10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 000-24381

HASTINGS ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Texas	75-1386375
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
3601 Plains Boulevard, Amarillo, Texas	79102
(Address of principal executive offices)	(Zip Code)

(806) 351-2300
(Registrant’s telephone number, including area code)

None
Former name, former address and former fiscal year, if changed since last report

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

Title of each class	Name of each exchange on which registered
Common Stock, $.01 par value per share	The NASDAQ Stock Market LLC

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

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 þ No o

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 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. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o       Accelerated filer o       Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 31, 2006, 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 of the registrant was $47.4 million based on the closing market price of $7.59 per share of Common Stock as reported on the Nasdaq National Market on that date.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class	Outstanding at March 31, 2007
Common Stock, $.01 par value per share	11,019,653

DOCUMENTS INCORPORATED BY REFERENCE

Document	Parts Into Which Incorporated
Portions of the Proxy Statement for the annual meeting of Shareholders of the registrant to be held in 2007	Part III

HASTINGS ENTERTAINMENT, INC.
Form 10-K Annual Report
For the Fiscal Year Ended January 31, 2007

INDEX

	PAGE
PART I
Item 1. Business	1
Item 1A. Risk Factors	8
Item 1B. Unresolved Staff Comments	11
Item 2. Properties	12
Item 3. Legal Proceedings	13
Item 4. Submission of Matters to a Vote of Security Holders	13
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6. Selected Financial Data	16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation	18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	29
Item 8. Financial Statements and Supplementary Data	30
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	54
Item 9A. Controls and Procedures	54
PART III
Item 10. Directors, Executive Officers and Corporate Governance	55
Item 11. Executive Compensation	55
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	55
Item 13. Certain Relationships and Related Transactions, and Director Independence	55
Item 14. Principal Accountant Fees and Services	55
PART IV
Item 15. Exhibits and Financial Statement Schedules	56
SIGNATURES	59
CERTIFICATIONS	61
Severance Agreement and Release with David Moffatt
Employment Agreement with Michael Rigby
Amended Loan and Security Agreement
Consent of Ernst & Young LLP
Certification of CEO Pursuant to Rule 13a-14(a)/15d-14(a)
Certification of CFO Pursuant to Rule 13a-14(a)/15d-14(a)
Certification of CEO and CFO Pursuant to Section 906

PART I

Forward-looking Statements

Certain written and oral statements set forth below or made by Hastings with the approval of an authorized executive officer of the Company constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “intend,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future including statements relating to the business, expansion, merchandising and marketing strategies of Hastings, industry projections or forecasts, inflation, effect of critical accounting policies including lower of cost or market for inventory adjustments, the returns process, rental asset depreciation, store closing reserves, impairment or disposal of long-lived assets, revenue recognition, comparable-store revenues and vendor allowances, sufficiency of cash flow from operations and borrowings under our revolving credit facility and statements expressing general optimism about future operating results are forward-looking statements. Such statements are based upon Company management’s current estimates, assumptions and expectations, which are based on information available at the time of the disclosure, and are subject to a number of factors and uncertainties, including, but not limited to, whether our assumptions turn out to be correct, our inability to attain such estimates and expectations, a downturn in market conditions in any industry relating to the products we inventory, sell or rent, the effects of or changes in economic conditions in the U.S or the markets in which we operate our stores, volatility of fuel and utility costs, acts of war or terrorism inside the United States or abroad, our success in forecasting customer demand for products and legal proceedings; any of which could cause actual results to differ materially from those described herein. We undertake no obligation to affirm, publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 1. BUSINESS.

General

Hastings Entertainment, Inc. (the “Company,” “Hastings,” or “Hastings Entertainment”) is a leading multimedia entertainment retailer. We operate entertainment superstores that buy, sell, trade, and rent various home entertainment products, including books, music, software, periodicals, new and used CDs, DVDs, video games and videocassettes, video game consoles, and DVD players, as well as consumables and boutique products such as apparel, t-shirts, action figures, posters, and greeting cards. As of March 31, 2007, we operated 154 stores in medium-sized markets located in 20 states, primarily in the Western and Midwestern United States. We also operate a multimedia entertainment e-commerce web site offering a broad selection of books, music, software, videocassettes, video games and DVDs. We operate two wholly-owned subsidiaries: Hastings Properties, Inc. and Hastings Internet, Inc. References herein to fiscal years are to the twelve-month periods that end in January of each following calendar year. For example, the twelve-month period ended January 31, 2007 is referred to as fiscal 2006.

