AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1998

REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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HASTINGS ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

TEXAS 5942 75-1386375
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)

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:

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

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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

========================================================================================================
TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------

Common Stock, $.01 par value......................... $58,650,000(1) $17,302
========================================================================================================

(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.

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.
================================================================================
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 MARCH 13, 1998

PROSPECTUS

HASTINGS ENTERTAINMENT, INC.

COMMON STOCK
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Of the shares of Common Stock, $.01 par value per share (the
"Common Stock"), offered hereby, shares are being sold by Hastings
Entertainment, Inc. (the "Company"), and 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 $ and $ per share. See
"Underwriting" for information relating to the factors considered in determining
the initial public offering price. Application has been made to have the Common
Stock listed on The Nasdaq Stock Market's National Market under the symbol
"HAST."

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.

====================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER(2)
- --------------------------------------------------------------------------------------------------------------------

Per Share $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Total(3) $ $ $ $
====================================================================================================================

(1) For information regarding indemnification of the Underwriters, see
"Underwriting."

(2) Before deducting expenses estimated at $ , of which $ is
payable by the Company and $ is payable by the Selling
Shareholder.

(3) The Company has granted the Underwriters a 30-day option to purchase up
to 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.

, 1998
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."
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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 five-for-one 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, 1997 is
referred to as "fiscal 1996." This Prospectus contains certain forward-looking
statements within the meaning of the federal securities laws. 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 117 superstores averaging 20,700 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
14% compound annual growth rate, growing from $187 million in fiscal 1992 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 143% from approximately 856,000 square feet in fiscal
1992 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 award-winning 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.

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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 20,700 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 40,000 book, 28,000
music, 1,000 software, 2,000 periodical and 6,000 videotape titles and 1,300
complementary and accessory items for sale and 15,000 videotape and video game
selections for rent. Although the superstores' core product assortment tends 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 or trend 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 in-depth research of its
customers and understanding of 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 1996, Hastings invested $8.5 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.

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6

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.

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 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 more 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 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. 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.

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

Common Stock offered by the Company......................... shares
Common Stock offered by the Selling Shareholder............. shares
Common Stock outstanding after the Offering(1).............. 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

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(1) Does not include 2,357,720 shares reserved for issuance under the Company's
various stock plans. As of January 31, 1998, options for 1,819,160 shares
have been granted under these stock plans with a weighted average exercise
price per share of $11.88. See "Management -- Stock Plans."

5
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 1994, 1995 and 1996 and the balance sheet data at January 31, 1996
and 1997 are derived from the audited financial statements included elsewhere in
this Prospectus. The income statement data set forth below for fiscal 1992 and
1993 and the balance sheet data at January 31, 1993, 1994 and 1995 are derived
from audited financial statements not included herein. The income statement data
set forth below for the nine months ended October 31, 1996 and 1997 and the
balance sheet data at October 31, 1996 and 1997 are derived from unaudited
financial statements included herein. In the opinion of management, such
unaudited financial statements have been prepared on the same basis as the
audited financial statements referred to above and include all adjustments,
consisting of normal accruals, necessary for a fair presentation of the
financial position of the Company and the results of operations for the
indicated periods. Operating results for the nine months ended October 31, 1997
are not necessarily indicative of the results that may be expected for fiscal
1997.

NINE MONTHS
FISCAL YEAR ENDED OCTOBER 31,
----------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------

INCOME STATEMENT DATA(1):
Merchandise revenue........................... $150,404 $171,049 $197,311 $232,463 $251,934 $170,940 $187,969
Video rental revenue.......................... 36,790 46,674 57,603 66,449 72,357 53,090 52,641
-------- -------- -------- -------- -------- -------- --------
Total revenues................................ 187,194 217,723 254,914 298,912 324,291 224,030 240,610
Gross profit.................................. 68,237 80,520 95,681 109,753 119,679 87,579 92,680
Selling, general and administrative
expenses.................................... 56,083 65,769 80,480 89,325 105,183 80,260 83,877
Development expenses.......................... -- 514 2,811 2,791 2,421 1,866 --
-------- -------- -------- -------- -------- -------- --------
Operating income.............................. 12,154 14,237 12,390 17,637 12,075 5,453 8,803
Interest expense, net......................... (169) (310) (718) (2,588) (3,585) (2,677) (3,093)
Gain (loss) on sale of mall stores, net(1).... -- 3,836 4,080 -- (2,500) (2,500) --
Other, net.................................... 603 2,051(2) 148 221 126 -- --
-------- -------- -------- -------- -------- -------- --------
Income before income taxes.................... 12,588 19,814 15,900 15,270 6,116 276 5,710
Income taxes.................................. 4,744 7,205 6,090 5,875 2,320 126 2,282
-------- -------- -------- -------- -------- -------- --------
Net income.................................... $ 7,844 $ 12,609 $ 9,810 $ 9,395 $ 3,796 $ 150 $ 3,428
======== ======== ======== ======== ======== ======== ========
Net income per common share...................
======== ======== ======== ======== ======== ======== ========
Weighted average common shares outstanding....
PERCENTAGE OF REVENUES AND OTHER DATA:
Gross profit.................................. 36.5% 37.0% 37.5% 36.7% 36.9% 39.1% 38.5%
Operating income.............................. 6.5% 6.5% 4.9% 5.9% 3.7% 2.4% 3.7%
Depreciation and amortization(3).............. $ 12,797 $ 19,110 $ 21,560 $ 31,175 $ 32,967 $ 24,567 $ 25,168
Capital expenditures.......................... $ 21,243 $ 30,247 $ 40,013 $ 48,358 $ 40,510 $ 32,037 $ 43,427
STORE DATA(1):
Number of Stores:
Open at beginning of period................. 83 82 91 102 108 108 111
Opened during period........................ 8 13 13 9 4 3 6
Closed during period........................ (9) (4) (2) (3) (1) (1) 0
Open at end of period....................... 82 91 102 108 111 110 117
Comparable store revenues increase(4)......... -- 17% 10% 4% 6% 7% 5%

OCTOBER 31, 1997
-------------------------
ACTUAL AS ADJUSTED(5)
-------- --------------

BALANCE SHEET DATA:
Working capital............................................. $ 62,437 $
Total assets................................................ 214,854
Total debt.................................................. 68,646
Total shareholders' equity.................................. 66,581

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(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, which filed for bankruptcy protection in August
1996. See "Business -- Litigation."

(2) 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.

(3) 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."

(4) Stores open a minimum of 60 weeks.

(5) Adjusted to reflect the sale of the shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $ per share and application of the estimated net proceeds
therefrom as set forth in "Use of Proceeds."

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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. This Prospectus contains certain forward-looking
statements within the meaning of the federal securities laws. 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
below and elsewhere in this Prospectus.

Expansion Strategy. 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 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 certain 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 or expanded
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 and 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 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."

Expansion into Electronic Commerce. 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. Although the Company believes that it has developed the electronic
and operational infrastructure necessary to offer its products through the
Internet in a manner that will be technologically sound and customer oriented,
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
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10

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 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.

Consumer Spending. 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.

Supplier Relationships. 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."

Competition and Technological Obsolescence. 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. Although the Company historically has
operated in small to medium-sized markets with less competition than would be
found in larger cities, 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
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."

Dependence on Key Personnel. 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. The Company
currently does not have an employment agreement with any member of management.
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 personnel or to attract additional
personnel could have a material adverse effect on the Company. See "Management."

Control of the Company; Effect of Certain Provisions in Articles of
Incorporation and Bylaws. Upon completion of the sale of the shares offered
hereby, approximately % 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 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 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, a majority of
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."

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 Prior Public Trading Market and 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.

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
$ per share, such dilution would have been equal to $ per
share at October 31, 1997. In addition, the future exercise of stock options and
warrants would result in further dilution. See "Dilution."

Shares Eligible for Future Sale. 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
shares of Common Stock outstanding. Of these shares, shares will be
"restricted securities" as defined by 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 shares, or % 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."

Dividend Policy. 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."

11
13

USE OF PROCEEDS

Assuming an initial public offering price of $ per share (the
midpoint of the range set forth on the cover page of this Prospectus), the net
proceeds from the sale of the shares of Common Stock offered by the Company
are estimated to be $ million ($ 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 $35.0 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.

12
14

DILUTION

As of October 31, 1997, the Company's net tangible book value was $66.6
million or $7.96 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 shares of Common Stock offered
by the Company hereby (at an assumed initial offering price of $ 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
October 31, 1997 would have been approximately $ or $ per
share, which represents an immediate increase of $ per share to
existing shareholders and an immediate dilution of $ per share to persons
purchasing shares in the public offering. The following table illustrates this
dilution per share:

Assumed initial public offering price....................... $
Net tangible book value per share at October 31, 1997..... $
------
Increase attributable to new investors....................
------
Net tangible book value per share after offering............
------
Dilution to new investors................................... $
======

The following table sets forth as of October 31, 1997 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
$ per share (before deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company):

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------- -------- ---------
(IN THOUSANDS) (IN THOUSANDS)

Existing Shareholders.............. 8,366,285 % $1,704 % $0.20
----- -----
New Investors......................
--------- ----- ------ ----- -----
Total....................
--------- ----- ------ ----- -----

The foregoing assumes no exercise of stock options outstanding at October
31, 1997. At October 31, 1997, there were outstanding stock options to purchase
an aggregate of 1,828,840 shares of Common Stock at a weighted average exercise
price of $11.94 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.

13
15

CAPITALIZATION

The following table sets forth the capitalization of the Company (i) as of
October 31, 1997 and (ii) as adjusted to give effect to the issuance and sale by
the Company of the shares of Common Stock being offered by the Company at
an assumed initial public offering price of $ 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.

OCTOBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)

Current maturities of long-term debt and capitalized lease
obligations............................................... $ 302 $ 302
-------- -------
Long-term debt and capitalized lease obligations:
Revolving Credit Facility(1).............................. 40,900
Series A Senior Notes(2).................................. 25,000 25,000
Other, excluding current maturities....................... 2,444 2,444
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; 8,552,000 shares issued, shares issued
as adjusted(4)......................................... 86
Additional paid-in capital................................ 1,656
Retained earnings......................................... 75,040 75,040
Less treasury stock, 185,715 shares, stated at cost....... (2,201) (2,201)
Redemption value of common stock held by estate of
Company's founder...................................... (8,000) --
-------- -------
Total shareholders' equity............................. 66,581
-------- -------
Total capitalization.............................. $143,227 $
======== =======

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

(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. If this Offering is consummated,
the Redemption Agreement will terminate.

(4) Excludes 2,357,720 shares reserved for issuance under the Company's various
stock plans. As of October 31, 1997, options for an aggregate 1,828,840
shares have been granted and are outstanding under these stock plans. See
"Management -- Stock Plans."

14
16

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 1994, 1995 and 1996 and the balance sheet data at January 31, 1996
and 1997 are derived from the audited financial statements included elsewhere in
this Prospectus. The income statement data set forth below for fiscal 1992 and
1993 and the balance sheet data at January 31, 1993, 1994 and 1995 are derived
from audited financial statements not included herein. The income statement data
set forth below for the nine months ended October 31, 1996 and 1997 and the
balance sheet data at October 31, 1996 and 1997 are derived from unaudited
financial statements included herein. In the opinion of management, such
unaudited financial statements have been prepared on the same basis as the
audited financial statements referred to above and include all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the financial position of the Company and the results of operations for the
indicated periods. Operating results for the nine months ended October 31, 1997
are not necessarily indicative of the results that may be expected for fiscal
1997.

NINE MONTHS ENDED
FISCAL YEAR OCTOBER 31,
--------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
-------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

INCOME STATEMENT DATA(1):
Merchandise revenue.................... $150,404 $ 171,049 $ 197,311 $ 232,463 $ 251,934 $ 170,940 $ 187,969
Video rental revenue................... 36,790 46,674 57,603 66,449 72,357 53,090 52,641
-------- --------- --------- --------- --------- --------- ---------
Total revenues......................... 187,194 217,723 254,914 298,912 324,291 224,030 240,610
Merchandise cost of revenue............ 106,594 119,090 141,910 165,320 182,314 117,604 129,137
Rental video cost of revenue........... 12,363 18,113 17,323 23,839 22,298 18,847 18,793
-------- --------- --------- --------- --------- --------- ---------
Total cost of revenues................. 118,957 137,203 159,233 189,159 204,612 136,451 147,930
Gross profit........................... 68,237 80,520 95,681 109,753 119,679 87,579 92,680
Selling, general and administrative
expenses............................. 56,083 65,769 80,480 89,325 105,183 80,260 83,877
Development expenses................... -- 514 2,811 2,791 2,421 1,866 --
-------- --------- --------- --------- --------- --------- ---------
Operating income....................... 12,154 14,237 12,390 17,637 12,075 5,453 8,803
Interest expense, net.................. (169) (310) (718) (2,588) (3,585) (2,677) (3,093)
Gain (loss) on sale of mall stores,
net(1)............................... -- 3,836 4,080 -- (2,500) (2,500) --
Other, net............................. 603 2,051(2) 148 221 126 -- --
-------- --------- --------- --------- --------- --------- ---------
Income before income taxes............. 12,588 19,814 15,900 15,270 6,116 276 5,710
Income taxes........................... 4,744 7,205 6,090 5,875 2,320 126 2,282
-------- --------- --------- --------- --------- --------- ---------
Net income............................. $ 7,844 $ 12,609 $ 9,810 $ 9,395 $ 3,796 $ 150 $ 3,428
======== ========= ========= ========= ========= ========= =========
Net income per common share............
======== ========= ========= ========= ========= ========= =========
Weighted average common shares
outstanding..........................
PERCENTAGE OF REVENUES AND OTHER DATA:
Gross profit........................... 36.5% 37.0% 37.5% 36.7% 36.9% 39.1% 38.5%
Operating income....................... 6.5% 6.5% 4.9% 5.9% 3.7% 2.4% 3.7%
Depreciation and Amortization(3)....... $ 12,797 $ 19,110 $ 21,560 $ 31,175 $ 32,967 $ 24,567 $ 25,168
Capital Expenditures................... $ 21,243 $ 30,247 $ 40,013 $ 48,358 $ 40,510 $ 32,037 $ 43,427
STORE DATA(1):
Number of stores:
Open at beginning of period.......... 83 82 91 102 108 108 111
Opened during period................. 8 13 13 9 4 3 6
Closed during period................. (9) (4) (2) (3) (1) (1) --
Open at end of period................ 82 91 102 108 111 110 117
Total selling square footage at end of
period............................... 855,964 1,118,049 1,452,945 1,719,867 1,831,657 1,801,129 2,007,205
Comparable store revenues
increase(4).......................... -- 17% 10% 4% 6% 7% 5%

15
17

OCTOBER 31, 1997
-------------------------
ACTUAL AS ADJUSTED(5)
-------- --------------

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

(2) 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) Stores open a minimum of 60 weeks.

(5) Adjusted to reflect the sale of the shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of
$ per share and application of the estimated net proceeds
therefrom as set forth in "Use of Proceeds."

16
18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

This Prospectus contains certain forward-looking statements within the
meaning of the federal securities laws. 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, and as a result
of the acquisition, the Company became an independent entity owned by the former
shareholders of Western. The Company continued to rely on Western for numerous
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
expensed an aggregate of $8.5 million of development costs 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-1980's, 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.

17
19

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.

STORE OPENING AND CLOSING DATA
------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----

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

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 the nine months ending October 31, 1997 were 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 of each videotape title based on 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 $9.96, 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. The Company
believes its expense allocation method is better at approximating the matching
of revenues to expenses than the methods used by its publicly traded
competitors.

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. 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.

18
20

RESULTS OF OPERATIONS

The following discussion of the Company's results of operations for fiscal
1994, 1995 and 1996 and for the nine months ended October 31, 1996 and October
31, 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.

NINE MONTHS
--------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----

Merchandise revenue........................ 77.4% 77.8% 77.7% 76.3% 78.1%
Video rental revenue....................... 22.6 22.2 22.3 23.7 21.9
----- ----- ----- ----- -----
Total revenues............................. 100.0 100.0 100.0 100.0 100.0
Merchandise cost of revenue................ 71.9 71.1 72.4 68.8 68.7
Video rental cost of revenue............... 30.1 35.9 30.8 35.5 35.7
Total cost of revenues..................... 62.5 63.3 63.1 60.9 61.5
----- ----- ----- ----- -----
Gross profit............................... 37.5 36.7 36.9 39.1 38.5
Selling, general & administrative
expenses................................. 31.6 29.9 32.4 35.8 34.8
Development expenses....................... 1.1 0.9 0.7 0.8 --
----- ----- ----- ----- -----
Operating income........................... 4.9 5.9 3.7 2.4 3.7
Other income (expense):
Interest expense, net...................... (0.3) (0.9) (1.1) (1.2) (1.3)
Gain (loss) on sale of mall stores, net.... 1.6 -- (0.8) (1.1) --
Other, net................................. 0.1 0.1 -- -- --
----- ----- ----- ----- -----
Income before income taxes................. 6.2 5.1 1.9 0.1 2.4
Income taxes............................... 2.4 2.0 0.7 -- 1.0
----- ----- ----- ----- -----
Net income................................. 3.8% 3.1% 1.2% 0.1% 1.4%
===== ===== ===== ===== =====

NINE MONTHS ENDED OCTOBER 31, 1997 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
1996

Revenues. Revenues for the nine months ended October 31, 1997 increased by
$16.6 million, or 7.4%, to $240.6 million from $224.0 million for the nine
months ended October 31, 1996. The revenue growth consisted of a 10.0% increase
in merchandise sales and a 0.8% decrease in video rental revenues. Overall
comparable store revenues increased 5% during the nine months ended October 31,
1997. Each significant merchandise category exhibited growth period to period,
with software products providing the largest percentage gains. Although rental
revenue performance trailed the prior period's revenue performance, video rental
revenues firmed during the nine months ended October 31, 1997, and revenues for
the three months ended October 31, 1997 outperformed the revenues from the
similar period in fiscal 1996. In addition, the Company opened six new
superstores during the nine months ended October 31, 1997.

Gross Profit. Gross profit as a percentage of revenues was 38.5% for the
nine months ended October 31, 1997 as compared to 39.1% for the same period in
fiscal 1996. Gross profit as a percentage of revenues for merchandise increased
slightly to 31.3% for the nine months ended October 31, 1997 from 31.2% for the
nine months ended October 31, 1996. Video rental gross profit as a percentage of
revenues of 64.5% in the nine months ended October 31, 1996 decreased to 64.3%
in the same period in fiscal 1997. The remaining change in gross profit as a
percent of revenues was a result of a slight increase in lower margin
merchandise sales as a percentage of overall revenue.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $80.3 million to $83.9 million and
decreased as a percentage of revenues to 34.8% in the nine months ended October
31, 1997 from 35.8% in the nine months ended October 31, 1996. Store operating
costs as a percentage of revenues declined during the nine months ended October
31, 1997 to 29.4% from 30.9% for the nine months ended October 31, 1996. During
the second quarter of fiscal 1997, the Company repriced certain stock options
granted to its Chief Executive Officer in fiscal 1992. The Company recognized a
one-time pre-

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tax charge of $1,016,800 as deferred compensation expense as a result of this
event. See "Management -- Option Grants, Exercises and Holdings."

Development Expenses. System development expenses for the nine months ended
October 31, 1996 were 0.8% of revenues. Development expenses were not separately
classified in the nine months ended October 31, 1997 as most significant
elements of the Company's 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 general and administrative classification.

Interest Expense. Interest expense increased to $3.1 million for the nine
months ended October 31, 1997 from $2.7 million for the nine months ended
October 31, 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 booked a total pre-tax gain of $7.9
million (after-tax gain of $4.9 million) in fiscal 1993 and fiscal 1994. Camelot
Music filed for bankruptcy protection 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."

