Good morning and welcome to the Blockbuster Inc. first quarter 2008 earnings release conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Ms. Angelika Torres, Blockbuster's Director of Investor Relations. Ms. Torres, you may begin.

Good morning and welcome to Blockbuster's first quarter 2008 earnings call. Today’s earnings call may include forward-looking statements relating to our operations and business outlook, financial and operational strategies and goals, including our expectations about our financial performance in 2008 and other matters that do not strictly relate to historical or current facts. Actual results may differ materially from those projected in the forward-looking statements. For additional information regarding these forward-looking statements and factors that could cause actual results to differ materially, please refer to the cautionary statements in today’s earnings release and in our SEC filings, including our upcoming Form 10-Q. Today’s earnings call may also include a discussion of certain non-GAAP financial measures. Please refer to today’s earnings release for the required reconciliation to the most directly comparable GAAP financial measures and other related disclosures. Our earnings release is available on our website at Blockbuster.com under the link for investor relations. With that, I will now turn the call over to Jim Keyes, our Chairman and Chief Executive Officer. James W. Keyes: Good morning, everyone. Thanks for joining us for the 2008 first quarter earnings call. Before we talk about earnings, I’ll give you a quick update on Circuit City and as you know, we’ve signed a confidentiality agreement and begun our due diligence process on the company. We’ve spoken with many of you to discuss the substantial strategic and financial benefits that we see in this proposed combination and we recognize that some questions remain, but we hope the due diligence process will reinforce the benefits of this opportunity. Meanwhile, I want to assure you of several things -- one, we will not proceed with the transaction unless it makes sense both strategically and financially and also creates significant value for our shareholders. Two, we remain confident that our core business is healthy and we remain confident in our ability to transform Blockbuster with or without this transaction. We see it as a potential accelerator for our stated strategy but the transaction is not critical to our continued transformation. Three, we are all interested in a timely resolution of this process. It’s our hope that due diligence will validate the strength we see in the possible combination but if it does not, I can assure you we will move on and focus on the continued improvements in our store and our online businesses, which I’m pleased to tell you about this morning. We are now nine months into our strategic transformation and I am sure you will agree we’ve made very significant progress. As you know, we focused on aggressive cost reduction and have trimmed annual run-rate G&A expenses by about $100 million. In fact, this quarter alone we reduced SG&A, including advertising, by $100 million during the quarter. But we’ve not stopped there. We’ve identified additional opportunities through outsourcing initiatives and improvements in both physical logistics and other costs throughout the company that will continue to improve our operating costs and our cost of goods sold. More important to the long-term success, we are also growing top line results in an industry that was perceived to be in decline. Our core business is off to a great start this year. Overall same-store domestic revenues, now this is just the store, not including by mail, same-store sales domestic revenues increased 2.9% for the quarter, reflecting a greater than 900 basis point improvement over the first quarter last year. This is the first increase in same-store comparable sales in five years and we are pleased to report continued improvement in same-stores for April and in May to date. As a result, we are successfully turning up our top line accomplishments into improved bottom line performance as well, as evidenced by our first quarter adjusted EBITDA and net income results, for which I hope you will share my enthusiasm. The question we are asked most often is what has changed? How has Blockbuster managed to turn the corner on both sales and profits and for the answer, I have to take you back to our three fundamental strategic initiatives that we’ve been talking about basically for the last nine months. The first strategic initiative, restoring the rental DVD business. We are now more confident than ever that our core business is healthy and capable of profitable growth. We recognize that the physical distribution of DVDs is clearly a mature business but we plan to manage it accordingly. In a mature business, price is important but the battle for incremental market share becomes incredibly expensive if we compete on price alone. We believe there are other better ways to satisfy the customer by providing better in-stock availability, improved customer service, and better product assortment, and we believe our customers will be willing to pay a price for that convenience. Consistent with this strategy, we took a number of steps which led to the renewed strength of our rental category. We improved the in-stock availability of hot new releases. On top new releases, for example, we are now 60% in-stock and still not satisfied with 60, but it’s a start. We are 60% in-stock during the first week this year versus less than 20% a year ago. We are being increasingly proactive in remerchandising the stores to feature seasonal content, exclusive content, and also highlighting new releases. We’ve also developed more prominent displays, better in-stock game availability to take advantage of the growing video game business and we put much less emphasis on aggressive pricing and discounting. To the pricing and terms opportunity, we’ve been testing, as you know, new in-store rental pricing in terms and are in the process of concluding the validation phase of those tests, which I am pleased to say are very encouraging. We’ve all been anxious for a national rollout of new pricing but we really needed to take the time to do this right and the better-than-expected improvements in our business has given us more time to test and retest better and new pricing formulas. Our objective is simplicity. We want to improve the value proposition from the consumer’s perspective and at the same time further improve the profitability of our rental business. We believe that we now have a formula that works and are prepared to roll out new pricing and new terms later on this year, probably this summer. In addition, we have also reshaped our total access by mail and in-store subscription offerings. As a result, I am pleased to report that total access subscriptions are stable at $3.1 million. The business is now profitable and we are getting back to the business of growth. We believe that we are now well-positioned for growth with a by-mail service that provides consumer value superior to Netflix across all offerings. Our apples-to-apples offering is cheaper, a dollar lower than Netflix across most of the popular by-mail only plans. Our in-store exchange is actually a huge advantage and a terrific value. Our most popular $19.99 plan includes unlimited by-mail rentals and five free in-store exchanges each month, with the in-store exchanges being worth about $20, all for only $3 more than Netflix’s comparable by-mail only program. And we are currently offering Blu-Ray at the same subscription prices to stimulate demand for this important new format. We believe this is an important platform for Blockbuster's convenience strategy and will carefully manage this business going forward to achieve, as I keep saying, profitable growth. The second strategic initiative, our growth in retail -- we are also making significant progress in diversifying our revenue streams through the development of a more robust retail business. While domestic retail gross profit is slightly down this quarter as we continue to adjust retail pricing models and invest in our retail growth, we are seeing significant upside as we expand those opportunities. Our strategy is to be a convenience retailer for media entertainment. In the near-term, that means selling DVDs, videogames, and other entertainment products but we are also moving into the arena of content-enabling devices, selling Sony PS3 players, Blu-Ray players, videogame consoles, et cetera, and we’ve begun testing the sale of portable and personal video devices in several locations. Games are also quickly emerging as another promising revenue opportunity for Blockbuster. The videogame industry is growing at a rapid pace and innovative products like Nintendo Wii are broadening the gaming audience. Casual gamers are already coming into our stores and we are working very quickly to expand our retail offerings to meet this growing new demand. Specifically, we’ve rolled out retail videogames and game hardware to all U.S. corporate owned stores. In addition, we are putting games on the new release wall for the first time. As an example, Grand Theft Auto 4 is currently on track to be our biggest rental and retail title of all time. We finished the first week with approximately 4.5% market share in retail, which is up from our typical 1% to 1.5% share and this trend is continuing. We are optimistic that our new emphasis on games, combined with other new merchandising efforts will ignite our retail momentum. Finally we are moving forward with the rollout of approximately 500 better Blockbuster and Rock the Block stores, and for those of you who have not yet seen this innovative new retail format, it represents a window into the future of our business. Product mix and overall consumer experience are much more enticing and the early indicators from our pilot are very encouraging. It is important to mention that we are carefully managing the development costs of these new retail formats to achieve a favourable return on investment