........................................................      5,238
Thereafter..................................................      6,008
                                                                -------
                                                                $51,612
                                                                =======
</TABLE>
    
 
   
 (5) LEASES
    
 
   
     The Company leases retail space under operating leases with terms ranging
     from three to fifteen years, with certain leases containing renewal
     options. Lease agreements generally provide for minimum rentals. Some
     leases also include additional contingent rental amounts based upon
     specified percentages of sales above predetermined levels. Rental expense
     for operating leases consists of the following (dollars in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                       1995       1996       1997
                                                      -------    -------    -------
<S>                                                   <C>        <C>        <C>
Minimum rentals.....................................  $10,032    $10,941    $11,555
Contingent rentals..................................    1,655      1,643      1,710
Less: Sublease income...............................     (115)      (184)      (151)
                                                      -------    -------    -------
          Rental expense............................  $11,572    $12,400    $13,114
                                                      =======    =======    =======
</TABLE>
    
 
                                      F-11
<PAGE>   69
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     Future minimum lease payments under noncancellable operating leases,
     excluding certain leases assumed by another party (see note 12), and the
     present value of future minimum capital lease payments as of January 31,
     1998 are (dollars in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                              CAPITAL    OPERATING
                                                              LEASES      LEASES
                                                              -------    ---------
<S>                                                           <C>        <C>
1998........................................................  $   241     $11,819
1999........................................................      251      11,331
2000........................................................      254      10,499
2001........................................................      256       9,483
2002........................................................      259       7,824
Thereafter..................................................    1,238      18,464
                                                              -------     -------
          Total minimum lease payments......................    2,499     $69,420
Less net present value of sublease income...................                 (451)
                                                                          -------
          Net minimum lease payments under operating
            leases..........................................              $68,969
                                                                          =======
Less amount representing imputed interest...................      862
                                                              -------
          Total obligations under capital leases............    1,637
Less current principal maturities of capital lease
  obligations...............................................       92
                                                              -------
          Obligations under capital leases, excluding
            current maturities..............................  $ 1,545
                                                              =======
</TABLE>
    
 
   
     The Company has relocated from 12 store leases which remain in effect.
     Included in accrued expenses and other liabilities is $2.0 million for the
     net present value of future payments attributable to such leases, net of
     probable sublease income. Future minimum lease payments due on these
     operating leases are included in the table above.
    
 
   
     A director of the Company is a limited partner in various limited
     partnerships that lease land and improvements to the Company under
     operating lease agreements. During fiscal 1995, 1996 and 1997, the Company
     made lease payments of $479,392, $480,019 and $500,256, respectively, to
     these partnerships.
    
 
   
 (6) INCOME TAXES
    
 
   
     Income tax expense (benefit) consists of the following (dollars in
     thousands):
    
 
   
<TABLE>
<CAPTION>
                                                            1995     1996     1997
                                                           ------   ------   ------
<S>                                                        <C>      <C>      <C>
Current federal..........................................  $3,967   $1,566   $4,139
Current state and local..................................     759       13    1,110
Deferred federal.........................................   1,014      281      328
Deferred state and local.................................     135      460     (307)
                                                           ------   ------   ------
                                                           $5,875   $2,320   $5,270
                                                           ======   ======   ======
</TABLE>
    
 
                                      F-12
<PAGE>   70
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     The difference between expected income tax expense (computed by applying
     the statutory rate of 35% for fiscal 1995, 34% for fiscal 1996, and 35% for
     fiscal 1997 to earnings before income taxes) and actual income tax expense
     is as follows (dollars in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                            1995     1996     1997
                                                           ------   ------   ------
<S>                                                        <C>      <C>      <C>
Computed "expected" tax expense..........................  $5,345   $2,079   $4,854
State and local income taxes, net of federal income tax
  benefit................................................     581      312      522
Other....................................................     (51)     (71)    (106)
                                                           ------   ------   ------
                                                           $5,875   $2,320   $5,270
                                                           ======   ======   ======
</TABLE>
    
 
   
     The tax effects of temporary differences that give rise to significant
     portions of the deferred tax assets and deferred tax liabilities are
     presented below (dollars in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                               1996      1997
                                                              -------   -------
<S>                                                           <C>       <C>
Deferred tax assets:
  Provision for merchandise return costs....................  $ 1,178   $    --
  Provision for contingent lease costs......................      922       566
  Alternative minimum tax carryforward......................      905        --
  Provision for abandoned leases............................      459       739
  Provision for deferred rent...............................      426       474
  Compensated absences......................................      208       189
  Deferred compensation.....................................       --       392
  Other.....................................................      390       591
                                                              -------   -------
          Total deferred tax assets.........................    4,488     2,951
Deferred tax liabilities:
  Inventories, principally due to the measurement of cost
     using LIFO for income tax purposes prior to fiscal
     1997...................................................  $ 4,656     3,492
  Freight costs.............................................      674       615
  Property and equipment, principally due to different
     depreciation methods for financial reporting and income
     tax purposes...........................................    1,340     1,047
                                                              -------   -------
          Total deferred tax liabilities....................    6,670     5,154
                                                              -------   -------
          Net deferred tax assets (liabilities).............  $(2,182)  $(2,203)
                                                              =======   =======
</TABLE>
    
 
   
     The Company did not record a valuation allowance for deferred tax assets at
     January 31, 1997 or 1998. In assessing the realizability of deferred tax
     assets, management considers the scheduled reversal of deferred tax assets
     and liabilities, future taxable income and tax planning strategies, and
     believes it is more likely than not the Company will realize the benefits
     of these deductible differences at January 31, 1998.
    