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 increased to 36.9%
in fiscal 1996 from 36.7% in fiscal 1995. This improvement was primarily a
result of an increase in video rental gross margin in fiscal 1996 due primarily
to lower video depreciation and reduced video pilferage. 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.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $105.2 million in fiscal 1996 from $89.3
million in fiscal 1995 and increased as a percentage of revenues to 32.4% from
29.9% as the Company completed its first year of operating independently from
the support services provided by Anderson. 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 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. See "Risk Factors -- Supplier Relationships."

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.

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FISCAL 1995 COMPARED TO FISCAL 1994

Revenues. Revenues increased by $44.0 million, or 17.3%, to $298.9 million
in fiscal 1995 from $254.9 million in fiscal 1994. This revenue increase
consisted of a 17.8% increase in merchandise sales and a 15.4% increase in video
rental revenues. All sales product categories exhibited annual growth in excess
of 10%, with videotape sales providing the largest increase of 32.0%. Comparable
store revenues increased 4% in fiscal 1995, and the Company opened nine
superstores and closed three superstores during fiscal 1995.

Gross Profit. Gross profit as a percentage of revenues declined to 36.7% in
fiscal 1995 from 37.5% in fiscal 1994. The gross profit on merchandise sales
increased to 28.9% in fiscal 1995 from 28.1% in fiscal 1994. During the second
half of fiscal 1995, the Company was able to reduce the purchase price for its
products primarily as a result of the Company's use of its own recently
developed purchasing department. Prior to and including a portion of fiscal
1995, the Company purchased the majority of its products from various
distributors, including Anderson, at prices that were relatively higher than
prices for products purchased directly from manufacturers. Offsetting the lower
inventory purchase prices that the Company began to obtain during fiscal 1995
was the continuing downward pressure on music industry retail prices. The
Company's videotape rental gross profit also decreased to 64.1% in fiscal 1995
from 69.9% in fiscal 1994 due to higher initial stocking levels in new stores
than anticipated and decreased transfer opportunities for overstocked tapes
during fiscal 1995.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $89.3 million in fiscal 1995 from $80.5
million in fiscal 1994. These expenses as a percentage of revenues decreased to
29.9% in fiscal 1995 from 31.6% in fiscal 1994. Store expenses, which comprise
the majority of this category, declined to 26.1% of revenues in fiscal 1995 from
26.9% of revenues in fiscal 1994 as the Company controlled store expenses while
increasing revenues.

Development Expenses. Development expenses remained constant at $2.8
million for both fiscal 1995 and fiscal 1994. As a percentage of revenues,
development expenses declined to 0.9% in fiscal 1995 from 1.1% in fiscal 1994.
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.

Gain on Sale of Mall Stores. During fiscal 1994, the Company sold the
assets, primarily inventory and leasehold improvements and fixtures, related to
its remaining 16 mall stores. Proceeds from the sale were $8.7 million, and the
Company recognized a pre-tax gain of $4.1 million and an after-tax gain of $2.5
million.

Interest Expense. Interest expense increased to $2.6 million in fiscal 1995
from $0.7 million in fiscal 1994 due to higher average borrowing balances.

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
$14.7 million, $33.7 million, $28.9 million and $26.2 million for fiscal 1994,
fiscal 1995, fiscal 1996 and the nine months ended October 31, 1997,
respectively. Capital expenditures, including purchase of rental videotapes,
were $40.0 million, $48.4 million, $40.5 million and $43.4 million for fiscal
1994, fiscal 1995, fiscal 1996 and the nine months ended October 31, 1997,
respectively.

As of October 31, 1997, 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 October 31, 1997 under the Note
Agreement and the Revolving Credit Facility was $65.9 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
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23

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.

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 October 31,
1997 was 7.34% per annum. This facility terminates in April 1999. The Company
estimates that immediately prior to the completion of the Offering the
outstanding balance on the Revolving Credit Facility will be approximately $35.0
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.

At October 31, 1997, the Company had one other debt obligation totaling
$1.1 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 $1.7 million at October 31, 1997.

The Company has opened eight superstores through the fiscal year ended
January 31, 1998 and plans to open 12 additional superstores in fiscal 1998. The
Company invests generally between $1 million and $2 million in a new superstore
(net of vendor receivables) with the largest components of that amount being
merchandise, videos, fixtures and leasehold improvements. In addition, the
Company expanded eight superstores through the first nine months of 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 are estimated to be approximately $51.0 million in fiscal
1997, of which approximately $31.0 million will be used to purchase rental
videos. Approximately $43.4 million has been used for capital expenditures
during the nine months ended October 31, 1997, of which $21.8 million has been
used to purchase rental videos.

The Company believes that cash flow from operations, borrowings under the
Revolving Credit Facility and the net proceeds from this Offering will be
sufficient to fund the Company's ongoing operations, new superstores and
superstore expansions through fiscal 1999.

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 and Fluctuations in Operating
Results." The

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seasonality of the Company's business is illustrated in the following tables
relating to the first three quarters of fiscal 1997, fiscal 1996 and the fourth
quarter of fiscal 1995:

Q1 Q2 Q3 Q4
------- ------- ------- --------
(DOLLARS IN THOUSANDS)

FISCAL 1997:
Total revenues.............................. $78,436 $81,653 $80,521
Gross profit................................ 28,691 33,203 30,786
Operating income............................ 2,873 3,820 2,110
Operating income as a percentage of
revenues.................................. 3.7% 4.7% 2.6%
Net income.................................. 1,348 1,352 728
Net income as a percentage of revenues...... 1.7% 1.7% 0.9%
FISCAL 1996:
Total revenues.............................. $73,875 $76,391 $73,764 $100,261
Gross profit................................ 27,899 29,531 30,149 32,100
Operating income............................ 2,104 1,560 1,789 6,622
Operating income as a percentage of
revenues.................................. 2.8% 2.0% 2.4% 6.6%
Net income.................................. 833 (1,149) 466 3,646
Net income as a percentage of revenues...... 1.1% (1.5)% 0.6% 3.6%
FISCAL 1995:
Total revenues.............................. $ 94,243
Gross profit................................ 33,008
Operating income............................ 7,232
Operating income as a percentage of
revenues.................................. 7.7%
Net income.................................. 3,281
Net income as a percentage of revenues...... 3.5%

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 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.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) has issued several
Statements of Financial Accounting Standards (SFAS's) in 1997 that may impact
the Company's accounting treatment and/or its disclosure obligations. None of
these new standards are expected to have a material impact on the Company. The
new SFAS's impacting the Company are as follows:

SFAS No. 128, "Earnings Per Share" was issued in February 1997 and
supersedes Accounting Principles Board Opinion No. 15, "Earnings Per
Share." The new rules will replace primary and fully diluted earnings per
share with basic and diluted earnings per share. SFAS No. 128 is effective
for periods ending after December 15, 1997. Previously reported per share
amounts will be restated upon adoption.

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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.

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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 117 superstores averaging 20,700 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.

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 -- Dependence on Key Personnel." 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 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,

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27

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 Stores, Inc. ("Wal-Mart"), and as
a condition of the sale, the Company became a separate entity owned by the
former shareholders of Western. Following the sale, the Company continued to
depend on Western for all its 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 $73.9 billion, a compound annual growth
rate of 12.3%.

According to the Veronis, Suhler & Associates 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 -- Consumer
Spending."

BUSINESS STRATEGY

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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 20,700 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 40,000 book, 28,000
music, 1,000 software, 2,000 periodical and 6,000 videotape titles and 1,300
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.

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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 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. The Hastings Web site was selected as one of "The
Premier 100" Web sites by ComputerWorld Magazine for 1997. 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.

The following table sets forth the approximate amount of total Company
revenues contributed by each of the following product categories for the periods
presented:

NINE MONTHS
FISCAL YEAR ENDED
---------------------------------------------------------- OCTOBER 31,
1994 1995 1996 1997
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)

Merchandise Revenues:
Music....................... $ 97,585 38.3% $112,827 37.7% $119,474 36.8% $ 89,562 37.2%
Books....................... 64,658 25.4 76,684 25.7 85,404 26.3 63,358 26.3
Video....................... 16,280 6.4 21,488 7.2 23,420 7.2 15,873 6.6
Software.................... 8,845 3.4 10,767 3.6 13,465 4.2 12,314 5.1
Other....................... 9,943 3.9 10,697 3.6 10,171 3.2 6,862 2.9
-------- ----- -------- ----- -------- ----- -------- -----
Total Merchandise Revenue..... $197,311 77.4 $232,463 77.8 $251,934 77.7 $187,969 78.1
Video Rental Revenue.......... 57,603 22.6 66,449 22.2 72,357 22.3 52,641 21.9
-------- ----- -------- ----- -------- ----- -------- -----
Total Revenues................ $254,914 100.0% $298,912 100.0% $324,291 100.0% $240,610 100.0%

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

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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 40,000 current book titles in a variety of subject categories,
28,000 music titles in a broad range of music categories, 2,000 periodical
titles, 6,000 new and previously viewed videotape titles and 1,000 software
titles. Additionally, the typical Hastings superstore carries approximately
15,000 videotape and video game rental titles. The typical Hastings superstore
also offers approximately 1,300 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,
selected as one of "The Premier 100" Web sites by ComputerWorld Magazine for
1997, 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 -- Competition and Technological Obsolescence."

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 SCHEMATIC]

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

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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 20,700 square feet, which
typically includes retail selling space, receiving and stocking areas, an
associate break room and manager 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

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.

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

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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 while maintaining desired levels of
customer service by preventing overscheduling or underscheduling sales, stocking
and customer service associates.
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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:

NAME OF STATE NUMBER OF STORES
------------- ----------------

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

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.

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.