but so far we are encouraged by the numbers, seeing about an 8% to 12% incremental lift in revenues and about a 3% to 5% growth in active members in these new retail formats, all without any advertising. We are still tweaking the way we merchandise these stores and learning a lot along the way. Through the process of building a retail presence, we are reinvigorating the Blockbuster brand and establishing greater consumer relevance well into the future. The third strategic initiative, development of the digital platform, the new mission for Blockbuster, convenient access to media entertainment, highlights the importance of our digital strategy because digital content provides the ultimate in consumer convenience. As technology improves and as consumer needs change, so must we. Our plan -- to become the preferred source for digital media entertainment by making it more accessible and more convenient for the ultimate customer. We believe that Blockbuster is very well-positioned to accomplish this goal. We are pushing forward in two related ways as part of our digital transformation. First, actively exploring options to acquire digital entertainment distribution rights that we know would be appealing to our customers. In other words, growing the biggest library that we can establish. And second, we are actively exploring options to distribute that entertainment content to our customer via many different digital platforms that are available and emerging in the marketplace. Our acquisition of Movielink provided both digital content and a distribution tool. Movielink integration is going well and proceeding as planned. We have a new online service in testing, in beta testing now and we are planning to make it available to all customers in June. The extensive library of over 9,000 titles gives us one of the largest digital VOD and day date electronic sell-through libraries in the marketplace. An important new initiative getting ready to test launch next month is our digital download kiosk. We’ve signed a pilot test agreement with NCR Corporation, a global leader in self-service and assisted service technology. NCR will provide the kiosk for this pilot launch and we are jointly holding talks with makers of portable devices also to offer a device along with this new kiosk service. The remaining missing pieces of our digital offering are relating to subscription content. We are actively exploring opportunities to acquire content and to develop partners for distribution to the PC, the portable device, and ultimately to the home. These are just a few of the many examples of work underway in the digital space. I can assure you that Blockbuster has not at all backed away from an online strategy. We called a time-out from our by-mail initiatives, both to make that business profitable and to develop a plan for true digital delivery. I look forward to providing more updates to you in the weeks and the months ahead. Whether in store, by mail, vending, kiosk, digital download, our goal is to be the most convenient source for media entertainment with the reinvigoration of our core rental business, the expansion of our retail offerings, and our new digital initiatives, we are more confident than ever that we are headed in the right direction and our strategy is in fact working. Now I’ll turn over the call to Tom for a more detailed review of the first quarter financials. Thomas M. Casey: Thanks, Jim. Good morning, everyone and thanks for joining us. We are very pleased with our profit growth this quarter. Net income increased by $94 million to a positive $45 million, adjusted EBITDA more than tripled to $115 million. This significant bottom line profit improvement is a direct result of the strategic actions we’ve pursued over the last three quarters. To add to Jim’s remarks on the strength of our domestic comps, I’d like to point out that again the first time in five years, growth in our rental comps both in the U.S. and abroad, our domestic same-store retail revenues grew by about 20%. The best way to discuss the financial results for the quarter is to look at the four basic parts of our company and then adjust for the items that affect year-over-year comparability. So as you look at the financial tables in the press release comparing the first quarter of 2008 to the first quarter of 2007, keep in mind two significant adjustments -- the first is the sale of the Game Station in May of last year which resulted in 217 fewer stores in the U.K. and a $113 million reduction in revenue. The second important adjustment to keep in mind is 160 stores were closed domestically since the first quarter of last year. So when you back out the effect of those non-recurring items and look at the four parts of our business on a per-store basis, the results are as follows: First, the domestic in-store rental business, which accounts for about 50% of our consolidated revenue and 60% of our consolidated gross profit, looking at that business comps were up 0.4% and gross profit dollars increased as well. We expect continued improvement in this business from greater copy depth, the evolution of Blu-Ray, and other initiatives. The second part of our business, the subscription business, represents a little under 10% of our consolidate revenue. This is where we compete directly with Netflix and we believe we now offer a better alternative to consumers. Year over year, our subscription business grew 6.2% and went from losing money to profitability. We take those first two parts of our business together, in-store rental and online, domestic rental gross profit increased by about 5% on a per store basis. Again, the primary drivers of this improvement were growth in in-store rental revenue and the changes we made to total access, which led to a more stabilized and profitable subscriber base. The third part of our business is retail. The domestic in-store retail business is a huge opportunity and thus far represents only 9% of our consolidated revenue and only 3.3% of our consolidated gross profit. However, this business is growing rapidly with nearly 20% comp increase in the first quarter. We are in the early stages of driving this business and we priced to gain customer acceptance. We have significant gross profit dollar opportunities in regular DVDs, Blu-Ray, games, food, and related merchandise. Lastly, Blockbuster's international business is a stable and growing business with the core in Canada, Mexico, and the U.K. International represents about 31% of consolidated revenue and 30% of consolidated gross profit. For the quarter, international rental comps increased 0.9% and retail comps declined 4.9, as we cycled against game platform changes last year. On a per-store basis, gross profit internationally increased about 10%. On working capital, I’d like to note that our working capital is providing more cash than usual this quarter due to the timing of our fiscal year-end. In the first quarter of 2007, working capital consumed about $176 million in cash flow compared with about $107 million in the first quarter this year. So if you look at working capital as a combination of Q1, you’ll see a regular pattern. As it relates to the capital structure, good news there as well. We had $706 million in debt and zero balance on our revolver at the end of the quarter, and on a trailing 12-month basis, total leverage, as defined by total debt to EBITDA, is under three times. Our amortization requirements for this year totaled $44.7 million and our revolver and term loan A mature in August of 2009. Let me talk about our guidance. So first we are reaffirming our guidance for 2008 for adjusted EBITDA in the range of $290 million to $310 million. Our target is based on a number of factors and I would to walk you through the math, starting with the adjusted EBITDA for 2007 of $180 million. So let’s talk about three things on the plus side. First is that we expect profitability improvement in our by-mail service to be in the range of $100 million to $120 million. Second, we expect exchange costs for total access to come down from last year by about $40 million to $50 million. And the third positive is we already took all the necessary actions to reduce our run-rate G&A by $100 million. Offsetting those increases, we have approximately $90 million to $100 million related to past actions or things we can’t control, like cost inflation, the 53rd week in 2007, and the impact of our international divestitures last year. And then we also have -- continue to invest in our digital strategy, plan to make important margin investments to improve customer experience in our stores through product availability, additional labor, and we’ve allocated $40 million to $60 million towards those initiatives. Lastly, as we continue to improve our base business and begin to see incremental sales opportunities in the market, advertising starts to make more sense so we see advertising expenses as a swing variable in our investment spend this year. So as our results improve, we will be well-positioned to capture market share from competitors such as Netflix -- excuse me, NFXL and Game Stop. When you combine all of the pluses and offsetting factors, that gets back to an EBITDA guidance of $290 million to $310 million. Lastly, as you adjust your models, please keep in mind that while we are very pleased with our strong results this quarter, we are heading into two seasonally low quarters. For purposes of seasonality comparison, 2006 is the most relevant of the recent years as 2007, 2005 were affected by other unusual events. It’s important here to adjust for investment in our digital strategy and stores, as noted above. We are making progress in the digital area and look forward to sharing more with you soon. In conclusion, we had a great quarter, demonstrating meaningful progress against our strategic initiatives. As Jim mentioned, we still have a lot of work to do to move the company forward and bring our results in line with where they need to be to generate long-term shareholder value. And with that, I would like to ask the operator to open up the call to questions.