 
   
     In fiscal 1997 the Company elected to change from the LIFO cost method to
     the FIFO cost method of inventory accounting for financial reporting and
     income tax purposes. The $4.7 million deferred tax liability related to the
     tax LIFO reserve at January 31, 1997 will be included in taxable income
     ratably over a four year period beginning in fiscal 1997.
    
 
   
 (7) PROFIT SHARING PLAN
    
 
   
     Employees who have attained age 21 are eligible to participate in the
     Company's profit sharing plan, and may elect to contribute up to 12 percent
     of their salary, subject to federal limitations, to the plan. Employer
     contributions are determined at the discretion of the Company and are
     allocated solely to
    
 
                                      F-13
<PAGE>   71
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     those employees who are participating in the plan and have completed one
     year of service. Amounts expensed related to the plan were $0.4 million,
     $0.6 million and $0.6 million during fiscal 1995, 1996 and 1997,
     respectively.
    
 
   
 (8) SHAREHOLDERS' EQUITY
    
 
   
     During fiscal 1996, the Company increased the number of authorized shares
     of its common stock from 20,000,000 to 75,000,000. The Board of Directors
     of the Company is authorized to establish and designate preferences,
     limitations and rights of the preferred stock.
    
 
   
     The Company has three stock option plans: the 1991 and 1994 Stock Option
     Plans and the 1996 Incentive Stock Plan. A total of 505,900 shares may be
     granted under each of the 1991 and 1994 Stock Option Plans, and 632,375
     shares may be granted under the 1996 Incentive Stock Plan.
    
 
   
     The 1991 and 1994 Stock Option Plans and the 1996 Incentive Stock Plan
     authorize the award of both incentive stock options and nonqualified stock
     options to purchase common stock to officers, other associates, and
     directors of the Company. The exercise price per share of incentive stock
     options may not be less than the appraised price of the Company's common
     stock on the date the option is granted. The exercise price per share of
     nonqualified stock options is determined by the Board of Directors, or a
     committee thereof. The term of each option is determined by the Board of
     Directors and generally will not exceed ten years from the date of grant.
     The exercise price of options issued to certain executive officers of the
     Company included fixed annual increases which were eliminated in fiscal
     1997.
    
 
   
     The 1996 Incentive Stock Plan also authorizes the granting of stock
     appreciation rights, restricted stock, dividend equivalent rights, stock
     awards, and other stock-based awards to officers, other associates,
     directors, and consultants of the Company. There have been no grants of
     these awards under this plan.
    
 
   
     The Company's nonemployee directors are also eligible for stock option
     awards. Grants to these directors have not been significant.
    
 
   
     The Company's Chief Executive Officer has an option to acquire 404,720
     shares of common stock. The option was not exercisable until February 1,
     1997, and may be exercised in full or in part from that date through
     January 31, 2007. In fiscal 1997, the exercise price of these options was
     reduced from $13.64 to $11.07 and fixed annual increases of the option
     exercise price were eliminated. The Company recorded compensation expense
     of $1,040,000 and an income tax benefit of $392,000 for the change in
     exercise price for the year ended January 31, 1998.
    
 
   
     In fiscal 1996, the Company adopted the management stock purchase plan that
     authorizes the issuance of up to 227,655 shares of common stock, pursuant
     to agreements providing for the purchase of Restricted Stock Units (RSU's).
     The cost of each RSU is equal to 75% of the fair market value of the common
     stock of the Company on the date the RSU is awarded. As of January 31,
     1998, no RSU's have been awarded under the Plan.
    
 
                                      F-14
<PAGE>   72
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     A summary of information with respect to all stock option plans is as
     follows:
    
 
   
<TABLE>
<CAPTION>
                                                                       WEIGHTED AVERAGE
                                                           OPTIONS      EXERCISE PRICE
                                                          ---------    ----------------
<S>                                                       <C>          <C>
Outstanding at January 31, 1995.......................    1,016,591         $ 9.65
  Granted.............................................      402,125          17.31
  Exercised...........................................       (1,098)          0.20
  Forfeited...........................................      (73,002)          7.10
                                                          ---------         ------
Outstanding at January 31, 1996.......................    1,344,616          12.08
  Granted.............................................      217,254          13.70
  Exercised...........................................       (6,425)         10.09
  Forfeited...........................................      (23,777)         10.84
                                                          ---------         ------
Outstanding at January 31, 1997.......................    1,531,668          12.33
  Granted.............................................      932,617          13.20
  Exercised...........................................       (6,612)          6.48
  Forfeited...........................................     (660,119)         15.30
                                                          ---------         ------
Outstanding at January 31, 1998.......................    1,797,554         $11.72
                                                          =========         ======
  Reserved and available for grant at January 31,
     1998.............................................      573,311
</TABLE>
    
 
   
     At January 31, 1998, the options outstanding and options exercisable, and
     their related weighted average exercise price, and the weighted average
     remaining contractual life for the ranges of exercise prices are shown in
     the table below. The table does not include 4,088 shares issued to outside
     directors at an exercise price of $.20.
    