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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:

NUMBER OF STORES OPTIONS
---------------- -------

Fiscal Year 1998............................................ 10 7
Fiscal Year 1999............................................ 11 10
Fiscal Year 2000............................................ 15 13
Fiscal Year 2001............................................ 8 8
Fiscal Year 2002............................................ 18 16
Thereafter.................................................. 55 54
--- ---
Total....................................................... 117 108
=== ===

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 33,000 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 117
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 -- Supplier Relationships."

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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, 110 were employed at the Company's distribution center and 270 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 -- Competition and Technological Obsolescence."

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 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.
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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 October 31, 1997, 17 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. The Company established a reserve of $2.5
million during fiscal 1996, which management believes is adequate for any
amounts that may be payable by Hastings 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.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is information concerning the executive officers and
directors of the Company:

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

John H. Marmaduke(1)....................... 50 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........................... 48 Vice President of Store Operations
Michael Woods.............................. 36 Vice President of Information Systems
Timothy R. Hoelscher....................... 40 Vice President of Real Estate/Construction
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

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

(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

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37

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 24
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.

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.

TIMOTHY R. HOELSCHER has served as Vice President of Real
Estate/Construction of the Company since October 1992. From August 1991 to
October 1992, Mr. Hoelscher served as Director of Real Estate/Construction. From
June 1988 to August 1991, Mr. Hoelscher served as Director of Construction of
the Company. Prior to joining the Company, Mr. Hoelscher served as Manager of
Construction, Specialty Retail Division of Brown Group, Inc. Mr. Hoelscher has
over 20 years experience in retail store development.

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 of Texas, N.A., a position held since January 1991. Mr. Dallas has
served as an officer of NationsBank of Texas, N.A. and its predecessors,
Boatmen's First National Bank of Amarillo and The First National Bank of
Amarillo, since 1965.

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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,
Mozola, 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. 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.

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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.

LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION(1) --------------------
NAME AND ----------------------- NUMBER OF SECURITIES
PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS
------------------ ---------- ---------- --------------------

John H. Marmaduke............................. $156,991 $239,085 465,000(2)
Chairman of the Board, President and
Chief Executive Officer
Phillip Hill.................................. 97,355 108,727 110,000
Senior Vice President and
Chief Operating Officer
Dennis McGill................................. 91,748 83,835 50,000
Vice President of Finance, Chief Financial
Officer, Treasurer and Secretary
Robert A. Berman.............................. 86,550 27,752 55,000
Vice President of Store Operations
Michael Woods................................. 74,418 45,333 15,000
Vice President of Information Systems

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

(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 400,000 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 $11.20 for the term of the option.

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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.

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%
---------- --------------- --------- ---------- ---------- -----------

John H. Marmaduke.... 24,825 2.8% $15.18(6) 08/28/02 $ 104,115 $ 230,067
40,175 4.6% 13.80 08/28/07 348,669 883,595
400,000(5) 45.9% 11.20(5) 01/31/07 4,833,598 14,234,072
Phillip Hill......... 25,000 2.9% 13.80 05/22/07 216,969 549,841
35,000 4.0% 13.80 08/28/07 303,756 769,778
50,000 5.7% 14.20(7) 01/31/10 766,039 2,255,846
Dennis McGill........ 10,000 1.1% 13.80 05/22/07 86,787 219,936
20,000 2.3% 13.80 08/28/07 173,575 439,873
20,000 2.3% 14.20(7) 01/31/10 306,416 902,338
Robert A. Berman..... 30,000 3.4% 13.80 05/22/07 260,362 659,809
25,000 2.9% 14.20(7) 01/31/12 383,020 1,127,923
Michael Woods........ 15,000 1.7% 13.80 08/28/07 130,181 329,905

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

(1) The Company granted options to other associates to purchase an aggregate of
126,740 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
$11.20 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 -- Nine Months Ended October 31, 1997 Compared to Nine Months
Ended October 31, 1996."

(6) Option granted with exercise price of $15.18 or 10% above 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.

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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.

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

John H. Marmaduke................. 479,800 174,995 $1,495,130 $404,948
Phillip Hill...................... 48,420 173,980 335,728 168,432
Dennis McGill..................... 2,500 82,500 -- 31,500
Robert A. Berman.................. 0 55,000 -- 0
Michael Woods..................... 10,790 57,805 36,193 84,030

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 625,000 shares of Common Stock,
representing % 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 423,125 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.

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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
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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 500,000 shares of Common
Stock, each representing % 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, 478,400 of the shares
authorized for issuance under the 1991 Plan were subject to options and 478,525
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
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the ISO is granted, provided the ISO granted to any owner of 10% or more of the
total combined voting power 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
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participant's beneficiary in shares of the Company's Common Stock or cash at the
election of the participant. 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 400,000 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 400,000 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 $7.84 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 $11.20 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 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 October 31, 1997, 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.

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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 225,000 shares of Common Stock, representing
% 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 $25,000 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
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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.

DIRECTOR COMPENSATION

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 reimburses directors for all
expenses incurred in connection with their activities as directors. The Company
has adopted a Stock Option Plan for Outside Directors (the "Directors Option
Plan") for its non-employee directors and has reserved 100,000 shares of Common
Stock for issuance thereunder. The Directors Option Plan provides that each non-
employee director receives an initial option for 2,500 shares of Common Stock
upon election as a director, and an annual grant of 2,500 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 35,000 shares have been granted under the Directors
Option Plan. The Company also granted options covering 7,720 shares under a
previous director compensation plan that was terminated in fiscal 1997.

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, Mozola, Smith & Rowley, P.C. in Amarillo, Texas,
which has provided legal services to the Company since 1993.

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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.

Jeffrey G. Shrader, a director of the Company, is a shareholder in the law
firm of Sprouse, Mozola, Smith & Rowley, P.C., Amarillo, Texas, which has
provided legal services to the Company since 1993.

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 107,195 shares of Common Stock for $1,479,291 paid in cash. 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. If this Offering is consummated, the Redemption Agreement will
terminate.

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.

SHARES OWNED SHARES SHARES OWNED
BEFORE THE OFFERING TO BE SOLD AFTER THE OFFERING
---------------------- ---------- ----------------------
NAME AND ADDRESS(1) NUMBER PERCENT(2) NUMBER PERCENT(2)
------------------- --------- ---------- --------- ----------

John H. Marmaduke(3)(4)........ 4,555,670 54.5% -- (4) %
Estate of Sam Marmaduke(4)..... 1,351,785 16.2% %
P.O. Box 33251
Amarillo, Texas 79120
Robert Schneider(5)............ 581,495 7.1% -- 581,495 %
P.O. Box 32270
Amarillo, Texas 79120
Stephen S. Marmaduke(6)........ 1,432,495 17.1% -- 1,432,495 %
Phillip Hill................... 65,920 * -- 65,920 *
Dennis McGill.................. 9,340 * -- 9,340 *
Robert A. Berman............... 500 * -- 500 *
Mike Woods..................... 12,200 * -- 12,200 *
Leonard L. Berry............... 12,180 * -- 12,180 *
Peter A. Dallas................ 17,020 * -- 17,020 *
Gaines L. Godfrey.............. 20,500 * -- 20,500 *
Craig R. Lentzsch(7)........... 13,650 * -- 13,650 *
Jeffrey G. Shrader(8).......... 26,205 * -- 26,205 *
Ron G. Stegall(9).............. 7,850 * -- 7,850 *
All directors and executive
officers as a group (13
persons)(2).................. 6,173,530 73.8% -- %

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

* 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 8,366,465 shares of Common Stock outstanding prior to the Offering
and shares outstanding upon completion of the Offering.

(3) Includes 1,351,785 shares held by the Estate of Sam Marmaduke, of which John
H. Marmaduke is the Independent Executor, and 2,229,220 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, 54,485 shares held by Martha A. Marmaduke, Mr. John H.
Marmaduke's wife, 8,550 shares held by Margaret Hart Marmaduke, John H.
Marmaduke's daughter, 10,000 shares held by Owen M. Marmaduke, Mr.
Marmaduke's son, and 479,800 shares subject to stock options exercisable
within 60 days, and excludes shares held in trusts for John H. Marmaduke's
children of which NationsBank of Texas, 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 shares as a Selling
Shareholder in this Offering.

(5) Includes 30,000 shares held by trusts for the benefit of Mr. Schneider's
children for which Mr. Schneider is trustee, and excludes 11,900 shares held
by other trusts for the benefit of Mr. Schneider's children.

(6) Includes 1,365,670 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, 60,130 shares
held by Shelley R. Marmaduke, Stephen S. Marmaduke's wife, and 4,080 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 of Texas, 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.

(7) Includes 3,500 shares held by the Lentzsch Special Trust 1, of which Craig
R. Lentzsch is a co-trustee.

(8) Includes 19,625 shares held in an individual retirement account for the
benefit of Mr. Shrader and 3,050 shares held in a defined benefit plan for
the account of Mr. Shrader.

(9) Includes 7,000 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

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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 -- Control of the Company; Effect of Certain
Provisions in Articles of Incorporation and Bylaws." 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 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 -- Control of the Company; Effect of Certain Provisions in
Articles of Incorporation and Bylaws." 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, a majority of 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,
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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 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. An application has been made for the Common Stock to be listed on The
Nasdaq National Market under the symbol "HAST." 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 shares of
Common Stock outstanding ( 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
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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 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 1,819,160 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 ( shares immediately following this Offering) or
(ii) the average weekly trading volume of the Company's outstanding Common 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. The Company believes that
the earliest date on which any shares of its Common Stock currently outstanding
will be eligible for sale under Rule 144 is , 1998.

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 2,108,900 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.

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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:

NUMBER
UNDERWRITER OF SHARES
----------- ---------

Smith Barney Inc............................................
A.G. Edwards & Sons, Inc....................................

-----
Total.............................................
=====

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 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. and A.G. Edwards & Sons, Inc.
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
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 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

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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.

An application to list the Common Stock for quotation on The Nasdaq
National Market under the symbol "HAST" has been filed by the Company.

At the request of the Company, the Underwriters have reserved up to
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 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
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.