(Operator Instructions) Our first question comes from Tony Wible with Citigroup.

Good morning and congratulations, guys. I was hoping we could start by touching on a timeline that you can see for some of the strategic investments. You talked about Circuit City, you mentioned kiosks today. What are the kind of milestones that you are looking for getting Circuit City done, on getting other kiosk initiatives out, and on marketing? When do those things start to kind of fall into place? James W. Keyes: I wish I could give you a more definitive timetable on Circuit City, as an example. As you know, the process of due diligence -- in the process of due diligence you confront a lot of unknowns. Here’s our objective -- we are looking at this process being more or less in two stages, the first stage being weeks, not months. And that first stage basically getting enough information to validate our high level assumptions to give us a go, no-go decision. And based on that go, no-go decision, which will hopefully be in a matter of weeks, as I mentioned, then we can decide whether to dig deeper, do a more in-depth due diligence, or get back to our core business. I am very concerned about the risks associated with distraction, et cetera, and I don’t want that to be an issue for Blockbuster, or for Circuit City, in fact. As it relates to the other initiatives, they are progressing as planned. The kiosk test, we’ve been talking about for -- really for the last six months about having a June timetable for the first pilot, that will probably take I would say six to 12 months in pilot before we are prepared to even begin to discuss any kind of rollout. We are very excited about the new technology, about the capabilities, but we are ahead of both the technology and the consumer a little bit on that initiative. We think it’s probably an initiative that is two to three years out in terms of widespread, both deployment and consumer acceptance, but we think it’s an exciting development and a very practical use of our digital content going forward. Other initiatives, the rollout, the continued rollout I referenced about 500 stores that we’ll touch this year in some form for our Rock the Block initiatives or better Blockbuster. We will continue rolling that I would expect over the next two years. The timetable for that rollout really depends on the continued improvement in results. The better the results, the faster we roll. And basically that’s an indication, as it is with many of these programs, of our desire to fund these initiatives in a self-funded sort of way. So in other words, we are -- rather than trying to raise capital to remodel 5,000 stores, we believe the incremental performance from our stores can generate enough free cash flow to be able to in a proactive method over the next two or three years, to touch virtually all of our stores with this better Blockbuster approach. That’s a very general description of our timetable for the various initiatives. Did that cover them all, Tony?