1

Business Strategy

Our goal is to enhance our position as a leading multimedia entertainment retailer primarily in medium-sized communities by expanding and remodeling existing stores, opening new stores in selected markets and to a lesser extent, offering our products through the Internet. Each element of our business strategy is designed to build consumer awareness of the Hastings concept and achieve high levels of customer loyalty and repeat business. We believe the key elements of this strategy are the following:

Superior Multimedia Concept. Our stores present a wide variety of product categories with individual products tailored to local preferences in a dynamic and comfortable store atmosphere with exceptional service. Our diverse product categories allow us to more effectively merchandise for our customers’ constant desire for entertainment, regardless of which formats are most popular at any given time. Our stores average approximately 20,000 square feet of sales space, with our new stores generally ranging in size from 15,000 to 25,000 square feet of sales space. Our stores offer customers an extensive product assortment customized for a specific store. Below is a listing of the approximate minimum and maximum title selections for our stores:

	Minimum		Maximum
Product Category	Title Count		Title Count
Books		12,000		63,000
Music		5,000		25,000
Sale VHS, DVD and Video Games		7,000		14,000
Rental VHS, DVD, Video Games		10,000		21,000
Used CDs, DVD, Video Games		3,000		29,000
Used Books		1,000		20,000
Boutique, Consumables and Accessories		2,000		4,000
Periodicals		1,000		4,000
Software		—		1,000

The following table shows our revenue mix as a percentage of total revenues for the last three fiscal years:

	Fiscal Year
Product Category	2006			2005			2004
Music		23	%		25	%		25	%
Books		22	%		22	%		22	%
Video		21	%		19	%		18	%
Rental		17	%		17	%		19	%
Video Games		9	%		9	%		8	%
Boutique		4	%		4	%		4	%
Consumables		3	%		3	%		2	%
Other		1	%		1	%		2	%

All stores carry a core product assortment for each product category that is supplemented with tailored components to accommodate the particular demographic profile and demand of the local market in which the store operates through the utilization of our proprietary purchasing and inventory management systems. We believe that our multimedia format reduces our reliance on and exposure to any particular entertainment segment and enables us to efficiently add exciting new entertainment categories to our product line.

Medium-Sized Market Focus. We target medium-sized markets with populations generally less than 250,000 where our extensive product selection in both new and used products, low pricing strategy, ability to trade-in, efficient operations and superior customer service enable us to become the market’s destination entertainment store. We believe that the medium-sized markets where we operate the majority of our stores present an opportunity to profitably operate and expand our unique entertainment store format. We base our merchandising strategy for our stores on an in-depth understanding of our customers and our individual markets. We strive to optimize each store’s merchandise selection by using our proprietary information systems to analyze the sales history, anticipated demand and demographics of each store’s market. In addition, we utilize flexible layouts that enable each store to present our products according to local interests and to customize the layout in response to new customer preferences and product lines.

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Customer-Oriented Format. We design our stores to provide an easy-to-shop, open store atmosphere by offering major product categories in a “store-within-a-store” format. Most of our stores position product with customer affinities together around a wide racetrack aisle or in three departments (e.g., books, music/video games/boutique and video) that are designed to allow customers to view the entire store. Currently 92 stores utilize some form of the three-department format and the Company plans to expand this model to an additional seven stores in fiscal 2007. This store configuration produces significant cross-marketing opportunities among the various entertainment departments, which we believe results in higher average transaction volumes and impulse purchases. To encourage browsing and the perception of Hastings as a community gathering place, we have continued to invest in our line of Hard Back Cafes. At January 31, 2007, we had 66 Hard Back Cafes serving gourmet coffee and pastries, 27 of which allow the customer to place drive-thru orders, and we have plans for an additional five stores to open Hard Back Cafes in fiscal 2007. Stores without Hard Back Cafes have incorporated other amenities, such as comfortable chairs for reading, soft drinks and snacks, music and video game auditioning stations, interactive information kiosks, children’s reading areas and in-store promotional events.