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EXPERTS

The financial statements of Hastings Entertainment, Inc. as of January 31,
1997 and 1996, and for each of the years in the three-year period ended January
31, 1997, have been included herein and elsewhere in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon authority of said firm
as experts in auditing and accounting.

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.

54
56

INDEX TO FINANCIAL STATEMENTS

PAGE
----

Independent Auditors' Report................................ F-2
Balance Sheets as of January 31, 1996 and 1997.............. F-3
Statements of Income for the years ended January 31, 1995,
1996 and 1997............................................. F-4
Statements of Shareholders' Equity for the years ended
January 31, 1995, 1996 and 1997........................... F-5
Statements of Cash Flows for the years ended January 31,
1995, 1996 and 1997....................................... F-6
Notes to Financial Statements............................... F-7
Balance Sheets as of October 31, 1996 and 1997
(unaudited)............................................... F-18
Statements of Income for the nine months ended October 31,
1996 and 1997 (unaudited)................................. F-19
Statements of Shareholders' Equity for the nine months ended
October 31, 1996 and 1997 (unaudited)..................... F-20
Statements of Cash Flows for the nine months ended October
31, 1996 and 1997 (unaudited)............................. F-21
Notes to Unaudited Financial Statements..................... F-22

F-1
57

WHEN THE TRANSACTION REFERRED TO IN NOTE 14 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, 1996 and 1997, and the related statements of income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended January 31, 1997. 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, 1996 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended January 31, 1997, in
conformity with generally accepted accounting principles.

Dallas, Texas
March 21, 1997, except as to note 14,
which is as of , 1998

F-2
58

HASTINGS ENTERTAINMENT, INC.

BALANCE SHEETS
JANUARY 31, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUES)

ASSETS
FISCAL
--------------------
1995 1996
-------- --------

Current assets:
Cash...................................................... $ 2,738 $ 4,972
Merchandise inventories (note 2).......................... 94,602 105,185
Other current assets...................................... 4,392 3,396
-------- --------
Total current assets.............................. 101,732 113,553
Property and equipment, net (note 3)........................ 63,684 67,165
Deferred income taxes (note 6).............................. 1,013 976
Other assets................................................ 798 27
-------- --------
$167,227 $181,721
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capitalized lease
obligations
(notes 4 and 5)........................................ $ 1,295 $ 301
Trade accounts payable.................................... 43,748 41,388
Accrued expenses and other liabilities (notes 5 and 12)... 11,438 11,120
Deferred income taxes (note 6)............................ 2,454 3,158
Income taxes payable...................................... 2,066 113
-------- --------
Total current liabilities......................... 61,001 56,080
Long-term debt and capitalized lease obligations, excluding
current maturities (notes 4 and 5)........................ 37,621 51,572
Other long-term liability (note 12)......................... -- 1,500
Redemption value of common stock held by estate of Company's
founder (note 9).......................................... 11,500 9,500
Shareholders' equity (notes 9 and 14):
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value; 75,000,000 shares
authorized; 8,552,000 shares issued.................... 86 86
Additional paid-in capital................................ 1,482 1,585
Retained earnings......................................... 68,064 71,721
Treasury stock, stated at cost............................ (1,027) (823)
Redemption value of common stock held by estate of
Company's founder...................................... (11,500) (9,500)
-------- --------
57,105 63,069
Commitments and contingencies (notes 5, 9, 11, 12 and 13)
-------- --------
$167,227 $181,721
======== ========

See accompanying notes to financial statements.

F-3
59

HASTINGS ENTERTAINMENT, INC.

STATEMENTS OF INCOME
YEARS ENDED JANUARY 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

FOR THE FISCAL YEAR
--------------------------------------
1994 1995 1996
---------- ---------- ----------

Merchandise revenue..................................... $ 197,311 $ 232,463 $ 251,934
Video rental revenue.................................... 57,603 66,449 72,357
---------- ---------- ----------
Total revenues................................ 254,914 298,912 324,291
Cost of revenues (note 8)............................... 159,233 189,159 204,612
---------- ---------- ----------
Gross profit.................................. 95,681 109,753 119,679
---------- ---------- ----------
Selling, general and administrative expenses............ 80,480 89,325 105,183
Development expenses (note 8)........................... 2,811 2,791 2,421
---------- ---------- ----------
83,291 92,116 107,604
---------- ---------- ----------
Operating income.............................. 12,390 17,637 12,075
---------- ---------- ----------
Other income (expenses):
Interest expense...................................... (718) (2,588) (3,585)
Gain (loss) on sale of mall stores (note 12).......... 4,080 -- (2,500)
Other, net............................................ 148 221 126
---------- ---------- ----------
3,510 (2,367) (5,959)
---------- ---------- ----------
Income before income taxes.................... 15,900 15,270 6,116
Income taxes (note 6)................................... 6,090 5,875 2,320
---------- ---------- ----------
Net income.................................... $ 9,810 $ 9,395 $ 3,796
========== ========== ==========
Net income per common share............................. $ 1.17 $ 1.11 $ .45
========== ========== ==========
Weighted average common shares outstanding.............. 8,378,245 8,429,165 8,452,190
========== ========== ==========

See accompanying notes to financial statements.

F-4
60

HASTINGS ENTERTAINMENT, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

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

Balances at January 31, 1994... 8,552,000 $ 9 $1,334 $49,085 186,985 $(1,541) $(15,500) $33,387
Purchase of treasury stock..... -- -- -- -- 3,750 (39) -- (39)
Sale of treasury stock
including stock option
exercises.................... -- -- 139 -- (65,335) 541 -- 680
Change in redemption value..... -- -- -- -- -- -- 2,000 2,000
Dividends ($.012 per share).... -- -- -- (105) -- -- -- (105)
Net income..................... -- -- -- 9,810 -- -- -- 9,810
Change in common stock
par value.................... -- 77 (77) -- -- -- -- --
--------- --- ------ ------- ------- ------- -------- -------
Balances at January 31, 1995... 8,552,000 86 1,396 58,790 125,400 (1,039) (13,500) 45,733
Purchase of treasury stock..... -- -- -- -- 15,535 (186) -- (186)
Sale of treasury stock
including stock option
exercises.................... -- -- 86 -- (23,130) 198 -- 284
Change in redemption value..... -- -- -- -- -- -- 2,000 2,000
Dividends ($.014 per share).... -- -- -- (121) -- -- -- (121)
Net income..................... -- -- -- 9,395 -- -- -- 9,395
--------- --- ------ ------- ------- ------- -------- -------
Balances at January 31, 1996... 8,552,000 86 1,482 68,064 117,805 (1,027) (11,500) 57,105
Sale of treasury stock
including stock option
exercises.................... -- -- 103 -- (23,440) 204 -- 307
Change in redemption value..... -- -- -- -- -- -- 2,000 2,000
Dividends ($.017 per share).... -- -- -- (139) -- -- -- (139)
Net income..................... -- -- -- 3,796 -- -- -- 3,796
--------- --- ------ ------- ------- ------- -------- -------
Balances at January 31, 1997... 8,552,000 $86 $1,585 $71,721 94,365 $ (823) $ (9,500) $63,069
========= === ====== ======= ======= ======= ======== =======

See accompanying notes to financial statements.

F-5
61

HASTINGS ENTERTAINMENT, INC.

STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)

FOR THE FISCAL YEAR
--------------------------------
1994 1995 1996
-------- -------- --------

Cash flows from operating activities:
Net income............................................... $ 9,810 $ 9,395 $ 3,796
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization......................... 19,397 23,661 24,939
(Gain) loss on sale of mall stores, net............... (4,080) -- 2,500
Loss on transfer of rental videos and disposal of
assets.............................................. 2,163 7,514 8,028
Deferred income tax expense (benefit)................. (563) 1,149 741
Changes in operating assets and liabilities:
Merchandise inventories............................. (17,284) (18,183) (6,521)
Other current assets................................ (1,009) (353) 996
Trade accounts payable and accrued expenses......... 6,899 9,782 (3,678)
Income taxes payable................................ (590) 726 (1,953)
-------- -------- --------
Net cash provided by operations.................. 14,743 33,691 28,848
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment...................... (40,013) (48,358) (40,510)
Proceeds from sales of stores............................ 8,689 -- --
(Increase) decrease in other assets...................... (260) (93) 771
-------- -------- --------
Net cash used in investing activities............ (31,584) (48,451) (39,739)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit
facility.............................................. (5,500) 4,450 (11,750)
Advances under long-term debt and capital lease
obligations........................................... 21,200 11,600 25,000
Principal payments under long-term debt and capital lease
obligations........................................... (121) (174) (293)
Payments of dividends.................................... (105) (121) (139)
Purchase of treasury stock............................... (39) (186) --
Proceeds from sale of treasury stock..................... 680 284 307
-------- -------- --------
Net cash provided by financing activities........ 16,115 15,853 13,125
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (726) 1,093 2,234
Cash and cash equivalents at beginning of year............. 2,371 1,645 2,738
-------- -------- --------
Cash at end of year........................................ $ 1,645 $ 2,738 $ 4,972
======== ======== ========

See accompanying notes to financial statements.

F-6
62

HASTINGS ENTERTAINMENT, INC.

NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1996 AND 1997

(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) General

Hastings Entertainment, Inc. (the "Company") operates a chain of retail
stores located in 15 states, primarily in the southwestern and Rocky Mountain
portions of the United States, with revenues originating primarily from music,
book 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, 1995, 1995 and 1997 are
referred to as fiscal 1994, 1995 and 1996, respectively.

(b) 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.

Merchandise inventories (music, books and videos) have been restated for
all periods presented and are recorded at the lower of cost (using 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.

(d) 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.

(e) 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 12 months. The Company
initially depreciates the video cost using the straight line method over an 18
month period. After an introductory rental period, 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.

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 $.10, respectively.

The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of, on

F-7
63
HASTINGS ENTERTAINMENT, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

February 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed 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. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.

(f) 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.

(g) Financial Instruments

All financial instruments held by the Company have been stated at values
which approximate fair value as of January 31, 1996 and 1997 due to the
instruments bearing interest at market rates.