 
   
<TABLE>
<CAPTION>
                                                                                WEIGHTED-
                                                              WEIGHTED-          AVERAGE
                                                               AVERAGE          REMAINING
RANGE: $5.34 -- $6.92                            OPTIONS    EXERCISE PRICE   CONTRACTUAL LIFE
---------------------                           ---------   --------------   ----------------
<S>                                             <C>         <C>              <C>
Options outstanding at January 31, 1998.......    248,862        5.56            4 years
Options exercisable at January 31, 1998.......    189,161        5.45
RANGE: $10.28 -- $14.03
 
Options outstanding at January 31, 1998.......  1,393,011       12.20            7 years
Options exercisable at January 31, 1998.......    574,884       11.23
RANGE: $15.00 -- $19.28
 
Options outstanding at January 31, 1998.......    151,593       18.23            8 years
Options exercisable at January 31, 1998.......      3,516       15.00
</TABLE>
    
 
   
     At January 31, 1996, 1997 and 1998, the number of options exercisable was
     115,300, 201,743 and 771,649, respectively, and the weighted average
     exercise price of those options was $6.66, $7.31 and $9.77, respectively.
    
 
   
     The Company applies APB 25 in accounting for its Plans. Since the Company
     grants substantially all stock options, except for options granted to the
     Company's Chief Executive Officer as described above, with an exercise
     price equal to or greater than the current market price of the stock on the
     grant date, compensation expense recorded is not significant. Had the
     Company determined compensation cost
    
 
                                      F-15
<PAGE>   73
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     based on the minimum value at the date of grant for its stock options under
     SFAS 123, the Company's net income and earnings per share would have been
     reduced to the pro forma amounts indicated below:
    
 
   
<TABLE>
<CAPTION>
                                                          1995      1996      1997
                                                         ------    ------    ------
<S>                                                      <C>       <C>       <C>
Net income
  As reported..........................................  $9,395    $3,796    $8,598
  Pro forma............................................   9,319     3,478     6,894
Earnings per share:
  As reported -- basic:................................    1.10       .44      1.01
  As reported -- diluted...............................    1.09       .43       .98
  Pro forma -- basic...................................    1.10       .41       .81
  Pro forma -- diluted.................................    1.08       .40       .79
</TABLE>
    
 
   
     The calculation of the effect on net income includes only options granted
     during fiscal 1995, 1996 and 1997. Therefore, the full impact of measuring
     compensation cost for stock options under SFAS 123 is not reflected in the
     calculation because compensation cost is reflected over the options'
     vesting period of five years and compensation cost for options granted
     prior to February 1, 1995 is not considered.
    
 
   
     The per share weighted average exercise price and the per share weighted
     average minimum value of stock options at the date of grant, using the
     Black Scholes option-pricing model for SFAS 123 disclosure purposes, is as
     follows:
    
 
   
<TABLE>
<CAPTION>
                                       EXERCISE PRICE             MINIMUM VALUE
                                  ------------------------   ------------------------
                                   1995     1996     1997     1995     1996     1997
                                  ------   ------   ------   ------   ------   ------
<S>                               <C>      <C>      <C>      <C>      <C>      <C>
Options granted at appraised
  price.........................  $12.26   $14.03   $13.64   $ 5.83   $ 6.84   $ 6.48
Options granted at prices
  exceeding appraised price.....   24.19       --    16.53      .27       --     4.14
Options granted at prices below
  appraised price...............     .20    11.13    11.06    12.16     6.25     7.25
Total options granted...........   17.31    13.70    13.20     3.48     6.77     6.26
</TABLE>
    
 
   
     The following assumptions were used in the calculation:
    
 
   
<TABLE>
<CAPTION>
                                                              1995    1996    1997
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Expected dividend yield.....................................    --      --      --
Risk-free interest rate.....................................  6.43%   6.68%   6.47%
Expected life in years......................................    10      10      10
</TABLE>
    
 
   
     The Company's Associate Stock Ownership Plan ("ASOP") permits full-time
     employees, as defined, who have attained age 21 and completed one year of
     service to participate in the ASOP. Employer contributions are determined
     at the discretion of the Company. The Board of Directors has determined
     that the level of contributions will be made based on attaining operational
     profit goals as set by the Board of Directors. The contribution is based on
     a percentage of participants' eligible compensation and provisions of $0.3
     million, $0.2 million and $.4 million were made in the accompanying
     financial statements for 1995, 1996 and 1997, respectively. Cumulative
     common shares allocated to the ASOP were 39,430, 56,722 and 66,814 at
     January 31, 1996, 1997 and 1998, respectively.
    
 
   
     The Company is a party to a stock redemption agreement with the estate of
     the Company's founder. Under the agreement, the estate may, at its option,
     require the Company to purchase shares of common stock at fair value in
     amounts equal to or less than specified annual obligations of $1.5 million
     for fiscal 1998 through 2001 and $1.0 million for fiscal 2002 and 2003. The
     redemption obligation is limited by Section 303 of the Internal Revenue
     code of 1986 and could be reduced based on the resolution of certain
     pending matters between the Internal Revenue Service and the estate of the
     Company's founder.
    
