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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2004.

OR

For the transition period from                                      to                                     

Commission File Number 001-15153

BLOCKBUSTER INC.

(Exact name of registrant as specified in its charter)

1201 Elm Street

Dallas, Texas 75270

(214) 854-3000

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10–K.    x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes x    No ¨

As of June 30, 2004, which was the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates was $507,573,174, based on the closing price of $15.18 per share of class A common stock as reported on the New York Stock Exchange composite tape on that date.

As of March 1, 2005, 118,336,989 shares of class A common stock, $.01 par value per share, and 72,000,000 shares of class B common stock, $.01 par value per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the annual meeting of stockholders of the registrant to be held during 2005 are incorporated by reference into Part III of this Form 10-K.

THIS ANNUAL REPORT ON FORM 10-K IS BEING DISTRIBUTED TO STOCKHOLDERS IN LIEU OF A SEPARATE ANNUAL REPORT PURSUANT TO RULE 14a-3(b) OF THE ACT AND SECTION 203.01 OF THE NEW YORK STOCK EXCHANGE LISTED COMPANY MANUAL.

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BLOCKBUSTER INC.

INDEX TO FORM 10-K

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PART I

Item 1.    Business

BLOCKBUSTER OVERVIEW

Blockbuster Inc. is a leading global provider of in-home rental and retail movie and game entertainment, with approximately 9,100 stores in the United States, its territories and 24 other countries as of December 31, 2004. Our focus in 2004 was on furthering our mission to become a complete source for movies and games. Specifically, we took advantage of our improved profitability from 2003 and the traffic generated by our core rental business to fund and create awareness for our strategic initiatives. During 2004 we (i) successfully launched BLOCKBUSTER ONLINE^™, our U.S. online subscription program; (ii) expanded our in-store subscription pass offering nationwide and significantly exceeded our in-store subscriber expectations and (iii) aggressively rolled out movie and game trading to thousands of stores. We believe that these strategic initiatives will provide growth opportunities for our business and complement our mature rental business, which continued to decline during 2004. Our total revenues and gross profit for 2004 were $6.1 billion and $3.6 billion, respectively. Of our revenues, 69.5% were generated in the United States and 30.5% were generated outside of the United States.

In October 2004, we completed our divestiture from Viacom Inc. We believe that we will compete effectively as an independent company and that the separation from Viacom has better positioned us to pursue our unique corporate goals and growth opportunities.

INDUSTRY OVERVIEW

Domestic Home Video Industry—In-Home Movies

Consumer Spending. The overall home video industry includes in-home movie entertainment offered through the retail home video, cable and satellite industries. The retail home video industry includes the sale and rental of movies on DVD and VHS by traditional video store retailers such as Blockbuster, as well as online and other retailers, including mass merchant retailers. According to estimates of Kagan Research, LLC (“Kagan”), consumer spending for in-home movie viewing in the United States increased from about $22.6 billion in 2003 to about $25.1 billion in 2004 and is projected to increase to about $33.8 billion by 2009. The U.S. retail home video industry represented about $24.0 billion of the $25.1 billion in revenues during 2004. The remainder of the revenues were generated by pay-per-view and other specialized cable and satellite services.

Of the estimated $24.0 billion in revenues generated by the U.S. retail home video industry during 2004, about $16.0 billion were generated by sales of movies and about $8.0 billion were generated by rentals of movies. This compared to about $13.5 billion of revenues that were generated by sales of movies and about $8.2 billion that were generated by rentals of movies during 2003. While the overall retail home video industry is projected to grow over the next several years, Kagan projects that movie rental revenues will continue to decline, from approximately $8.0 billion in 2004 to about $6.3 billion in 2009. Adams Media Research, however, does not project similar declines in movie rental revenues. Because of the many variables affecting movie rental revenues, it is difficult to predict fluctuations in the movie rental industry with certainty. We believe, however, that overall movie rental revenues will stabilize by the end of 2005, when the majority of U.S. television households are projected to have a DVD player and the initial enthusiasm for ownership of retail DVDs should have largely run its course.