Just the advertising component, and I guess you’ve already seen on rock the block without advertising. When would you anticipate starting to promote some of these changes? James W. Keyes: Well, the advertising -- two pieces of advertising. One is the online and the second is in-store. The in-store advertising I believe is dependent on critical mass. It’s difficult until you have 80% of the stores in a market that have been reconfigured to tell the consumer there’s really something different, because you don’t have enough stores in the market yet. So you will see us be a little slower to talk about the new Blockbuster in the use of advertising for our in-store campaign. Now we’ll still do some image advertising as we have been historically, but I don’t expect to step up that level of advertising in the near future until we get more critical mass. The online advertising is a different case. Now that we do have a profitable business, you will see us be more aggressive as we find the most effective tools to communicate our online and our by-mail services, so we do plan to step up some of that advertising and in fact, as Tom reiterated the guidance, as you can tell by the momentum we have, we had an opportunity perhaps to look at that guidance and perhaps forecast higher EBITDA targets going forward, but the swing variable here to some extent, at least for the next quarter, is our use of advertising. We’ve got an opportunity to be much more aggressive with Netflix, much more aggressive with Game Stop, and the question is how much of our advertising will be used in that fashion. And we’ve basically got the option to dial it up as results continue to improve.

And in that guidance that you provided, what are the assumptions on just a writers’ strike -- I’m sorry, actors’ strike and/or the Olympics? James W. Keyes: We’re not baking anything in to our outlook for the actors’ strike. We think frankly we are at the far enough end of that curve that it will have little if any measurable impact on us. As far as the Olympics goes, that is traditionally something that can create a little soft spot in our demand but frankly we’ve got so many initiatives underway at the store with new product, new content available and we are working on that period right now to fill the store with different alternatives that customers haven’t seen before that will hopefully offset any of that adverse effect from the Olympics.

Great, and last question, and this is not to beat a dead horse but for those of us that haven’t seen Rock the Block or that might be new on the call, the concept for Circuit City, once you have that ideally where you would like it to be, can you describe what you envision the new store formats would look like? James W. Keyes: Sure. The irony is if you have seen the Rock the Block stores, and some of you have actually been out to visit them, it’s a very different look. It’s not a very expensive transformation but the physical appearance of the store because we now have a bigger gaming presence, a small consumer electronics presence, and particularly that consumer electronics presence focuses on portable devices in our stores, it does give you the appearance of more of a retail, an entertainment retail environment than a traditional video store. In much the same way, our vision for the Circuit City of the future is less about just selling consumer electronics and more about an entertainment retail environment. So you would see a much bigger presence for game demonstrations for perhaps demonstrating to the consumer the new digital download capabilities in the store that will be emerging in the next couple of years. And so we see this line blurring between what have traditionally been devices and content. We see those opportunities coming together in a retail environment. We are actually doing this now in the Rock the Block stores in a small way, in the 5,000 square foot environment. The bigger store would just give us a bigger opportunity and certainly more products to be able to display in that fashion.

Thank you very much and congratulations again.

Our next question comes from Arvind Bhatia with Sterne Agee.

Thank you. Good morning and congratulations. A couple of questions -- number one is on domestic store comps. As we look forward to the next three quarters, obviously you started providing a lot more information at the store level. As we look at the next three quarters, my sense is that your comparisons actually get easier and I know you [inaudible] [is closing] your last year’s comparisons as you report, but can you give us some color on kind of at least directionally if comps are getting easier at the store level, that would be helpful. And then on the pricing model, can you give us some hint as to what is working? Is it going to be a different model in terms of number of days out or any hint on that front would be helpful as well. James W. Keyes: Sure. First to the domestic store comps, we are very optimistic that we will be able to continue to grow this business. Now you will, because the comps to get easier as you referenced in the next few quarters, you are likely to see somewhat higher comps, given what we are cycling against. I wouldn’t expect that we are going to grow this business in a dramatic way on an ongoing basis but we do think that there is modest growth potential even in a mature industry if we can do the right things. And that’s our objective, to have consistency in growth going forward, which we believe is possible if we are effective in remerchandising the stores as we’ve described. So near-term, probably expect a continuation. There’s a delicate balance here between retail comps and margin and as we fill the shelves, it’s costing us more to fill the shelves. There is a bit of a trade-off in product cost to be able to achieve the higher comps and we are very, very carefully managing that balance as we go forward, all toward the objective ultimately of continuing to drive improvement in gross profit dollars. As it relates to pricing, pricing represents one of those opportunities, both to improve our comps going forward and improve our gross profit dollars, both revenue comps and gross profit comps. The reason is as I’ve referenced before, our pricing in the past has been somewhat erratic and as a customer, I can tell you my biggest problem with it is it’s confusing. We have very many different pricing programs two days out, three days out, different combinations of prices and terms. What we’ve found in tests is that simplicity actually helps to stimulate customer satisfaction. So virtually all of our tests, whether it’s a test of a per diem or a test of what we call demand pricing, which is three or five day terms at a simplified price structure, we’ve been rewarded for the more simpler, the more simple approach that we’ve given our customers and the greater level of convenience that they have discovered in the stores. We are still, as I said, fine-tuning those tests. The ones that would appear to work best are the ones that give our customers more days outstanding. The balance there is the trade-off between inventory cost and the levels of inventory on the shelves, and so that is why you haven’t seen us move forward as quickly. Candidly, if what I had guessed would work best, which would have been a per diem, had been the method preferred by the customer, these pricing programs would be in place already. But when the customer voted in favour of longer terms rather than shorter terms in our stores, that presented a bit of a dilemma for us because that meant we had to very carefully work with our studio relationships, our contracts for acquiring product so that we didn’t sacrifice our in-stock availability in order to provide the customer a different term structure. So I know that it’s still a little bit grey. Until we are finished with the final validations of our test, I’d prefer not to give too much more color on that, other than to say we are excited about the potential for giving our customers a better approach and believe it will help both our customers and our shareholders as a result.