 
                                      F-16
<PAGE>   74
   
                          HASTINGS ENTERTAINMENT, INC.
    
 
   
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     In fiscal 1997, the Company purchased $1,500,000 of shares pursuant to this
     agreement. The agreement will terminate should the Company's stock become
     publicly traded.
    
 
   
 (9) SUPPLEMENTAL CASH FLOW INFORMATION
    
 
   
     Cash payments for interest during fiscal 1995, 1996 and 1997, totaled $2.5
     million, $3.3 million and $3.3 million, respectively. Cash payments for
     income taxes during fiscal 1995, 1996 and 1997 totaled $4.0 million, $3.6
     million, $2.8 million, respectively.
    
 
   
     Noncash investing activities during fiscal 1995, 1996 and 1997 include the
     transfer of videos with a depreciated cost of $4.4 million, $4.1 million
     and $5.8 million, respectively, from property and equipment to merchandise
     inventory.
    
 
   
(10) CONTINGENCIES
    
 
   
     The Company's employees are covered under a self-insured health plan.
     Claims in excess of $100,000 per employee are insured by an insurance
     company. Estimated claims incurred but not reported have been accrued in
     the accompanying financial statements. Health insurance expense during
     fiscal 1995, 1996 and 1997 were $0.5 million, $1.0 million and $1.1
     million, respectively.
    
 
   
     The Company is partially self-insured for workers' compensation. Claims in
     excess of $100,000 per accident and $1.1 million in the aggregate annually
     are insured by an insurance company. Estimated claims incurred but not
     reported have been accrued in the accompanying financial statements.
     Workers' compensation expense during fiscal 1995, 1996 and 1997 was $0.5
     million, $0.6 million and $0.1 million, respectively.
    
 
   
     The Company is involved in various claims and legal actions arising from
     the ordinary course of business. In the opinion of management, the ultimate
     disposition of these matters will not have a material adverse effect on the
     Company's financial statements.
    
 
   
(11) SALE OF MALL STORES
    
 
   
     During fiscal 1993, the Company sold the assets, primarily inventory and
     leasehold improvements, related to 26 mall stores to Camelot Music, Inc.
     ("Camelot"). Proceeds from the sales were $9.4 million and the Company
     recognized a gain of $3.8 million. During fiscal 1994, the Company sold the
     assets of another 16 mall stores to Camelot. Proceeds from the 1994 sales
     were $8.7 million and the Company recognized a gain of $4.1 million.
    
 
   
     In connection with the sales, the Company assigned the underlying leases on
     the stores to Camelot. Some of the leases have expired and the Company has
     been released from liability by the landlord on other leases. In August
     1996, Camelot filed for protection from creditors under the federal
     bankruptcy code and the bankruptcy court approved its plan in December
     1997. The Company has been named in suits by lessors alleging that Camelot
     has defaulted on certain of its obligations under these leases. As of
     January 31, 1998, 20 of such leases remained in effect where the Company
     may have contingent liability, of which Camelot has assumed 14 leases. In
     1996, the Company recorded a loss reserve of $2.5 million for the future
     lease obligations of these stores. Based on these events, the Company
     reduced their recorded loss reserve to $1.5 million which is included in
     accrued expenses and other liabilities at January 31, 1998. Because the
     ultimate liability is dependent, in part, on the Company's ability to
     sublease the stores, enter into agreements with lessors, and other events,
     it is reasonably possible that the Company's estimate of the liability may
     change in the near term.
    
 
   
(12) SUBSEQUENT EVENTS
    
 
   
     The Company effected a 5.059 for 1 stock split on             , 1998, the
     effects of which have been retroactively applied to the financial
     statements.
    
 
                                      F-17
<PAGE>   75
 
======================================================
 
     NO DEALER, SALES PERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR BY ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS
AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
 
                               ------------------
 
                               TABLE OF CONTENTS
 
   
<TABLE>
<CAPTION>
                                        PAGE
                                        ----
<S>                                     <C>
Prospectus Summary....................     3
Risk Factors..........................     8
Use of Proceeds.......................    13
Dividend Policy.......................    13
Dilution..............................    14
Capitalization........................    15
Selected Financial and Operating
  Data................................    16
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations.......................    18
Business..............................    25
Management............................    37
Certain Transactions..................    48
Principal Shareholders and Selling
  Shareholder.........................    49
Description of Capital Stock..........    50
Shares Eligible for Future Sale.......    52
Underwriting..........................    53
Legal Matters.........................    55
Experts...............................    55
Available Information.................    56
Index to Financial Statements.........   F-1
</TABLE>
    
 
     UNTIL        , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
 
======================================================
======================================================
 
                                3,377,333 SHARES
 
                          HASTINGS ENTERTAINMENT, INC.
 
                                  COMMON STOCK
                              [Issuer's Logotype]
                                  ------------
                                   PROSPECTUS
                                        , 1998
 
                                  ------------
                              SALOMON SMITH BARNEY
 
                           A.G. EDWARDS & SONS, INC.
 