(h) 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.

(i) 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. Since the Company grants substantially all
stock options with an exercise price equal to or greater than the current market
price of the stock on the grant date, compensation expense recorded is
immaterial. 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 not to adopt the recognition provision of SFAS
123 and will continue to account for stock-based compensation under APB 25.

(j) Advertising Costs

Advertising costs for newspaper, television and other media are expensed as
incurred.

F-8
64
HASTINGS ENTERTAINMENT, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(k) Net Income Per Share

Net income per share is computed on the basis of the weighted average
number of common shares outstanding during the period. The effect of stock
options on the computation of net income per share was not material.

(l) 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):

1995 1996
------- --------

Merchandise inventories at standard cost, which approximates
FIFO:
Music..................................................... $36,019 $ 39,538
Books..................................................... 35,317 40,785
Videos.................................................... 10,315 10,408
Other..................................................... 13,281 18,354
------- --------
94,932 109,085
Less allowance for inventory returns and shrinkage.......... 330 3,900
------- --------
$94,602 $105,185
======= ========

During fiscal 1995 and 1996, the Company purchased approximately 47% and
32%, respectively, of all products (defined herein as merchandise inventories
and rental videos) from three independent suppliers. During fiscal 1994 and
1995, the Company purchased approximately 59% and 18%, respectively, of all
products from Anderson Merchandisers, Inc. ("Anderson"), an affiliate of the
Company. During fiscal 1996, the Company had nominal purchases from Anderson.

Merchandise inventories that are not sold can normally be returned to the
suppliers. In the 1996 fourth quarter, the Company recorded a loss 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 $3.5
million reserve is included in the allowance for inventory returns and shrinkage
at January 31, 1997. 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.

F-9
65
HASTINGS ENTERTAINMENT, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(3) PROPERTY AND EQUIPMENT

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

1995 1996
------- --------

Rental videos............................................... $51,759 $ 57,940
Furniture and equipment..................................... 42,258 49,257
Leasehold improvements...................................... 26,810 28,983
Property under capital lease................................ 1,948 1,948
------- --------
122,775 138,128
Less accumulated depreciation and amortization.............. (59,091) (70,963)
------- --------
$63,684 $ 67,165
======= ========

(4) LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS

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

1995 1996
------- -------

Revolving credit facility................................... $25,650 $23,900
Term note................................................... 10,000 --
Series A senior notes....................................... -- 25,000
Capitalized lease obligations (note 5)...................... 1,779 1,714
Other....................................................... 1,487 1,259
------- -------
38,916 51,873
Less current maturities..................................... 1,295 301
------- -------
$37,621 $51,572
======= =======

During fiscal 1994, the Company entered into an unsecured credit agreement
with a group of banks which provides for a $30 million revolving credit facility
and a $10 million term note. During fiscal 1995, the unsecured credit agreement
was amended to provide an additional $10 million seasonal credit facility.
During fiscal 1996, the unsecured credit agreement was amended to permanently
increase the revolving credit facility to $45 million. The revolving credit
facility bears interest at variable rates based on the lender's base rate and
LIBOR (7.4% and 7.2% at January 31, 1996 and 1997, respectively) and expires on
April 30, 1999. The seasonal credit facility and the term note, which was repaid
in June 1996, expired during fiscal 1996.

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 Company selectively uses off-balance-sheet derivative instruments to
manage its interest rate risk. On June 16, 1995, the Company entered into 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,
1997, taking into consideration current interest rates and assuming the
creditworthiness of the counterparties. The fair value of the agreement at
January 31, 1997 was immaterial.

F-10
66
HASTINGS ENTERTAINMENT, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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 effective
interest rate of 7.53%. 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 1996 are as follows:

1997........................................................ $ 301
1998........................................................ 321
1999........................................................ 29,241
2000........................................................ 5,354
2001........................................................ 5,370
Thereafter.................................................. 11,286
-------
$51,873
=======

(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):

1994 1995 1996
------ ------- -------

Minimum rentals........................................ $8,149 $10,032 $10,941
Contingent rentals..................................... 1,840 1,655 1,643
------ ------- -------
Rental expense............................... $9,989 $11,687 $12,584
====== ======= =======

F-11
67
HASTINGS ENTERTAINMENT, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum lease payments under noncancellable operating leases,
excluding certain leases assumed by another party in February 1994 (see note
12), and the present value of future minimum capital lease payments as of
January 31, 1997 are (dollars in thousands):

CAPITAL OPERATING
LEASES LEASES
------- ---------

1998........................................................ $ 233 $10,706
1999........................................................ 241 10,549
2000........................................................ 251 9,925
2001........................................................ 254 8,675
2002........................................................ 256 7,277
Thereafter.................................................. 1,497 14,342
------ -------
Total minimum lease payments...................... 2,732 $61,474
=======
Less amount representing imputed interest................... 1,018
------
Total obligations under capital leases............ 1,714
Less current principal maturities of capital lease
obligations............................................... 73
------
Obligations under capital leases, excluding
current maturities.............................. $1,641
======

During fiscal 1994, the Company relocated or committed to relocate from
eight existing store leases for which the property will no longer be used by the
Company. Six of the eight store leases still remain in effect. During fiscal
1996, the Company relocated from one existing store lease for which the property
will no longer be used by the Company. Included in accrued expenses and other
liabilities is $1.2 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 1994, 1995 and 1996, the Company made lease
payments of $443,998, $479,392 and $480,019, respectively, to these
partnerships.

(6) INCOME TAXES

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

1994 1995 1996
------ ------ ------

Current federal.......................................... $5,541 $3,967 $1,566
Current state and local.................................. 1,112 759 13
Deferred federal......................................... (345) 1,014 281
Deferred state and local................................. (218) 135 460
------ ------ ------
$6,090 $5,875 $2,320
====== ====== ======

The difference between expected income tax expense (computed by applying
the statutory rate of 35% for fiscal 1994 and 1995 and 34% for fiscal 1996 to
earnings before income taxes) and actual income tax expense is as follows
(dollars in thousands):

1994 1995 1996
------ ------ ------

Computed "expected" tax expense.......................... $5,565 $5,345 $2,079
State and local income taxes, net of federal income tax
benefit................................................ 595 571 228
Other.................................................... (70) (41) 13
------ ------ ------
$6,090 $5,875 $2,320
====== ====== ======

F-12
68
HASTINGS ENTERTAINMENT, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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):

1995 1996
------- -------

Deferred tax assets:
Provision for merchandise return costs.................... $ -- $ 1,178
Provision for contingent lease costs...................... -- 922
Alternative minimum tax carryforward...................... -- 905
Provision for abandoned leases............................ 533 459
Provision for deferred rent............................... 292 426
Compensated absences...................................... 191 208
Other..................................................... 397 390
------- -------
Total deferred tax assets......................... 1,413 4,488
Deferred tax liabilities:
Inventories, principally due to the measurement of cost
using LIFO for income tax purposes..................... 2,230 4,656
Freight costs............................................. 546 674
Property and equipment, principally due to different
depreciation methods for financial reporting and income
tax purposes........................................... 78 1,340
------- -------
Total deferred tax liabilities.................... 2,854 6,670
------- -------
Net deferred tax assets (liabilities)............. $(1,441) $(2,182)
======= =======

The Company did not record a valuation allowance for deferred tax assets at
January 31, 1996 or 1997. 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, 1997.

At January 31, 1997, the Company has an alternative minimum tax
carryforward for federal income tax purposes of $0.9 million which is available
indefinitely to offset future regular federal taxable income.

(7) PROFIT SHARING PLAN

Employees who have attained age 21 and completed one year of service 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 those employees who are participating in the plan.
Amounts expensed related to the plan were $0.6 million, $0.4 million and $0.6
million during fiscal 1994, 1995 and 1996, respectively.

(8) TRANSACTIONS WITH FORMER AFFILIATE

The Company had a Branch Support Service Agreement ("Agreement") with
Anderson which, among other things, provided that Anderson would supply to the
Company products for retail sale or rental and would provide services for
accounting, management information systems, advertising, printing, and other
services reasonably necessary for the performance of the Company's operations.

The Agreement was terminated on January 31, 1996. Prior to the termination
of the Agreement, the Company began the development of various systems to assist
in its efforts to become independent of Anderson. Development expenses included
in the accompanying statements of income include costs to develop various
information and other systems for buying, distribution, finance, inventory and
store operations.

F-13
69
HASTINGS ENTERTAINMENT, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(9) SHAREHOLDERS' EQUITY

During fiscal 1994, the Company changed the par value of its common shares
from $.001 to $.01 and increased the number of authorized shares from 5,000,000
to 20,000,000. In addition, 5,000,000 shares of preferred stock were authorized.
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 500,000 shares may be
granted under each of the 1991 and 1994 Stock Option Plans, and 625,000 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 fair market value 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 includes fixed annual increases.

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 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 400,000
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.
These options may be exercised in fiscal 1997 at an exercise price of $13.82.
The exercise price of the options increases 12% in each fiscal year through
fiscal 2001 and remains fixed thereafter.

In fiscal 1996, the Company adopted the management stock purchase plan that
authorizes the issuance of up to 225,000 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, 1997, no RSU's
have been awarded under the Plan.

F-14
70
HASTINGS ENTERTAINMENT, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------

Outstanding at January 31, 1994.......................... 811,505 $ 9.61
Granted................................................ 193,565 10.33
Exercised.............................................. (335) 0.20
--------- ------
Outstanding at January 31, 1995.......................... 1,004,735 9.76
Granted................................................ 397,435 17.51
Exercised.............................................. (1,085) 0.20
Forfeited.............................................. (72,150) 7.18
--------- ------
Outstanding at January 31, 1996.......................... 1,328,935 12.22
Granted................................................ 214,720 13.86
Exercised.............................................. (6,350) 10.21
Forfeited.............................................. (23,500) 10.97
--------- ------
Outstanding at January 31, 1997.......................... 1,513,805 $12.48
========= ======
Exercisable at January 31, 1997........................ 199,390 7.40
Reserved and available for grant at January 31, 1997... 417,645

At January 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $.20 to $24.48 and seven
years, respectively.