One last question, if I could, and that’s we all have seen the press on -- as far as the studios are concerned regarding day-and-date for VOD. I would like to get your updated thoughts as we’ve had a chance to digest some of that. James W. Keyes: Sure. You know, there seems to be a lot of noise about day-and-date and there’s two different announcements that came out that were somewhat troubling. One was Apple, and this was something relatively new for the Apple announcement that they announced a group of titles that would be now available on day-and-date. And I think what most people forgot is Movielink already had a substantially larger collection that already was day-and-date for electronic sell-through. So that really wasn’t an impact effect. It was Apple catching up more with where the rest of the industry was at that point. The other announcement that caused a little bit of a stir was an announcement about Warner’s move to day-and-date. We’re not really sure what that means. Warner has been experimenting with different titles on day-and-ate. I don’t see it as an across the board change in their philosophy. I think they will continue to do what works best for them and for their various business partners. So we are not overly concerned about that change and on balance, if you look forward, I’ll give you the glass half full and the glass half empty, however you’d like to look at it. The opportunity that day-and-date creates eventually when we are more into a digital environment, is it makes that digital offering more relevant to the consumer, since we are positioning ourselves to be one of the largest and most effective providers of digital content. At some point, that will be a good thing for us and for our digital consumer. In the short-term, we don’t think it has an adverse impact necessarily on the stores. If anything, if you think of how many homes have access to video-on-demand now, we think it’s about 30% of U.S. households. That means 70% of the households are still using DVDs as their preferred choice and when the studios advertise releases on a more timely schedule, if Warner does choose to go day-and-date on a release and they advertise that heavily, it in the near-term actually can benefit our stores. So there’s two ways to look at this day date thing. Do we want it to occur now across the entire industry? Absolutely not. It’s much better for our business we think on balance if we keep the window. We are encouraging our studio partners to look at the near-term benefit of keeping that window open, both for them and for us. The longer term, we think it is less relevant because as more and more of our customers shift to digital, we think it just represents a matter of changing along with those customer needs, so we are not intimidated by it in the longer term.

Thank you, Jim. James W. Keyes: Sure. Maybe more than you asked for but hopefully it paints a bit of a picture. I know this has been a confusing area for everyone out there and we are hoping that it puts a little light on the issue.

Your next question comes from Carla Casella with J.P. Morgan.

This is actually Gretchen [Howey] for Carla Casella. I just wanted to ask on the Rock the Block stores, what’s the cost per store? James W. Keyes: Well, the cost per store for these prototypes of course is higher than they will be in deployment. Everything is one-off that we are doing. We are targeting a cost going forward of anywhere from $20,000, depending on what we do in the store, if it’s just paint and cosmetics to depending on what physical needs the store may have, some of these stores have a lot of maintenance needs that have been unfulfilled for several years. So it could be as much as 100. We think the average, we are going to try to settle out somewhere under $50,000 per remodel, and believe we’ll get the benefits that we are projecting at those levels. And as I said, the plan is to self-fund this deployment with improved free cash flow from the core business.

Okay, great. And then any thoughts on refinancing your back facilities? Have you thought about timing on that and possibly refinancing the term loan D [as the A revolver refinance]? Thomas M. Casey: Well, as I said, the revolver and the A mature in August of 2009, so as far as timing of that, just assume whatever is normally done -- it would be logical for us to look at that toward the end of this year.

Okay. Thank you very much.

Your next question comes from Barton Crockett with J.P. Morgan.

Okay, great. From the equity side now, thanks for taking the question. I wanted to ask a question about looking at the Circuit City process and I wanted to find out if in your evaluation of that if there is potentially a scenario on the table where you could gain the synergies of a Circuit City without having to absorb the risk of actually buying the company and absorbing its top line risk. Is there any kind of intermediate partnership possibility there? James W. Keyes: Barton, we’re looking at all possibilities. It’s too early to tell. It’s part of the due diligence process to find out what we’ve got and what might be of interest for us, for them, and for potentially other parties but it is very early. A simple answer to your question -- sure, everything is a possibility and to the extent that we can capture synergies and minimize risk, that’s ultimately our objective.

Okay. And then turning to the comment about total access and it’s now profitable and you are interested in growth, to be clear, are you saying that it’s profitable including the cost of the free in-store exchange or excluding that? And what do you mean by pursue growth? Are you talking about adding subscribers? Thomas M. Casey: When you take into account the cost of the in-store exchange, it is profitable.

Okay. James W. Keyes: And to your question about adding subscribers, yes. Now, here’s the dilemma and I think our competition is also recognizing that, we believe there is a finite number of customers looking for subscription for DVDs by mail. The store represents a good alternative, we think a better alternative for immediate gratification. We think we’ve reached a tremendous number of American households with the by-mail offering and that we recognize it’s not an unlimited pool of potential subscribers, so we don’t want to foolishly invest in trying to grow a business that may be too expensive to grow. So what we do think we have is an opportunity to certainly capture market share because while have had the foot off of the accelerator as we’ve been restructuring our business, clearly the competition has picked up some share. We think there’s an opportunity to capture some of that market back as customers see some of the attributes that I mentioned in my comments of Blockbuster and we’ll be very selectively getting out with careful use of our media spending so that we are not trying to buy those customers. And I think that’s the most important action item here. We are not in the business of buying subscribers. We are in the business of adding profitable subscribers. To the extent we can grow that business effectively, you will see us be much more aggressive in trying to do so.