   
                                  FURMAN SELZ
    
 
======================================================
<PAGE>   76
 
   
                                  SCHEDULE II
                  HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARY
    
 
   
         SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
    
   
                             (AMOUNTS IN THOUSANDS)
    
 
   
<TABLE>
<CAPTION>
                       JANUARY 31,    JANUARY 31,    JANUARY 31,
     DESCRIPTION          1998           1997           1996
     -----------       -----------    -----------    -----------
<S>                    <C>            <C>            <C>
RESERVES DEDUCTED
  FROM ASSETS
Allowance for
  inventory returns
  and shrinkage:
  Balance at
     beginning of
     period..........    $ 3,900        $   330        $ 2,108
  Additions charged
     to costs and
     expenses........      5,289          5,727          1,463
  Deductions of
     write-offs......     (4,057)        (2,157)        (3,241)
                         -------        -------        -------
  Balance at end of
     period..........    $ 5,132        $ 3,900        $   330
                         =======        =======        =======
</TABLE>
    
 
                                       S-1
<PAGE>   77
 
                                    PART II
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
     The following table indicates the expenses expected to be incurred in
connection with the Offering described in this Registration Statement, all of
which will be paid by the Company:
 
   
<TABLE>
<S>                                                           <C>
SEC Registration Fee........................................  $17,302
NASD Filing Fee.............................................    6,365
Nasdaq National Market Listing Fee..........................   81,625
Transfer Agent and Registrar Fees...........................     *
Blue Sky Fees (including counsel fees)......................     *
Accountants' Services and Expenses..........................     *
Legal Services..............................................     *
Printing and Engraving Fees.................................     *
Miscellaneous...............................................     *
                                                              -------
          TOTAL.............................................  $  *
                                                              =======
</TABLE>
    
 
---------------
 
* To be supplied by amendment
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
     Article 2.02-1 of the Texas Business Corporation Act permits a corporation
to indemnify certain persons, including officers and directors and former
officers and directors, and to purchase insurance with respect to liability
arising out of their capacity or status as officers and directors. Such law
provides further that the indemnification permitted thereunder will not be
deemed exclusive of any other rights to which officers and directors may be
entitled under the corporation's articles of incorporation, bylaws, any
agreement or otherwise.
 
     Article Thirteen of the Company's Articles of Incorporation provides as
follows:
 
          The corporation shall indemnify any person who was, is or is
     threatened to be made a named defendant or respondent in a proceeding (as
     hereinafter defined) because the person (a) is or was a director or officer
     of the corporation or (b) while a director or officer of the corporation,
     is or was serving at the request of the corporation as a director, officer,
     manager, partner, venturer, proprietor, trustee, employee, agent or similar
     functionary of another foreign or domestic corporation, limited liability
     company, partnership, joint venture, sole proprietorship, trust, employee
     benefit plan or other enterprise, to the fullest extent that a corporation
     may grant indemnification to a person serving in such capacity under the
     Texas Business Corporation Act, as the same exists or may hereafter be
     amended.
 
          Such right shall include the right to be paid by the corporation for
     all expenses incurred in defending any such proceeding in advance of its
     final disposition to the maximum extent permitted under the Texas Business
     Corporation Act, as the same exists or may hereafter be amended. If a claim
     for indemnification or advancement of expenses hereunder is not paid in
     full by the corporation within 90 days after a written claim has been
     received by the corporation, the claimant may at any time thereafter bring
     suit against the corporation to recover the unpaid amount of the claim, and
     if successful in whole or in part, the claimant shall be entitled to be
     paid also the expenses of prosecuting such claim. It shall be a defense to
     any such action that such indemnification or advancement of costs of
     defense are not permitted under the Texas Business Corporation Act, but the
     burden of proving such defense shall be on the corporation. Neither the
     failure of the corporation (including its Board of Directors or any
     committee thereof, special legal counsel or shareholders) to have made its
     determination prior to the commencement of such action that indemnification
     of, or advancement of costs of defense to, the claimant is permissible in
     the circumstances nor an actual determination by the corporation (including
     its Board of Directors or any committee thereof, special legal counsel or
     shareholders) that such indemnification or advancement is not permissible,
     shall be a defense to the action or create a presumption that such
     indemnification or advancement is not permissible.
 
                                      II-1
<PAGE>   78
 
          The corporation may additionally indemnify any person not covered by
     the grant of mandatory indemnification contained above to the fullest
     extent permitted by law.
 
          Neither the amendment nor repeal of this Article, nor the adoption of
     any provision of these Third Restated Articles of Incorporation
     inconsistent with this Article, shall eliminate or reduce the effect of
     this Article in respect of any proceeding that accrued or arose prior to
     such amendment, repeal or adoption of any inconsistent provision.
 
          As used herein, the term "proceeding" means any threatened, pending or
     completed action, suit or proceeding, whether civil, criminal,
     administrative, arbitrative or investigative, any appeal in such an action,
     suit or proceeding, and any inquiry or investigation that could lead to
     such an action, suit or proceeding.
 
     In addition, Article Nine of the Company's Bylaws provides for such
indemnification of officers and directors within the limits set forth in the
Articles of Incorporation and applicable provisions of Texas law. The Company
has entered into indemnification agreements with each of its directors and
executive officers providing indemnification to the fullest extent permitted by
applicable law.
 