The Company applies APB 25 in accounting for its Plans. Since the Company
grants substantially all stock options with an exercise price equal to or
greater than the current market price of the stock on the grant date,
compensation expense recorded is not significant. Had the Company determined
compensation cost based on the minimum value at the date of grant for its stock
options under SFAS 123, the Company's net income and net income per share would
not have been materially different. The calculation of the effect on net income
includes only options granted during fiscal 1995 and 1996. 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:

EXERCISE PRICE MINIMUM VALUE
---------------- --------------
1995 1996 1995 1996
------ ------ ----- -----

Options granted at market price................... $12.40 $14.20 $5.86 $6.96
Options granted at prices exceeding market........ 24.48 -- 0.27 --
Total options granted............................. 17.32 14.20 3.58 6.96

The following assumptions were used in the calculation:

1995 1996
---- ----

Expected dividend yield..................................... -- --
Risk-free interest rate..................................... 6.43% 6.68%
Expected life in years...................................... 10 10

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

F-15
71
HASTINGS ENTERTAINMENT, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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 $0.2 million, $0.3 million and $0.2 million were made in the
accompanying financial statements for 1994, 1995 and 1996, respectively. Common
shares allocated to the ASOP were 38,970, 60,405 and 77,495 at January 31, 1995,
1996 and 1997, 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
1997 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, as
amended, and could be reduced based upon the resolution of certain pending
matters between the Internal Revenue Service and the estate of the Company's
founder. As of January 31, 1997, the Company has not acquired any shares
pursuant to this agreement.

(10) SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for interest during fiscal 1994, 1995 and 1996, totaled $0.7
million, $2.5 million and $3.3 million, respectively. Cash payments for income
taxes during fiscal 1994, 1995 and 1996 totaled $5.8 million, $4.0 million, $3.6
million, respectively.

Noncash investing activities during fiscal 1994, 1995 and 1996 include the
transfer of videos with a depreciated cost of $1.9 million, $4.4 million and
$4.1 million, respectively, from property and equipment to merchandise
inventory.

(11) 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 paid have been accrued in the accompanying
financial statements. Health insurance expense during fiscal 1994, 1995 and 1996
were $0.7 million, $0.5 million and $1.0 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 paid have
been accrued in the accompanying financial statements. Workers' compensation
expense during fiscal 1994, 1995 and 1996 was $0.3 million, $0.5 million and
$0.6 million, respectively.

(12) 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. At January 31, 1997,
the Company was contingently liable on 19 of the original 42 store leases. In
August 1996, Camelot filed for protection from creditors under the federal
bankruptcy code. The Company has been named in suits by lessors alleging that
Camelot has defaulted on certain of its obligations under these leases. In 1996,
the Company recorded a loss reserve of $2.5 million for the future lease
obligations of these stores. At January 31, 1997, current accrued liabilities
and other long-term liability include $0.9 million and $1.5 million,
respectively, for these obligations. Because the ultimate liability is
dependent, in part, on the
F-16
72
HASTINGS ENTERTAINMENT, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

rulings of the bankruptcy court and the Company's ability to sublease the
stores, it is reasonably possible that the Company's estimate of the liability
may change in the near term.

(13) LEGAL PROCEEDINGS

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.

(14) SUBSEQUENT EVENTS

The Company effected a five for one stock split on , 1998, the
effects of which have been retroactively applied to the financial statements.

In July 1997 and January 1998, the Company amended the option of the Chief
Executive Officer to acquire 400,000 shares of common stock. The exercise price
of these options has been reduced to $11.20 and the fixed annual increases in
the exercise price have been eliminated. The Company also eliminated the fixed
annual increases of the exercise prices of options issued to certain executive
officers under the Company's stock plans.

F-17
73

HASTINGS ENTERTAINMENT, INC.

BALANCE SHEETS
OCTOBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUES)
UNAUDITED

ASSETS

FISCAL
--------------------
1996 1997
-------- --------

Current Assets:
Cash...................................................... $ 276 $ 3,146
Merchandise inventories................................... 110,988 126,994
Income Taxes Receivable................................... 939 349
Other current assets...................................... 2,613 2,377
-------- --------
Total current assets.............................. 114,816 132,866
Property and equipment, net................................. 67,912 80,983
Deferred income taxes....................................... 1,590 975
Other assets................................................ 864 30
-------- --------
$185,182 $214,854
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
Current maturities of long-term debt and capitalized lease
obligations............................................ $ 1,296 $ 302
Trade accounts payable.................................... 43,199 48,957
Accrued expenses and other liabilities.................... 13,853 18,012
Deferred income taxes..................................... 322 3,158
-------- --------
Total current liabilities......................... 58,670 70,429
Long term debt and capitalized lease obligations, excluding
current maturities........................................ 56,112 68,344
Other long-term liability................................... 1,500 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; 8,552,000 shares issued.................... 86 86
Additional paid-in capital................................ 1,576 1,656
Retained earnings......................................... 68,112 75,040
Treasury stock............................................ (874) (2,201)
Redemption value of common stock held by estate of
Company's founder...................................... (9,500) (8,000)
-------- --------
Total shareholders' equity........................ 59,400 66,581
-------- --------
$185,182 $214,854
======== ========

See accompanying notes to financial statements.

F-18
74

HASTINGS ENTERTAINMENT, INC.

STATEMENTS OF INCOME
NINE MONTHS ENDED OCTOBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED

FOR THE FISCAL NINE MONTHS
--------------------------
1996 1997
----------- -----------

Merchandise revenue......................................... $170,940 $187,969
Video rental revenue........................................ 53,090 52,641
-------- --------
Total revenues.................................... 224,030 240,610
Cost of revenues............................................ 136,451 147,930
-------- --------
Gross Profit...................................... 87,579 92,680
Selling, general and administrative expenses................ 80,260 83,877
Development expenses........................................ 1,866 --
-------- --------
82,126 83,877
-------- --------
Operating income.................................. 5,453 8,803
Other income (expenses):
Interest expense.......................................... (2,677) (3,093)
Loss on sale of mall stores............................... (2,500) --
-------- --------
(5,177) (3,093)
-------- --------
Income before income taxes............................. 276 5,710
Income taxes................................................ 126 2,282
-------- --------
Net income........................................ $ 150 $ 3,428
======== ========
Net income per common share................................. $ $
======== ========
Weighted average common shares outstanding..................

See accompanying notes to financial statements.

F-19
75

HASTINGS ENTERTAINMENT, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED OCTOBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED

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

Balances at January 31,
1996..................... 8,552,000 $86 $1,482 $68,064 117,805 $(1,027) $(11,500) $57,105
Sale of treasury stock,
including stock option
exercises................ -- -- 94 -- (17,590) 153 -- 247
Dividends ($.012 per
share)................... -- -- -- (102) -- -- (102)
Net income................. -- -- -- 150 -- -- 150
Change in redemption
value.................... -- -- -- -- -- 2,000 2,000
--------- --- ------ ------- -------- ------- -------- -------
Balances at October 31,
1996..................... 8,552,000 $86 $1,576 $68,112 100,215 $ (874) $ (9,500) $59,400
========= === ====== ======= ======== ======= ======== =======

Balances at January 31,
1997..................... 8,552,000 $86 $1,585 $71,721 94,365 $ (823) $ (9,500) $63,069
Purchase of treasury
stock.................... -- -- -- -- 13,160 (168) -- (168)
Sale of treasury stock,
including stock option
exercises................ -- -- 71 -- (29,005) 290 -- 361
Dividends ($.013 per
share)................... -- -- -- (109) -- -- (109)
Net income................. -- -- -- 3,428 -- -- 3,428
Redemption of common stock
held by estate........... -- -- -- -- 107,195 (1,500) 1,500 --
--------- --- ------ ------- -------- ------- -------- -------
Balances at October 31,
1997..................... 8,552,000 $86 $1,656 $75,040 185,715 $(2,201) $ (8,000) $66,581
========= === ====== ======= ======== ======= ======== =======

See accompanying notes to financial statements.

F-20
76

HASTINGS ENTERTAINMENT, INC.

STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS)
UNAUDITED

FOR THE FISCAL NINE MONTHS
--------------------------------------
1996 1997
----------------- -----------------

Cash flows from operating activities:
Net income.............................................. $ 150 $ 3,428
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization........................... 18,866 20,515
Loss on sale of mall stores............................. 2,500 --
Deferred tax benefit.................................... (2,709) --
Loss on transfer of rental videos and disposal of
assets............................................... 5,701 4,653
Changes in operating assets and liabilities:
Merchandise inventories.............................. (13,144) (17,367)
Other current assets................................. 1,779 1,019
Trade accounts payable, accrued expenses and other
liabilities........................................ 866 14,461
Income taxes payable................................. (3,005) (462)
-------- --------
Net cash provided by operations................. 11,004 26,247
-------- --------
Cash flows from investing activities:
Purchases of property and equipment..................... (32,037) (43,427)
Increase in other assets................................ (66) (3)
-------- --------
Net cash used in investing activities........... (32,103) (43,430)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit
facility............................................. (6,300) 17,000
Advances under long term debt and capital lease
obligations.......................................... 25,000 --
Principal payments under long term debt and capital
lease obligations.................................... (208) (227)
Payment of dividends.................................... (102) (109)
Purchase of treasury stock.............................. -- (168)
Proceeds from sale of treasury stock.................... 247 361
Redemption of common stock held by estate of Company's
founder.............................................. -- (1,500)
-------- --------
Net cash provided by financing activities....... 18,637 15,357
-------- --------
Net increase (decrease) in cash........................... (2,462) (1,826)
Cash at beginning of period............................... 2,738 4,972
-------- --------
Cash at end of period..................................... $ 276 $ 3,146
======== ========

See accompanying notes to financial statements.