Okay, and then one final area I wanted to ask you about is I know that you are aware of the press about the discussions that Paramount and Lionsgate and MGM have been having and some of the reports have put you guys at the table as well. And I believe you are not going to comment on that specifically but I was wondering if you could comment more generally on what if any advantage a Blockbuster might gain from some type of new equity partnership with a content network or a pay TV network. And kind of in a similar vein, you’ve talked a lot about digital content as an area of growth of you longer term. As far as I can tell, people aren’t really making money there today. I mean, Apple is selling below their cost and Netflix is including it as a free view within their subscription. What makes you think that Blockbuster could make money there? James W. Keyes: Well first of all, I’ll bring you back to my comments in the -- a few minutes ago; we have two out of three elements or ways to sell digital content now. We can allow our customers to buy or rent electronic content through Movielink. We have both the distribution platform with Movielink and the digital rights for those two areas. What we don’t have yet is the ability to offer our customers a subscription model. That is something that we are actively exploring. We have not yet announced any success in acquiring subscription rights but we do think it is an important part of our portfolio, and be able to offer customers the ability to buy, rent, or subscribe, more or less just like we do in the store. So if you think about our physical platform for DVDs, you can buy, you can rent, you can subscribe to the physical DVDs in a Blockbuster environment and we want our digital environment to be a virtual image of our in-store experience. So that subscription piece is something that we have been in active discussions with a number of different content providers to acquire. Now, as far as the monetization of any of these, you are absolutely right. I don’t think there is an automatic transfer, and many people I think do believe that the by-mail subscriber will automatically become a digital subscriber. We think those are very different use occasions. I subscribe by mail today but I have no interest in watching a movie on my PC at home. I may be interested in loading a movie onto a portable device, perhaps a PC but more likely a handheld device that I can take with me when I travel, and that’s the purpose of our kiosk test in June. So what we think is going to happen relative to the monetization of this digital content is technology will catch up and provide a bit more convenient access to customers than they have today. When we look at historical ability to monetize digital content, it’s either been video-on-demand, as I referenced where a few households today have access to true video-on-demand, and via PC, which is not a very elegant solution for the consumer. With technology advances, we think we will be able to offer customers digital content in portable devices quickly loaded through kiosks, better availability for video-on-demand over time through different devices and eventually through IP television, as both devices and the infrastructure improve over time. And so basically what we are doing is positioning Blockbuster to be able to participate in that arena. The good news is we think we have plenty of time, that while there is a need to acquire content and secure rights today, we don’t think that investment need today requires a monetization model and puts the kind of pressure on us to begin charging for a business that is not yet fully developed in the marketplace. So a long answer, sorry about the detail but basically we are trying to position ourselves in all three of these platforms to be able to compete in the future with a Blockbuster brand that we think gives us a competitive advantage and to be the largest aggregator of digital content, both for electronic sell-through, for rent, and for subscription to be able to offer our customer multiple platforms.

Okay, thanks a lot. I’ll leave it there.

Your next question comes from [Drew Martinson] with Deutsche Bank.

Good morning. You referenced additional opportunities for cost saves in SG&A. I was wondering in terms of the magnitude and the timing of how should we look at that going forward. James W. Keyes: Well, the magnitude I can tell you is huge. Coming from a more traditional retail environment, I look at our cost of goods and I’m appalled at what it cost us to get everything from DVDs to candy bars into our stores. You know, it’s one of those things that we have been able to make money with a higher cost structure over the years and didn’t have the kinds of pressure to improve our logistic system. Today, if you look forward given the pressure on the traditional retail -- or traditional rental business and the desire to develop more of a retail business, we’ve got to fix our cost of goods and our ability to get product into the stores on a more cost-effective basis. We’ve got plans to improve our logistic systems. We are working with partners. One of the synergies we had addressed in the Circuit City opportunity was in fact their logistic system, which we think is very strong and could accelerate our initiatives. With or without that logistic system, we will be finding other partners to get products delivered more efficiently into our stores and that savings over time, it does take, if we do it by ourselves in particular or with other partners, that will take some time. But the upside is significant, very significant. The average cost of goods into the store now is in the low teens. It could be, if we had a more efficient distribution system, down in the single digits. And there’s substantial savings there. Other forms of savings, as we look at outsourcing opportunities, whether it is the ability to do a lot of our manual processing externally and save money there -- we are basically looking at every opportunity we can to eliminate unnecessary direct cost to partner with others, and to find ways of reducing our basic cost of doing business. So you’ll get more color as we get through the year and announce some of these outsourcing opportunities and logistics improvements, but I can tell you the savings are substantial but it won’t be a cliff savings, as we’ve been able to enjoy with G&A. The G&A cuts we made were a very fast access to $100 million in savings. Going forward, it does take more time to reengineer the business processes, find outsource partners, and improve fundamental areas of our business, like logistics. So stay tuned as we make those improvements going forward.

In terms of the game side of the business, what’s the working capital investment required to kind of bring that up to speed? Thomas M. Casey: Well, we’ve had about a -- from the end of the year to the end of the quarter, about a $50 million-ish increase in inventory, as you can see on the balance sheet. I would say two-thirds of that roughly is related to game inventory. The rest is related to other product for sale on the film side. So it’s a somewhat increase but we are pleased with the terms we’ve been able to work out with the vendors and certainly very pleased with the success on the sales.

With the $300 million kind of midpoint of your EBITDA guidance, your leverage here will be coming down nicely. Do you have a leverage target in mind or how to kind of optimize your capital structure absent the Circuit City and other potential actions? Thomas M. Casey: We haven’t provided a number, a specific number. We are pleased with the reduction and we expect it to continue to come down.