     Article Fourteen of the Company's Articles of Incorporation further
includes a provision eliminating the monetary liability of a director to the
Company or its shareholders for an act or omission in the director's capacity as
a director to the fullest extent permitted by Texas law. See "Description of
Capital Stock -- Exculpatory Charter Provisions; Liability and Indemnification
of Officers and Directors."
 
     The Company intends to maintain liability insurance for the benefit of its
directors and officers.
 
                                      II-2
<PAGE>   79
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
 
   
     The following table relates to all securities issued or sold by the Company
within the past three years and not registered under the Securities Act. All
such sales were made in reliance on the exemption from registration contained in
Section 4(2) of the Securities Act as transactions not involving a public
offering and related state securities law. With respect to the Common Stock, the
number of shares issued and the price per share information have been adjusted
to reflect the 5.059 for 1.000 split of the Company's Common Stock effected
immediately prior to the Offering.
    
 
   
<TABLE>
<CAPTION>
                                                                NUMBER OF   PRICE PER    AGGREGATE
          PURCHASER/TRANSFEREE            DATE OF TRANSACTION    SHARES       SHARE        PRICE
          --------------------            -------------------   ---------   ---------   -----------
<S>                                       <C>                   <C>         <C>         <C>
Jeffrey G. Shrader......................  June 27, 1995           2,201      $12.26     $ 26,970.00
ASOP(1).................................  October 12, 1995       15,637       12.26      191,642.00
Owen Marmaduke..........................  November 1, 1995        2,443       12.26       29,946.00
Samuel Marmaduke........................  November 1, 1995        2,039       12.26       24,986.00
Jeffrey G. Shrader(2)...................  January 31, 1996          668         .20          132.00
Roxanne Conant-Spradlin(3)..............  May 15, 1996              506       10.28        5,200.00
ASOP(1).................................  July 19, 1996          17,292       14.03      242,678.00
Kelly Wood(4)...........................  October 21, 1996        7,831       14.03      109,908.00
Marilyn McCrary Wilson(4)...............  November 27, 1996       1,351       14.03       18,957.00
Howard Miller(3)........................  December 16, 1996         354        6.92        2,450.00
Sherry Scoggins(4)......................  January 8, 1997             5       14.03           71.00
Theresa Rooney(4).......................  January 8, 1997            66       14.03          923.00
Jeffrey D. Sumpter(3)...................  January 14, 1997          506       10.28        5,200.00
Walter McNeer...........................  January 30, 1997        5,059       10.28       52,000.00
Marilyn Foos(3).........................  February 4, 1997          354       12.26        4,340.00
Richard Williamson(2)...................  February 28, 1997         825         .20          163.00
William J. Morey(3).....................  February 28, 1997         202       10.28        2,080.00
Brenda D. Kuykendall(3).................  May 5, 1997               506       10.28        5,200.00
Darrell Kendall(3)......................  May 30, 1997              506       10.28        5,200.00
Darrell Kendall(3)......................  May 30, 1997              101       12.26        1,240.00
ASOP(1).................................  July 16, 1997          13,427       13.64      183,126.00
Vinny Losasso(3)........................  July 22, 1997             718        6.92        4,970.00
James Fritz(3)..........................  August 8, 1997            718        6.92        4,970.00
James Fritz(3)..........................  August 8, 1997          1,012       10.28       10,400.00
James Fritz(3)..........................  August 8, 1997            228       12.26        2,790.00
Michael Terk............................  October 1, 1997           506       13.64        6,900.00
Leonard L. & Nancy Berry................  October 1, 1997         5,059       13.64       69,000.00
Matthew J. Berry........................  October 1, 1997           506       13.64        6,900.00
Jonathan E. Berry.......................  October 1, 1997           506       13.64        6,900.00
Robert A. & Vickie Berman...............  October 1, 1997           506       13.64        6,900.00
Stanley Marsh 3 Special Trust...........  October 7, 1997         3,334       13.64       45,471.00
Stanley Marsh 3 Special Trust...........  October 9, 1997         3,556       13.64       48,507.00
Gaines L. Godfrey(2)....................  October 10, 1997        3,541         .20          700.00
Carroll Rogers..........................  October 31, 1997          126       13.64        1,725.00
Kent Andrews Life Est. Trust............  December 3, 1997          212       13.64        2,898.00
Howard Miller(3)........................  December 15, 1997         182        6.92        1,260.00
</TABLE>
    
 
---------------
 
(1)  Transfer of stock to the Company's ASOP for annual funding.
 
(2)  Pursuant to options granted under the Directors Option Plan.
 
(3)  Pursuant to options granted under the Company's 1991 or 1994 Stock Option
     Plans or the Amended 1996 Incentive Stock Plan.
 
(4)  Purchases from the Company's ASOP or its 401(k) Plan as a result of
     forfeitures.
 
