® Annual Report 2008 • Revised corporate mission: To provide convenient access to 2007 media entertainment • Announced decisive steps to strengthen the core rental business, enhance the company’s retail offering, and embrace digital content delivery • Positioned BLOCKBUSTER Total Access™ into a profi table and stable business • Completed Blu-ray Disc™ kiosk installation • Launched a new and improved blockbuster.com and integrated 2008 Movielink’s 10,000+ titles into the site • Improved studio relationships, with 80% of movie studios currently committed to revenue share arrangements • Enhanced approximately 600 domestic stores • Improved in-stock availability to 60% during the fi rst week a hot new release is available on DVD • Expanded entertainment related merchandise, including licensed memorabilia • Launched “Rock the Block” Concept in Reno, Dallas and New York City • Introduced consumer electronics, games and game merchandise in approximately 4,000 domestic stores • Launched new products and services nationally, including event ticketing through alliance with Live Nation • Continued to improve product assortment among confection and snack items • Launched BLOCKBUSTER® OnDemand through alliance with 2Wire® • Announced alliance with NCR Corporation to provide DVD vending 2009 • Teamed with Sonic Solutions® to provide consumers instant access to Blockbuster’s digital movie service across extensive range of home and portable devices • Began to gradually roll-out “Choose Your Terms” nationally • Announced pilot program to include online video game rentals as part of BLOCKBUSTER Total Access™ subscription, establishing Blockbuster as the fi rst and only online provider of both movies and games • Reported full year 2008 revenues of $5.29 billion • Recorded 6.4% increase year-over-year in domestic same-store sales, including a 1.2 percent increase in domestic same-store rental comparables and a 37.4 percent increase in domestic same-store retail comparables • Generated positive cash fl ow from operations during the fourth quarter, resulting in free cash fl ow of $110 million • Announced alliance with TiVo®, integrating BLOCKBUSTER® OnDemand service into TiVo Series2™, Series3™, TiVo HD, and TiVo HD XL DVRs Dear Shareholders: In 2008 Blockbuster set out on a mission to provide year improvements in revenue per store visit, gross profi t consumers with convenient access to media entertainment per square foot and the net paid fi lm rental rate, all key – whenever, however, wherever and in whatever format operating metrics. they want to receive content. To deliver on this mission, we focused on three key initiatives: During the year, we also made signifi cant progress in the improvement of in-store terms and pricing. Th rough a • Strengthening our core rental business; variety of in-market tests, consumers clearly let us know they enjoy being able to choose to rent either by the day, the • Facilitating an in-store transition from rental week or the month. Based on the positive response from our to retail; and, customers, in the fi rst quarter of 2009, we began to gradually roll-out our “Choose Your Terms” off ering nationally. • Embracing digital content delivery. As for our by-mail rental service, in 2008 we improved its We believe our performance last year demonstrates the merit of profi tability, enhanced our website, and made our extensive our strategy to diversify our business and affi rms Blockbuster’s library of digital content available on blockbuster.com. We role as a brand of choice for the entertainment customer. also recently announced that we plan to off er by-mail game rentals, making us the only online service to off er both 2008 Year-In-Review movies and games. Amid a challenging retail environment, Blockbuster recorded a 6.4 percent increase year-over-year in domestic same-store On the digital content delivery side, although this remains sales, which included a 1.2 percent increase in domestic a smaller piece of the media entertainment market, same-store rental comparables and a 37.4 percent increase we continue to provide compelling, cinematic digital in domestic same-store retail comparables. Additionally, solutions for our customers through smart alliances with the company continued to generate positive cash fl ow from device manufacturers and service providers; such as, Sonic operations before working capital, which resulted in free cash Solutions®, 2Wire® and TiVo®. fl ow of $110 million during the fourth quarter. 2009 Strategic Focus We made tremendous progress with our eff orts to convert For most of last year, we operated Blockbuster for growth, our stores into full-service entertainment destinations as investing in our transformation even as we worked to evidenced by the nearly 600 remodeled domestic locations, eliminate extraneous costs. However, in light of the macro including the installation of new concept prototypes. economic environment and ongoing uncertainty of the Additionally, we launched an aggressive Blu-ray Disc™ constrained capital markets, we believe it is prudent to adopt off ering that consists of movies for rent or purchase and Blu- a more conservative approach regarding our more capital- ray players. We also increased the number of new products intensive initiatives, further reduce costs and maximize cash and services we off er in our stores, from event ticketing to fl ow. As a result, we expect lower revenue comparables but games, consumer electronics and licensed merchandise. As a continued strong EBITDA results for the full year of 2009. result of this retail focus, we experienced domestic year-over- With that said, we remain dedicated to further diversifying it a bit more challenging than we anticipated. We have our business and implementing our rental, retail and digital dedicated considerable eff orts and resources to achieving entertainment initiatives. A few of the specifi c programs workable fi nancing solutions, and we were pleased to that we will be working on this year in support of these announce a resolution regarding the August 2009 maturity strategies include: of our revolving credit facility. We believe the tremendous support received from our lenders serves as an endorsement • Introducing new terms and pricing nationwide to of Blockbuster and the company’s transformation into a provide customers with value and choice; multi-channel provider of media entertainment. • Improving by-mail rental off erings; Blockbuster remains a vital distribution channel for the entertainment industry, in particular the movie studios, • Expanding our physical points of distribution and a growth vehicle for the game manufacturers. As for the by leveraging our strategic alliance with NCR consumer, now, more than ever, they are seeking not only a Corporation, with the goal of introducing thousands great entertainment value, but also an escape from the stress of vending machines into the market within the next of the macro-economic environment. Th ose are exactly what twelve to eighteen months; Blockbuster provides. • Enhancing our digital off erings by continuing to work to make BLOCKBUSTER® branded content widely Thank You available on connected devices through smart alliances I would like to thank our employees, franchisees, customers with device manufacturers and service providers; and, and all of our stakeholders for their continued support. We look forward to sharing our business updates in 2009. • Pursuing the sale and licensing of our international assets, which we believe will allow the company to redeploy capital domestically and reduce debt while Sincerely, retaining our strong brand presence across 20 countries. In Summary We believe our success in 2008 was attributable to the improvements of our core rental business as well as our James W. Keyes diversifi cation into retail movies and games. During the year we accomplished a great deal, but a tremendous Chairman and Chief Executive Offi cer amount of work lies ahead. We were in the midst of transforming the company, but the capital markets made James W. Keyes Chairman of the Board and Chief Executive Offi cer UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 4, 2009. OR ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 For the transition period from to Commission File Number 001-15153 BLOCKBUSTER INC. (Exact name of registrant as specified in its charter) DELAWARE 52-1655102 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1201 Elm Street Dallas, Texas 75270 (214) 854-3000 (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Class A Common Stock, $.01 par value per share New York Stock Exchange Class B Common Stock, $.01 par value per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No È Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,tothe best of the registrant’s knowledge, in definitive proxy or information statements incorporatedby reference in Part III of this Form 10-K or any amendment to this Form 10-K.