The increased sale of movies reflects the movie studios’ continued “sell-through” pricing to home video retailers for DVDs. As discussed in more detail below under “—Our Business—Suppliers and Purchasing Arrangements,” unlike the historically high wholesale pricing for VHS product, substantially all DVD product is released at a price to the home video retailer that is low enough to allow for affordable pricing for sales to

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consumers at the same time as movies are released to consumers for rental. This sell-through pricing has given consumers the option to purchase DVDs instead of, or in addition to, renting them and has enabled consumers to build libraries of classic movies and personal favorites. Although movie sales are estimated to have increased during 2004, rental transactions continued to exceed sales transactions. According to industry statistics, during 2003, rentals represented approximately 74.1% of the total number of industry transactions and sales represented approximately 25.9% of the total number of industry transactions. During 2004, rentals represented approximately 68.7% of the total number of industry transactions and sales represented approximately 31.3% of the total number of industry transactions. We believe that rentals continue to provide a compelling proposition for consumers because movie rentals offer relatively low cost entertainment and because they provide consumers who are contemplating a purchase with an inexpensive opportunity to view a title prior to making a purchasing decision. In addition, we believe that the increasing market penetration of the DVD format beyond the typically more affluent early adopters will also be an important factor in the stabilization of the rental industry. The number of U.S. DVD households is estimated to have increased from 52.6% of U.S. television households at the end of 2003 to 65.4% of U.S. television households by the end of 2004. Kagan projects that this will increase to 76.0% of U.S. television households by the end of 2005 and to 92.9% of U.S. television households by the end of 2009. We believe that later-adopting DVD households are generally less likely to purchase DVDs at the high rates of early adopters. We also believe that efforts to increase consumer satisfaction, such as our elimination of extended viewing fees, commonly referred to as “late fees,” and the increased offering of in-store and online rental subscription programs will enhance the relevance of movie rentals to consumers and help drive rental business in the future.

Kagan projects that sales and rentals of movies in the United States will decline somewhat as a percentage of overall consumer spending for in-home movie viewing; however, we believe that the DVD format will drive continued growth in the retail home video industry due to (i) its superior sound and picture quality and (ii) the additional home viewing features that it offers, such as deleted scenes, outtakes, cast interviews, interactive features, director commentary, multiple language tracks and the ability to skip directly to scenes, rather than fast-forwarding and rewinding. We believe that growth in the retail home video industry will also be driven by the increasing popularity of in-home theater systems and related enhanced viewing and sound capabilities, and the anticipated launch of high-definition DVD. In addition, we believe that there are substantial opportunities in the consumer market for used DVDs, which we believe will also drive industry growth by providing additional retail opportunities, including trading of used DVDs by customers in exchange for merchandise credit, discounts on other products or cash.

Studio Release Schedule to Home Video Retailers. A competitive advantage that the U.S. retail home video industry continues to enjoy over most other movie distribution channels, except theatrical release, is the early timing of its “distribution window.” As discussed below under “—Movie Studio Dependence on the Retail Home Video Industry,” the retail home video industry is a critical source of revenue to U.S. movie studios. In order to maximize this revenue, studios release their movies to different distribution channels at different points in time. The first distribution channel after theatrical release is home video (rental and retail, including mass merchant retail) on DVD and VHS. This distribution window is typically exclusive against most other forms of non-theatrical movie distribution, such as pay-per-view, video-on-demand, premium television, basic cable and network and syndicated television. The length of this exclusive distribution window for home video retailers varies, but, since the mid-1990’s, has averaged from between 43 and 54 days for domestic home video retailers. Thereafter, movies are made sequentially available to the television distribution channels. Although the distribution window is a significant advantage to the U.S. retail home video industry, its advantage to traditional home video retailers with core rental businesses has been diminished due to the sell-through pricing of DVDs. This is because sell-through pricing has resulted in significant competition from mass merchant retailers, as movies are released for rental and sale at the same time. Studio pricing is discussed further below under “—Our Business—Suppliers and Purchasing Arrangements” and “Cautionary Statements—Current Studio Pricing Policies Have Resulted in Increased Competition from Mass Merchant Retailers, Which Has Affected, and Will Continue to Affect, Consumer Rental and Purchasing Behavior. We Cannot Control or Predict with Certainty Future Studio Decisions. Future Changes in Studio Pricing Could Negatively Impact our Profitability.”