                                      II-3
<PAGE>   80
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
  (a) Exhibits
 
   
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                            DESCRIPTION OF EXHIBITS
        -------                            -----------------------
<C>                      <S>
         1.1+            -- Form of Underwriting Agreement.
         3.1+            -- Third Restated Articles of Incorporation of the Company.
         3.2+            -- Amended and Restated Bylaws of the Company.
         4.1*            -- Specimen of Certificate of Common Stock of the Company.
         4.2+            -- Third Restated Articles of Incorporation of the Company
                            (see 3.1 above).
         4.3+            -- Amended and Restated Bylaws of the Company (see 3.2
                            above).
         5.1*            -- Form of Opinion of Locke Purnell Rain Harrell (A
                            Professional Corporation).
        10.1+            -- Form of Indemnification Agreement by and between the
                            Company and its directors and executive officers.
        10.2+            -- Note Purchase Agreement regarding $25,000,000 7.75%
                            Senior Notes Due June 13, 2003.
        10.3*            -- Credit Agreement among Hastings Books, Music & Video,
                            Inc. and The Boatmen's National Bank of St. Louis dated
                            as of December 12, 1994, as amended.
        10.4+            -- Hastings Amended 1996 Incentive Stock Plan.
        10.5*            -- Hastings 1994 Stock Option Plan.
        10.6*            -- Hastings 1991 Stock Option Plan.
        10.7+            -- Hastings Entertainment, Inc. Associates' 401(k) Plan and
                            Trust Agreement.
        10.8+            -- Hastings Employee Stock Ownership Plant Trust Agreement.
        10.9*            -- Chief Executive Officer Stock Option, as amended.
        10.10+           -- Corporate Officer Incentive Plan.
        10.11+           -- Management Stock Purchase Plan.
        10.12+           -- Management Incentive Plan.
        10.13+           -- Salary Incentive Plan.
        10.14+           -- Hastings Entertainment, Inc. Stock Option Plan for
                            Outside Directors.
        10.15*           -- Lease Agreement, dated August 3, 1994, as amended,
                            between Omni Capital Corporation and the Company, for
                            office space located at Sunset Center in Amarillo, Texas.
        10.16+           -- Lease Agreement, dated August 3, 1994, between Omni
                            Capital Corporation and the Company, for warehouse space
                            located at Sunset Center in Amarillo, Texas.
        10.17++          -- Stock Redemption Agreement dated May 3, 1994, as amended,
                            between John H. Marmaduke, Independent Executor of the
                            Estate of Sam Marmaduke, Deceased, and the Company.
        10.18+           -- Lease Agreement dated May 28, 1992 between the City of
                            Amarillo and the Company for space located at 1900 W. 7th
                            Avenue in Amarillo, Texas.
        10.19+           -- $1,600,000 Promissory Note and Security Agreement in
                            favor of First Interstate Bank of Texas, NA.
        10.20*           -- Form of Employment Agreement by and between the Company
                            and certain of its executives.
        10.21*           -- Stock Grant Plan for Outside Directors.
        10.22*           -- Form of Directed Share Program materials.
        21.1*            -- Subsidiaries of the Company.
        23.1*            -- Consent of KPMG Peat Marwick LLP and Report on Schedule.
        23.2++           -- Consent of Locke Purnell Rain Harrell (A Professional
                            Corporation) (to be included in Exhibit 5.1).
        24.1+            -- Powers of Attorney (included on signature pages).
        27.1*            -- Financial Data Schedule for fiscal 1997.
        27.2*            -- Financial Data Schedule for fiscal 1996.
</TABLE>
    
 
---------------
 
 * Filed herewith.
 
 + Previously filed.
 
   
++ To be filed by amendment.
    
 
                                      II-4
<PAGE>   81
 
  (b) Financial Statement Schedules.
 
   
     II Valuation and Qualifying Accounts and Reserves for the Years ended
January 31, 1996, 1997 and 1998.
    
 
     All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are not required under the related instructions, are not applicable or the
information has been provided in the Financial Statements or the notes thereto.
 
ITEM 17. UNDERTAKINGS.
 
     The undersigned Company hereby undertakes to provide to the representative
of the Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
 
     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by any
director, officer or controlling person in connection with the securities being
registered, the Company will, unless the in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
 
     The Company hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities
     Act, the information omitted from the form of Prospectus filed as part of
     this Registration Statement in reliance upon Rule 430A and contained in a
     form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
     or 497(h) under the Securities Act shall be deemed to be part of this
     Registration Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act, each post-effective amendment that contains a form of prospectus shall
     be deemed to be a new registration statement relating to the securities
     offered therein, and the offering of such securities at that time shall be
     deemed to be the initial bona fide offering thereof.
 
                                      II-5
<PAGE>   82
 
                                   SIGNATURES
 
   
     Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Amarillo, State of Texas, on this 18th day of May, 1998.
    
 
                                            HASTINGS ENTERTAINMENT, INC.
 