And then just lastly, in terms of the mail order business, I mean, there’s certainly been talk that as you guys focus more on retail and digital, this will kind of become an afterthought. I certainly am not hearing that on this call. Am I misreading you or how do you view that as a part of your business? James W. Keyes: No, I think you are reading me loud and clear. I’ve been surprised myself by all the reports of us turning our back on the online business. It was never the intent. It isn’t the intent. We think it is the ultimate in convenience for our customers. We just think that not everybody is going to want DVDs by mail, and we also don’t think that it’s an automatic transfer between the by-mail subscriber and the digital subscriber. So for those reasons, we stepped back from the online business. It didn’t make any sense to drive this -- to basically buy subscribers in a business if it’s not transferable to digital in the future and so we stepped back from the very aggressive subscriber acquisition model that we had in place and said you know, this is an important part of our offering but let’s try to add value to it and let’s try to capture a premium for that value if we are going to let customers exchange DVDs in the store, that’s an added benefit and they should be willing to pay a price for that benefit. So now that we’ve done that, of course we had to suffer the initial pains of making that change and we as a result created two perceptions; one perception was that we were higher priced, which is not true, versus our competition. We actually add more value for very little additional price. And the other perception was that we were turning our backs on the business -- not at all true. We think it’s a very important piece of our business going forward, plan to protect what we have and think there’s growth opportunities, profitable growth opportunities.

Thank you very much, guys.

Your next question comes from Michael Pirna with AAD Capital.

Good morning. Thanks for taking my questions. Firstly would be on transactions -- what was the in-store transaction count domestically in ’07? And should we expect growth in ’08? Thomas M. Casey: We don’t disclose transactions specifically but certainly if our expectation is to, or our goal is to drive traffic and transactions through a greater offering in the store. I mean, that would just be a logical implication of the steps we are taking. James W. Keyes: I will add a little more color -- in the near-term, most of our upside potential is going to come with stabilizing our transactions. We obviously have been declining transactions over the years as we perhaps didn’t have the product on the shelves, et cetera. Our objective is to stabilize transactions in the near-term, capture most of our near-term improvement in sales with a higher ticket price by encouraging people to buy more and perhaps pay more for a better service in the store. Then, once we have more critical mass, we are already finding that just through word of mouth without even advertising in our pricing tests in our Rock the Block stores, we are increasing traffic. So that’s very gratifying to know that just the improvement in the physical location and improvement in the offering in the stores is getting that word of mouth going and it’s driving incremental transactions. We don’t expect to see that improvement in transaction occur in a system-wide way until we have much more wide-scale deployment of new pricing and terms and much more wide-scale system-wide deployment of our, or at least market by market deployment of our remodeled stores. Then, once we see those things, we are able to get out and market by market begin to tell customers more proactively using our advertising that something is different about Blockbuster. Then you will see a more substantial and measurable increase in transactions and at some point, we will be reporting transaction count going forward as well.

Okay. Maybe just to follow-up on in-store rental pricing -- in your analyst day last fall, you had a slide that showed average in-store rental, $2.79; average length of rental, five days, and that works out to about $0.56 per day. Could you give us a sense maybe with the tests you are running, where do you envision each of those metrics could go? Could the average in-store rental go up, average length of rental down, average revenue per day -- where do you envision all of that? James W. Keyes: Well, I’ll share with you some of the various models that we have in place. We tried certainly a per diem, a $0.99 per day model, similar to what you see in some of the vending. The challenge there, it’s a double-edged sword. The good news is that you get movies returned more quickly. The average I think in that situation is probably two days versus five days. The bad news is if they return it to quickly at $0.99 a day, it’s pretty tough to make money at it. So there is good and bad in the per diem model. There are other permutations that we’ve looked at but basically in our circumstance, I think this is unique to Blockbuster, the feedback we are getting in a per diem environment is that the customers -- it looks and feels a little too much like a late fee to the customers and we think that that has influenced the test results that we received. Not that it is a late fee, it’s certainly not a penalty. It’s ultimately very fair, maybe even a better price than they are paying today and yet the perception is, since it is a daily charge, they feel like it might be a return to late fees. So that could be some of the influence on the test results. Other models, we’ve tried a three-day model where we charge let’s say, as an example, $3.99 for three days out. We’ve tried models where we have $4.99 for five days out. That’s more of a dollar per day but the customer pays a $5 charge even if they bring it back in two days. That model seems to be one -- the longer duration seems to be one that the customers respond most favorably to. As I mentioned previously, our challenge is in that model if we can find that it’s more profitable for us, can we also encourage the customer to bring those titles back sooner, perhaps with an incentive. These are the kinds of tweaks we are talking about putting into our pricing validation to find ways to accomplish both, which is basically to extract a higher initial charge from the customer, a more prompt return from the customer, and ultimately to fix that back-end challenge, which is if they do keep it for three weeks, to be able to get a value from them without it being a late fee, or feeling like -- having the customer feel like they are being penalized. It’s one of the more challenging pricing opportunities that personally I’ve experienced out there, but we are learning a lot from these tests and I think we certainly have a lot of upside, both as I said from the customer and the shareholder with a different approach.