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International Home Video Industry—In-Home Movies

Some of the attributes of the home video industry outside of the United States are similar to those of the home video industry within the United States. For example, the major studios generally release movies outside of the United States according to sequential distribution windows. However, other attributes of the home video industry outside of the United States do not necessarily mirror the home video industry within the United States. For example, most countries have different systems of supply and distribution of movies, and competition in many of our international markets tends to be more fragmented. In addition, under the laws of some countries and trading blocs (e.g., the European Union), home video retailers must obtain the right to rent videos to consumers through a licensing arrangement or a “purchase-with-the-right-to-rent” arrangement, and studios may charge these home video retailers more for product purchased for rental than product purchased solely for sale to consumers. This is commonly referred to as “two-tiered pricing,” and it affects the international movie rental industry, especially in the United Kingdom, Ireland, Italy and Spain. Two-tiered pricing not only results in increased competition from mass merchant retailers in those countries and trading blocs, it also creates increased competition with video rental outlets that operate in violation of the two-tiered pricing legislation by renting product purchased at the lower “sell-through” price. The potential impact of studio pricing decisions is discussed under “Cautionary Statements—Current Studio Pricing Policies Have Resulted in Increased Competition from Mass Merchant Retailers, Which Has Affected, and Will Continue to Affect, Consumer Rental and Purchasing Behavior. We Cannot Control or Predict with Certainty Future Studio Decisions. Future Changes in Studio Pricing Could Negatively Impact our Profitability.” The international home video industry also faces high levels of piracy. Although piracy is also a concern in the United States, it is having a more significant adverse affect on the retail video industry in international markets. Piracy is discussed further below under “—Our Business—Competition” and “Cautionary Statements—Piracy of the Products We Offer or the Disregard of Release Dates May Adversely Affect Our Operations.”

Movie Studio Dependence on the Retail Home Video Industry

Of the many movies produced by major studios and released in the United States each year, relatively few are profitable for the movie studios based on box office revenues alone. As a result, the studios rely upon their distribution windows in order to maximize revenues. According to industry estimates, sales and rentals of DVDs and videos through the retail home video industry, which includes traditional video store retailers such as Blockbuster, as well as online and other retailers such as mass merchant retailers, continue to be the largest source of revenue to U.S. movie studios. In 2004, the worldwide retail home video industry is estimated to have contributed approximately 50.2% of U.S. studios’ revenues. Industry analysts project that the contribution of retail home video to studios’ revenues will be approximately the same in 2005.

We believe that sales and rentals by home video retailers will continue to be a key source of revenues for the movie studios. In addition, rentals provide particular benefits to the studios, as video rental stores acquire and rent movies that did not generate significant revenues in the theatrical box office, thus providing the movie studios with a reliable source of revenue for movies that would not be as popular for purchase. We believe that consumers are more likely to view movies that were not box office hits through a rental than through most other post-theatrical distribution channels because

As discussed above under “—Domestic Home Video Industry—In-Home Movies—Studio Release Schedule to Home Video Retailers,” we believe there is a strong economic incentive to the studios to maintain

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the retail home video distribution window. However, any consolidation or vertical integration of media companies to include both content providers and digital distributors could pose a risk to this continuation of the distribution window.