                                            By:      /s/ DENNIS MCGILL
                                              ----------------------------------
                                            Name: Dennis McGill
                                            Title: Vice President of Finance,
                                                   Chief Financial Officer,
                                                   Treasurer and Secretary
 
     Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
 
   
<TABLE>
<CAPTION>
                     SIGNATURES                                        TITLE                        DATE
                     ----------                                        -----                        ----
<C>                                                    <S>                                    <C>
 
               /s/ JOHN H. MARMADUKE*                  Chairman of the Board, President and       May 18, 1998
-----------------------------------------------------    Chief Executive Officer (principal
                  John H. Marmaduke                      executive officer)
 
                  /s/ DENNIS MCGILL                    Vice President of Finance, Chief           May 18, 1998
-----------------------------------------------------    Financial Officer, Treasurer and
                    Dennis McGill                        Secretary (principal financial
                                                         officer and principal accounting
                                                         officer)
 
                  /s/ PHILLIP HILL*                    Senior Vice President, Chief               May 18, 1998
-----------------------------------------------------    Operating Officer and Director
                    Phillip Hill
 
                /s/ LEONARD L. BERRY*                  Director                                   May 18, 1998
-----------------------------------------------------
                  Leonard L. Berry
 
                /s/ PETER A. DALLAS*                   Director                                   May 18, 1998
-----------------------------------------------------
                   Peter A. Dallas
 
               /s/ GAINES L. GODFREY*                  Director                                   May 18, 1998
-----------------------------------------------------
                  Gaines L. Godfrey
 
               /s/ CRAIG R. LENTZSCH*                  Director                                   May 18, 1998
-----------------------------------------------------
                  Craig R. Lentzsch
 
              /s/ STEPHEN S. MARMADUKE*                Director                                   May 18, 1998
-----------------------------------------------------
                Stephen S. Marmaduke
 
               /s/ JEFFREY G. SHRADER                  Director                                   May 18, 1998
-----------------------------------------------------
                 Jeffrey G. Shrader
 
                 /s/ RON G. STEGALL*                   Director                                   May 18, 1998
-----------------------------------------------------
                   Ron G. Stegall
</TABLE>
    
 
   
*By:      /s/ DENNIS MCGILL
     -------------------------------
    
           Dennis McGill
          Attorney-in-Fact
 
                                      II-6
<PAGE>   83
 
                               INDEX TO EXHIBITS
 
   
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                            DESCRIPTION OF EXHIBITS
        -------                            -----------------------
<C>                      <S>
         1.1+            -- Form of Underwriting Agreement.
         3.1+            -- Third Restated Articles of Incorporation of the Company.
         3.2+            -- Amended and Restated Bylaws of the Company.
         4.1*            -- Specimen of Certificate of Common Stock of the Company.
         4.2+            -- Third Restated Articles of Incorporation of the Company
                            (see 3.1 above).
         4.3+            -- Amended and Restated Bylaws of the Company (see 3.2
                            above).
         5.1*            -- Form of Opinion of Locke Purnell Rain Harrell (A
                            Professional Corporation).
        10.1+            -- Form of Indemnification Agreement by and between the
                            Company and its directors and executive officers.
        10.2+            -- Note Purchase Agreement regarding $25,000,000 7.75%
                            Senior Notes Due June 13, 2003.
        10.3*            -- Credit Agreement among Hastings Books, Music & Video,
                            Inc. and The Boatmen's National Bank of St. Louis dated
                            as of December 12, 1994, as amended.
        10.4+            -- Hastings Amended 1996 Incentive Stock Plan.
        10.5*            -- Hastings 1994 Stock Option Plan.
        10.6*            -- Hastings 1991 Stock Option Plan.
        10.7+            -- Hastings Entertainment, Inc. Associates' 401(k) Plan and
                            Trust Agreement.
        10.8+            -- Hastings Employee Stock Ownership Plant Trust Agreement.
        10.9*            -- Chief Executive Officer Stock Option, as amended.
        10.10+           -- Corporate Officer Incentive Plan.
        10.11+           -- Management Stock Purchase Plan.
        10.12+           -- Management Incentive Plan.
        10.13+           -- Salary Incentive Plan.
        10.14+           -- Hastings Entertainment, Inc. Stock Option Plan for
                            Outside Directors.
        10.15*           -- Lease Agreement, dated August 3, 1994, as amended,
                            between Omni Capital Corporation and the Company, for
                            office space located at Sunset Center in Amarillo, Texas.
        10.16+           -- Lease Agreement, dated August 3, 1994, between Omni
                            Capital Corporation and the Company, for warehouse space
                            located at Sunset Center in Amarillo, Texas.
        10.17++          -- Stock Redemption Agreement dated May 3, 1994, as amended,
                            between John H. Marmaduke, Independent Executor of the
                            Estate of Sam Marmaduke, Deceased, and the Company.
        10.18+           -- Lease Agreement dated May 28, 1992 between the City of
                            Amarillo and the Company for space located at 1900 W. 7th
                            Avenue in Amarillo, Texas.
        10.19+           -- $1,600,000 Promissory Note and Security Agreement in
                            favor of First Interstate Bank of Texas, NA.
        10.20*           -- Form of Employment Agreement by and between the Company
                            and certain of its executives.
        10.21*           -- Stock Grant Plan for Outside Directors.
        10.22*           -- Form of Directed Share Program materials.
        21.1*            -- Subsidiaries of the Company.
        23.1*            -- Consent of KPMG Peat Marwick LLP and Report on Schedule.
        23.2++           -- Consent of Locke Purnell Rain Harrell (A Professional
                            Corporation) (to be included in Exhibit 5.1).
        24.1+            -- Powers of Attorney (included on signature pages).
        27.1*            -- Financial Data Schedule for fiscal 1997.
        27.2*            -- Financial Data Schedule for fiscal 1996.
</TABLE>
    
 
---------------
 
 * Filed herewith.
 
 + Previously filed.
 
   
++ To be filed by amendment.