On the per diem, have you tried any tests other than the $0.99? And to your comment on feeling like a late fee, is there any capability of charging them, taking the credit card information up front rather than charging them when they come back to the store? James W. Keyes: First on the question of different alternatives to the per diem, we’ve looked at a lot of different alternatives. Frankly I like a model and where I thought we would end up is more of a $2 per day model. If the consumer didn’t like $0.99, they we think would like $2 even less. It wasn’t -- the $0.99 test wasn’t as much the adverse impact on our earnings as much potentially as much as it was the adverse effect on the customer perception of that being a late fee related transaction. So yes, there are other kinds of tests that we can do. We’ve contemplated doing this. This is part of the reason that we are still in test right now, trying to decide whether or not we should get out and get more learnings on per diem, but the -- well, basically we have still work in process on that opportunity and welcome any suggestions that anyone would have about the different pricing opportunities. The second part of the question -- oh, on credit cards. The credit card opportunity -- here’s the opportunity in a nutshell. Unfortunately, not enough of our customers use a credit card for their transaction. There are many cash purchases and there are many debit card purchases. We are exploring, as part of our strategy an alternative transaction approach that would allow us to offer our customers a prepaid device that could be, if you think about the Starbucks Duetto card, it’s both a prepaid transaction device and a credit card at the same time. If we can develop this kind of convenient transaction model for our customers, we would like to over time eliminate cash completely from our purchase because the cash purchase represents obviously greater risk, greater bad debt in our system and yet we don’t have the convenient alternative for the customer today. So we are trying to do this in two steps; one is to get more and more customers signed up on credit cards and to use credit cards to be able to back up their purchases, and secondly to develop a transaction device that recognizes many of our customers either don’t have a credit card or don’t want to use a credit card but it gives them an alternative prepaid device that gives them the same convenience as using a credit card with a prepaid transaction. More to come on that opportunity as we go forward.

Perfect, and a final question, and thank you again for your time, is there any difference for the pricing schema internationally versus the domestic stores in terms of average rental price and length of stay? James W. Keyes: Every market, even in the United States there are many differences market by market and in our international operations, the pricing and terms are all across the board. Very many different variations. The one thing I can tell you and the one thing I am most excited about and learning from our international markets is some of the success we’ve enjoyed in the U.K., for example, has been this evolution from traditional rental only to more of a retail model. This trend started in our Ireland market. It progressed into -- in fact, we put the management from our Ireland market in charge of the U.K. They brought the retailing philosophy in. They have been moving into electronic devices. They’ve been very successful in the sale of portable devices, for example, and we think that’s a very good leading indicator for where we can take our domestic stores. Another example of success in retail has been our licensee in Brazil. We sold the -- not too long ago our Blockbuster stores in Brazil to Lojas Americanas and they have a retail model established that transformed those Blockbuster stores into much more of a retail format and have been extremely successful in that transformation. So as we go forward, we’ll continue to share more of those international learnings but I think they represent a good leading indicator for the opportunity here in the United States as well.

Great. Thank you.

Your next question comes from Emily Shanks with Lehman Brothers. Emily E. Shanks: Good morning. I wanted to know if you could break out for us in terms of the $100 million-ish of SG&A saves, could you break it out between the savings on ad expense, lower store base, and corporate overhead? James W. Keyes: In the $100 million, it’s a little bit delicate and only because it’s a coincidence that for the first quarter, we had $100 in SG&A savings and yet, based on our cost-cutting initiatives on a year to year run-rate, we are also by coincidence at $100 million in G&A alone. So the G&A alone savings, that $100 million does not include advertising. That’s pure savings on our general and administrative expense, primarily a reduction in staff and associated costs related to that. Thomas M. Casey: I would also just -- in the tables, there’s some SG&A breakout that shows you just year over year comparison, and then as Jim said, the $100 million of G&A cuts was a run-rate. Offsetting that somewhat is an inflation drag against our G&A year over year, which is in the $50 million to $60 million range, so you need to take into account as well. Emily E. Shanks: Okay. That’s very helpful, thank you. And then in terms of the question earlier around the working capital investment in the game category, I believe you said that $50 million of the increase in inventory on a sequential basis was about two-thirds related to game and a third to other product sales. Should I assume that other third is sort of, as we coin it, the ancillary movie offerings -- the posters, et cetera? Is that what you were referring to? James W. Keyes: Well, no, it’s DVDs, mostly. Emily E. Shanks: Okay. Okay, then that is all I have. Thank you.

Our last question comes from Randy Raisman with Durham Asset Management.

Have you guys given any guidance for free cash flow for the year? I know the 280 to 310 of EBITDA, but how should we think about that getting down to free cash to then get to kind of like a year-end leverage level? Thomas M. Casey: The short answer is we have not. We’ve given guidance on CapEx of 130 and so you know our debt level, you know our interest rates, you can probably -- you know our tax. You can probably figure it out pretty easily.

Okay, and then the plan though would be to at least consider some type of a refinancing of the entire bank facility at year-end? Is that kind of what you had alluded to earlier? Thomas M. Casey: Well, it’s just that -- again, in August ’09, we have the term A and the revolver maturing, so we would look to refinance those at the end of this year.

I guess what about the term loan B, is what I’m asking. Thomas M. Casey: Yeah, that’s -- well, the term B matures in 2011, so we -- that’s not a requirement for now.

Is it something you would try to do? Thomas M. Casey: We’ll evaluate that as the year progresses.

Okay. Thank you.

At this time, there are no further questions. Mr. Keyes, do you have any final remarks? James W. Keyes: Sure. I’d just like to thank everyone for joining us for the call this morning. I hope you’ll agree this quarter’s result represents a significant improvement in our operating performance. I think it demonstrates the underlying strength in our core business and I hope you can tell, we’re more confident than ever that our strategy is working. While it may seem though that we have many strategic initiatives underway, we do, or that any one of the pieces of the puzzle may not seem to fit, I can assure you that all of the things that we have underway are consistent with our transformation plan. They are all a part of either restoring our core retail business -- I’m sorry, our core rental business, a part of growing retail, or they are part of developing our digital platforms. We’ve got much to do. This is a business clearly that needed a renewed sense of urgency. We have that now. We recognize how important it is to transform our business to become more relevant into the future and we believe that we not only have all of the pieces in place to continue that transformation but with all the progress we are making and more to come, I look forward to sharing more of these kinds of announcements with you in the weeks and months ahead. So thank you again for your time and Operator, with that, we’ll conclude our call today. Thanks, everybody.

Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time and have a wonderful day.