Home Video Game Industry

The video game industry is complex and different in many ways from the home video industry. The market for video games is highly cyclical and prone to changes in technology. In addition, video games have significantly higher price points than DVDs, but hit game titles generate significantly less volume than hit movie titles. According to industry estimates, during 2004, total hardware unit sales in the United States declined approximately 7% and hardware sales revenues declined by approximately 17%. These declines were primarily the result of lower retail prices on hardware units as well as significant shortfalls in supply on Microsoft’s Xbox and Sony’s PS2 units during the crucial holiday selling period. In 2005, we expect hardware sales for the existing platforms to slow as consumers delay purchases in anticipation of new, more advanced platforms expected to launch in late 2005 and in 2006.

Game software sales in the United States for the existing platforms increased from approximately $5.8 billion in 2003 to approximately $6.2 billion in 2004, driven mainly by significant growth in value ($29.99 or less) product. We anticipate 2005 software sales for existing platforms to remain relatively flat, with growth coming from the handheld segment. This reflects the cyclical nature of the home video game industry, which has traditionally been affected by changing technology, limited hardware and software lifecycles, frequent introduction of new products and the popularity, price and timing of new hardware platforms and software titles. The home video game industry typically grows with the introduction of new hardware platforms and games, but tends to slow prior to the introduction of new platforms, as consumers hold back their purchases in anticipation of new platform and game enhancements. However, we believe that the cyclical nature of the industry, along with the sizeable number of gaming households and the substantial number of game titles available, should contribute to the creation of a significant market for used games and games trading. Games trading enables consumers to exchange their games for merchandise credit, discounts on other products or cash.

We also believe that the game rental industry continues to play an important role in the video game cycle, due in part to the relatively high purchase prices for game software. Video games typically generate most of their rental revenue during the first twelve months after their initial release. We believe that during this time period, the difference between the retail price and the rental price of a popular new video game title is typically high enough to make rentals an attractive alternative for customers. In addition, we believe rental pricing provides an attractive alternative for customers who do not want to buy a game close to the introduction of a new hardware platform. Game rentals also provide a testing ground for many consumers considering a game purchase. During 2003, U.S. video game rental revenues, including in-store and online subscription, totaled approximately $804 million and, according to industry statistics, are forecasted to grow 7% annually from 2003 to 2008 to approximately $1.1 billion, driven primarily by the launch of next generation platforms. However, we believe that increased retail offerings of low-priced catalog, or “value,” games and increased games trading by us and our competitors compete with game rentals and sales of previously played game product.

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OUR BUSINESS

General

Blockbuster Inc. is a leading global provider of in-home rental and retail movie and game entertainment, with approximately 9,100 stores in the United States, its territories and 24 other countries as of December 31, 2004.

Our focus in 2004 was on furthering our mission to become a complete source for movies and games. Specifically, we took advantage of our improved profitability from 2003 and the traffic generated by our core rental business to fund and create awareness for our strategic initiatives. We believe these strategic initiatives will provide growth opportunities for our business and complement our mature retail business. While our rental business continued to decline during 2004, we believe that it is, and will continue to be, a significant contributor to our cash flows and will enable us to invest in our strategic initiatives, which include:

In order to more actively participate in the growing market for online rental subscription services, we launched BLOCKBUSTER ONLINE, our online subscription service in the United States, in August 2004. Our U.K. operations launched its online subscription service in May 2004. These internet-based services allow customers to rent DVDs by mail and offer substantially more titles than our stores, including a wide array of both new release and catalog DVDs. Additionally, BLOCKBUSTER ONLINE subscribers receive two free in-store rental coupons each month that can be redeemed for movies or games. In contrast to our in-store subscription service, our online subscription services require significant ongoing subscriber acquisition investment in order to tap into this growing market and build a customer base large enough to allow this business to be profitable. As of March 9, 2005, we had more than 750,000 BLOCKBUSTER ONLINE subscribers, and we plan to invest heavily in this business during 2005 with a goal of having over two million subscribers by the end of the first quarter of 2006. We believe that, at that point, we will be able to choose to operate BLOCKBUSTER ONLINE at a profit or further accelerate our subscriber acquisition efforts. We believe that either of these options will result in improved operating profits for Blockbuster in 2006.