F-21
77

HASTINGS ENTERTAINMENT, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1997

The accompanying unaudited financial statements of Hastings Entertainment,
Inc. as of October 31, 1996 and 1997 and for the nine months ended October 31,
1996 and October 31, 1997 have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission ("SEC") and do not include
all of the information and footnotes required by generally accounting principles
for a complete presentation of financial statements.

In the opinion of management, all adjustments considered necessary for a
fair presentation of the results of the interim periods have been included.
Operating results for any interim period are not necessarily indicative of the
results that may be expected for the entire fiscal year. The Company's business
is heavily dependent on fourth quarter revenues. Historically, the fourth
quarter has accounted for a significantly disproportionate share of the
Company's revenues and earnings. These statements should be read in conjunction
with the financial statements and notes thereto as of January 31, 1997 and for
the three years ended January 31, 1997.

The Company effected a five for one stock split on , 1998, the
effects of which have been retroactively applied to the financial statements.

In July 1997 and January 1998, the Company amended the option of the Chief
Executive Officer to acquire 400,000 shares of common stock. The exercise price
of these options has been reduced to $11.20 and the fixed annual increases in
the exercise price have been eliminated. The Company recorded a charge of $.6
million (net of income tax benefit of $.4 million) related to the July 1997
amendment. The Company also eliminated the fixed annual increases of the
exercise prices of options issued to certain executive officers under the
Company's stock plans.

Cash payments for interest during the nine months ended October 31, 1996
and October 31, 1997 totaled $2.7 million and $3.1 million respectively. Cash
payments for income tax during the nine months ended October 31, 1996 and
October 31, 1997 totaled $3.2 million and $.2 million, respectively.

Noncash investing activities during the nine months ended October 31, 1996
and October 31, 1997 include the transfer of videos with a depreciated cost of
$3.2 million and $4.4 million, respectively, from property and equipment to
merchandise inventory.

F-22
78

SCRIPT OF CD-ROM TO BE ATTACHED TO INSIDE BACK COVER PAGE OF PROSPECTUS
[TO BE PROVIDED SUPPLEMENTALLY.]
79

[CD-ROM SLEEVE]

[STORE SCHEMATIC; INTERIOR/EXTERIOR PHOTOGRAPHS OF STORE; PHOTOGRAPHS OF
PRODUCT/ARTISTS; AND/OR MAP OF STORE LOCATIONS]
80

======================================================

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

PAGE
----

Prospectus Summary....................
Risk Factors..........................
Use of Proceeds.......................
Dividend Policy.......................
Dilution..............................
Capitalization........................
Selected Financial Data...............
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................
Business..............................
Management............................
Certain Transactions..................
Principal Shareholders and Selling
Shareholder.........................
Description of Capital Stock..........
Shares Eligible for Future Sale.......
Underwriting..........................
Legal Matters.........................
Experts...............................
Available Information.................
Index to Financial Statements.........

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.

======================================================
======================================================

HASTINGS ENTERTAINMENT, INC.

COMMON STOCK
[Issuer's Logotype]
------------
PROSPECTUS
, 1998

------------
SALOMON SMITH BARNEY

A.G. EDWARDS & SONS, INC.

======================================================
81

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:

SEC Registration Fee........................................ $ *
NASD Filing Fee............................................. *
Nasdaq National Market Listing Fee.......................... *
Transfer Agent and Registrar Fees........................... *
Blue Sky Fees (including counsel fees)...................... *
Accountants' Services and Expenses.......................... *
Legal Services.............................................. *
Printing and Engraving Fees................................. *
Miscellaneous............................................... *
-------
TOTAL............................................. $
=======

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

* 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
82

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
83

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 five-for-one split of the Company's Common Stock effected
immediately prior to the Offering.

NUMBER OF PRICE PER AGGREGATE
PURCHASER/TRANSFEREE DATE OF TRANSACTION SHARES SHARE PRICE
-------------------- ------------------- --------- --------- -----------

Jeffrey G. Shrader...................... June 27, 1995 2,175 $12.40 $ 26,970.00
ASOP(1)................................. October 12, 1995 15,455 12.40 191,642.00
Owen Marmaduke.......................... November 1, 1995 2,415 12.40 29,946.00
Samuel Marmaduke........................ November 1, 1995 2,015 12.40 24,986.00
Jeffrey G. Shrader(2)................... January 31, 1996 660 .20 132.00
Roxanne Conant-Spradlin(3).............. May 15, 1996 500 10.40 5,200.00
ASOP(1)................................. July 19, 1996 17,090 14.20 242,678.00
Kelly Wood(4)........................... October 21, 1996 7,740 14.20 109,908.00
Marilyn McCrary Wilson(4)............... November 27, 1996 1,335 14.20 18,957.00
Howard Miller(3)........................ December 16, 1996 350 7.00 2,450.00
Sherry Scoggins(4)...................... January 8, 1997 5 14.20 71.00
Theresa Rooney(4)....................... January 8, 1997 65 14.20 923.00
Jeffrey D. Sumpter(3)................... January 14, 1997 500 10.40 5,200.00
Walter McNeer........................... January 30, 1997 5,000 10.40 52,000.00
Marilyn Foos(3)......................... February 4, 1997 350 12.40 4,340.00
Richard Williamson(2)................... February 28, 1997 815 .20 163.00
William J. Morey(3)..................... February 28, 1997 200 10.40 2,080.00
Brenda D. Kuykendall(3)................. May 5, 1997 500 10.40 5,200.00
Darrell Kendall(3)...................... May 30, 1997 500 10.40 5,200.00
Darrell Kendall(3)...................... May 30, 1997 100 12.40 1,240.00
ASOP(1)................................. July 16, 1997 13,270 13.80 183,126.00
Vinny Losasso(3)........................ July 22, 1997 710 7.00 4,970.00
James Fritz(3).......................... August 8, 1997 710 7.00 4,970.00
James Fritz(3).......................... August 8, 1997 1,000 10.40 10,400.00
James Fritz(3).......................... August 8, 1997 225 12.40 2,790.00
Michael Terk............................ October 1, 1997 500 13.80 6,900.00
Leonard L. & Nancy Berry................ October 1, 1997 5,000 13.80 69,000.00
Matthew J. Berry........................ October 1, 1997 500 13.80 6,900.00
Jonathan E. Berry....................... October 1, 1997 500 13.80 6,900.00
Robert A. & Vickie Berman............... October 1, 1997 500 13.80 6,900.00
Stanley Marsh 3 Special Trust........... October 7, 1997 3,295 13.80 45,471.00
Stanley Marsh 3 Special Trust........... October 9, 1997 3,515 13.80 48,507.00
Gaines L. Godfrey(2).................... October 10, 1997 3,500 .20 700.00
Carroll Rogers.......................... October 31, 1997 125 13.80 1,725.00
Kent Andrews Life Est. Trust............ December 3, 1997 210 13.80 2,898.00
Howard Miller(3)........................ December 15, 1997 180 7.00 1,260

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

(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
84

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------

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++ -- 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, 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.
11.1++ -- Computation of Per Share Gain (Loss).
21.1+ -- Subsidiaries of the Company.
23.1+ -- Consent of KPMG Peat Marwick LLP.
23.2++ -- Consent of Locke Purnell Rain Harrell (A Professional
Corporation) (included in Exhibit 5.1).
24.1+ -- Powers of Attorney (included on signature pages).
27.1+ -- Financial Data Schedule.

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

+ Filed herewith.

++ To be filed by amendment.

(b) Financial Statement Schedules.

II-4
85

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, 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
86

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Amarillo, State of Texas,
on this 13th day of March, 1998.

HASTINGS ENTERTAINMENT, INC.

By: /s/ JOHN H. MARMADUKE
------------------------------------
Name: John H. Marmaduke
Title: President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

POWER OF ATTORNEY

KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Dennis McGill and Jeffrey G. Shrader, and
each of them, such individual's true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for such individual and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and any registration statement related to the Offering contemplated by this
registration statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

SIGNATURES TITLE DATE
---------- ----- ----

/s/ JOHN H. MARMADUKE Chairman of the Board, President and March 13, 1998
- ----------------------------------------------------- Chief Executive Officer (principal
John H. Marmaduke executive officer)

/s/ DENNIS MCGILL Vice President of Finance, Chief March 13, 1998
- ----------------------------------------------------- Financial Officer, Treasurer and
Dennis McGill Secretary (principal financial
officer and principal accounting
officer)

/s/ PHILLIP HILL Senior Vice President, Chief March 13, 1998
- ----------------------------------------------------- Operating Officer and Director
Phillip Hill

/s/ LEONARD L. BERRY Director March 13, 1998
- -----------------------------------------------------
Leonard L. Berry

/s/ PETER A. DALLAS Director March 13, 1998
- -----------------------------------------------------
Peter A. Dallas

II-6
87

SIGNATURES TITLE DATE
---------- ----- ----

/s/ GAINES L. GODFREY Director March 13, 1998
- -----------------------------------------------------
Gaines L. Godfrey

/s/ CRAIG R. LENTZSCH Director March 13, 1998
- -----------------------------------------------------
Craig R. Lentzsch

/s/ STEPHEN S. MARMADUKE Director March 13, 1998
- -----------------------------------------------------
Stephen S. Marmaduke

/s/ JEFFREY G. SHRADER Director March 13, 1998
- -----------------------------------------------------
Jeffrey G. Shrader

/s/ RON G. STEGALL Director March 13, 1998
- -----------------------------------------------------
Ron G. Stegall

II-7
88

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------

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++ -- 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 Plan and 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, 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.
11.1++ -- Computation of Per Share Gain (Loss).
21.1+ -- Subsidiaries of the Company.
23.1+ -- Consent of KPMG Peat Marwick LLP.
23.2++ -- Consent of Locke Purnell Rain Harrell (A Professional
Corporation) (included in Exhibit 5.1).
24.1+ -- Powers of Attorney (included on signature pages).
27.1+ -- Financial Data Schedule.

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

+ Filed herewith.

++ To be filed by amendment.