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In December 2004, we announced the “end of late fees” beginning on January 1, 2005, which means we no longer charge extended viewing fees, commonly referred to as “late fees,” on any movie or game rental at more than 4,500 company-operated stores and approximately 550 participating franchise stores in the United States. Our Canadian operations also adopted a similar program at its 426 stores across Canada, effective January 29, 2005. We believe that the elimination of extended viewing fees will help to eliminate the most prevalent customer complaints in renting movies and combat our competitors’ use of this concept to differentiate their service offerings. Rental transactions continue to have due dates of either two days or one-week, depending on the specific rental, with all transactions having a one-week grace period from the due date. If the product has not been returned by the end of the grace period, it is purchased by the customer under the terms of our standard membership agreement. The purchase price will be the lower of (i) the full retail price or (ii) the price for previously-rented product, if the product was available from us as a previously-rented product at the time of the rental. In addition, the price will be reduced by the amount of the rental fee paid. If the product is subsequently returned within 30 days, the customer will receive a full credit to his or her account, less a minimal restocking fee of $1.25. For the full year 2005, we have projected that extended viewing fees would have directly contributed an estimated $400 million to $450 million in revenue and approximately $250 million to $300 million in operating income, which we expect to be partially offset by growth in revenues resulting from increased store traffic, less promotional and marketing activity and increased focus on management of operating expenses.

Our franchisees have control over all operating and pricing decisions at their respective locations, including whether or not to eliminate extended viewing fees and the specific rental terms underlying any elimination of extended viewing fees. This has resulted in variations of rental terms, selling terms and restocking fees between company-operated and franchised BLOCKBUSTER^® stores, as well as variations in these terms among franchised BLOCKBUSTER stores.

We view the elimination of extended viewing fees as a substantial consumer benefit, and we believe that our customers share that view. We recognize that it is in our continuing best interest, as well as the best interests of our customers, that consumers fully understand the terms of the elimination of extended viewing fees. We have taken, and will continue actively taking, steps to ensure that they do. Nevertheless, in January 2005, we received inquiries from several state attorneys general, and received notices that certain other state attorneys general were commencing investigations, to determine the compliance by us with applicable laws in connection with the advertisement of our “end of late fees” program. While we believe that the advertisement of the program was conducted in compliance with applicable laws, on March 29, 2005, we entered into an Assurance of Voluntary Compliance (“AVC”) with 47 states and the District of Columbia, as discussed in Note 9 to the consolidated financial statements. The AVC is not an admission of any legal violation by us. For information about other litigation relating to the program, see Note 9 to the consolidated financial statements.

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International Operations

We are a leading international provider of in-home rental and retail movie and game entertainment. As of December 31, 2004, we had 3,291 stores operating under the BLOCKBUSTER brand and other brand names owned by us located in 24 markets outside of the United States. Of these stores, 734 were operated through our franchisees. In the Republic of Ireland and Northern Ireland, we operate under the XTRA-VISION brand name due to its strong local brand awareness. In the United Kingdom, we operate freestanding and store-in-store game locations under the brand name GAMESTATION^®. In Australia, we also operate freestanding and store-in-store game locations under the GAME RUSH brand. In 2004, 30.5% of our worldwide revenues were generated outside of the United States, compared to 26.2% in 2003 and 21.1% in 2002. As discussed in more detail below in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the overall increase in revenues generated outside of the United States reflects the impact of favorable foreign exchange rates and the continued growth in international retail sales. Additional information regarding our revenues and long-lived assets by geographic area is included in Note 12 to the consolidated financial statements.

Our international operations experienced a decrease in same-store rental revenues of approximately 3.0% and an increase in total same-store revenues of approximately 3.0%, driven by strong retail sales growth during 2004. Although 2004 benefited from a return to more normal weather patterns than the unseasonably warm weather experienced in Europe in the summer of 2003, strong competition from mass merchant retailers and speciality outlets and further escalation of piracy continued to impact our business. However, our international markets continue to be significant financial and strategic contributors to our overall business. Our global presence allows us to capitalize on opportunities worldwide as we continue to extend our U.S. concepts and knowledge to our international markets and vice versa. We believe this gives us an advantage over competitors that are solely dependent on a U.S. business. For example, we have the opportunity to use our knowledge and experience from our GAMESTATION operations in our other markets around the world, including the United States.

We continued to test and roll out strategic initiatives in 2004 in those international markets where we already had a substantial presence. For example, the majority of BLOCKBUSTER stores in the United Kingdom offer movie and game trading which allows customers to trade and buy DVDs, VHS tapes and games. We are rolling out our trading initiative in Denmark, Italy, Spain and Mexico based on our strong test results and have begun further testing of trading in Ireland and Australia. We continue to test models for subscription-based rentals, both in-store and online, and launched an on-line rental subscription service in the United Kingdom during 2004. In 2005, we plan to continue testing and rollout of our strategic initiatives in our international company-operated stores. In addition, although we have eliminated extended viewing fees domestically in the United States and in Canada, we continue to research and review consumer requirements in the remaining international markets, and will roll out this initiative only when and if the conditions are deemed appropriate.

During 2004, we exited the Hong Kong market and discontinued operations in Norway. In addition, our franchisee in Ecuador also discontinued operations. We will continue to evaluate our international markets and make investment decisions based on local market conditions that reflect our desire to better focus on key international markets.

We maintain offices for each major region and most of the countries in which we operate in order to manage, among other things, (i) store development and operations; (ii) marketing; and (iii) the purchase, supply and distribution of each store’s products.

Stores and Store Operations

Site Selection. We have developed a comprehensive model that we use to find suitable locations for company-operated stores and to assist our franchisees with finding suitable locations for franchised stores in the United States and in some of our larger international markets. In our smaller international markets, while we

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have very refined site selection criteria, the lack of availability, access and reliability of local demographic, geographic and statistical data sometimes makes it difficult to develop a model that is as comprehensive as that mentioned above. Within each targeted market, we identify potential sites for new and replacement stores by evaluating market dynamics, some of which include population demographics, customer concentration levels and possible competitive factors. We seek to place stores in locations that are convenient and visible to the public. We also seek to locate our stores in geographic areas with population and customer concentrations that enable us to better allocate available resources and manage operating efficiencies in inventory management, advertising, marketing, distribution, training and store supervision. We use our extensive membership transaction and real estate databases to monitor market conditions, select strategic store locations and maximize revenues without significantly decreasing the revenues of our nearby stores. We also periodically examine whether the size and formats of our existing stores are optimal for their location and may adjust the size of or relocate existing stores as conditions require. Our franchise program provides us with an additional avenue for expanding our consumer reach. Outside of the United States, we plan to open most of our new company-operated stores in our core markets in which we already have a significant presence.

Store Development. The following table sets forth our net store count information for both company-operated and franchised stores, domestic and international, during 2004:

Store Operations. Our U.S. company-operated stores generally operate under substantially similar hours of operation. Domestic stores are generally open 365 days a year, with daily hours from approximately 10:00 a.m. to 12:00 midnight. The hours of operation for franchised stores will vary depending on the franchisee, but generally, franchisees decide to follow the store hours of our company-operated stores. Our U.S. company-operated stores each employ an average of 14 people, including one store manager and one assistant store manager. Staffing for franchised stores will vary and is the sole responsibility of our franchisees. International store operations vary by country.

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Store Locations. At December 31, 2004, in the United States and its territories, we operated 4,708 stores, including 61 specialty game stores operating under the name RHINO VIDEO GAMES^®, and our franchisees operated 1,095 stores. The following table sets forth, by state or territory, the number of domestic stores operated by us and our franchisees as of December 31, 2004.

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