Low Pricing. Our pricing strategy is to offer value to our customers by maintaining low prices that are competitive with or lower than the prices charged by other retailers in the market. We determine our prices on a market-by-market basis, depending on the level of competition and other market-specific considerations. We believe that our low pricing structure results in part from (i) our ability to purchase a majority of our products directly from publishers, studios and manufacturers as opposed to purchasing from distributors, (ii) our proprietary information systems, to which we have made improvements that have enabled management to make more precise and targeted purchases and pricing for each store and (iii) our consistent focus on maintaining low occupancy and operating costs.

Used and Budget-Priced Products. Since 1992, we have bought or traded for customers’ CDs to sell as used product in order to leverage the value of our CD offering. Since 2001, we have added DVDs and video games and since 2004, we have added used books to our used product offerings. In addition to used products, we offer budget-priced products in all of our major product categories to provide enhanced value to our customers. During fiscal 2006 and 2005, we generated approximately 9.9% and 9.4%, respectively, of our total revenues from used and budget-priced products. We believe customer loyalty and additional visits are created by customers trading in unwanted entertainment media for cash or credit. Additionally, we offer used and budget products allowing the customer to choose between a new or a less expensive used copy of the same title.

Internet. Augmenting our store offering, we operate an e-commerce Internet web site (www.gohastings.com). Our site enables customers to electronically access more than 1,000,000 new and used entertainment products and unique, contemporary gifts. Additionally, we fill Internet orders for used products placed at www.gohastings.com and Amazon Marketplace through Hastings’ goShip program in which 56 stores participate and ship product directly from store inventories. We plan to expand this program to an additional 30 stores in fiscal 2007. Our site features exceptional product and pricing offers, search and auditioning capabilities, and digital downloading of music selections. The web site is designed to fully integrate into a store kiosk to leverage both the physical and digital shopping experience. The site also features an Investor Relations section with links to past press release information and filings with the Securities and Exchange Commission, including officer certifications of financial information listed as exhibits to such filings.

Expansion Strategy

We plan to open three stores and expand or relocate five stores during fiscal 2007. We have identified potential locations for future stores in under-served, medium-sized markets that meet our new-market criteria. Management intends to continue its practice of reviewing the profitability trends and prospects of existing stores and closing or relocating under-performing stores. We believe that with our current information systems and distribution capabilities, our infrastructure can support our anticipated rate of expansion and growth for at least the next several years.

3

Merchandising Strategy

Hastings Entertainment is a leading entertainment retailer. The combination of music, books, periodicals, videos, video games, boutique, and consumables are unique in the marketplace. These core categories, supplemented by our video and video game rental business and the ability of our customers to buy, sell, and trade used products, create a store environment that appeals to a broad customer base and positions our stores as destination entertainment stores in our targeted medium-sized markets.

The specific merchandise mix within our core product categories is continually refined to reflect changing trends and new technologies. Product assortments are tailored to match the local demographic profiles with our customers’ needs at the community level kept in mind. This store level profiling is accomplished through our proprietary purchasing, inventory management, selection, and database management systems.

Information Technologies

Our information system is based on technology that allows for communication and exchange of current information among all locations, corporate and retail, via a wide-area network. The primary components of the information system are as follows:

New Release Allocation. Our buyers use our proprietary new release allocation system to purchase new release products for the stores and have the ability within the system to utilize multiple methods of forecasting demand. By using store-specific sales history, factoring in specific market traits, applying sales curves for similar titles or groups of products and minimizing subjectivity and human emotion from a transaction, the system customizes purchases for each individual store to satisfy customer demand. The process provides the flexibility to allow us to anticipate customer needs, including tracking missed sales and factoring in regional influences. We believe that the new release allocation system enables us to increase revenues by having the optimum levels and selection of products available in each store at the appropriate time to satisfy customers’ entertainment needs.

Rental Asset Purchasing System. Our proprietary rental asset purchasing system uses store-specific performance on individual rental titles to anticipate customer demand for new release rental titles. The system analyzes the first eight weeks’ performance of a similar title and factors in the effect of such influences as seasonal trends, box office draw and prominence of the movie’s cast to customize an optimum inventory for each individual store. The system also allows for the customized purchasing of other catalog rental assets on an individual store basis, additional copy depth requirements under revenue-sharing agreements and timely sell-off of previously viewed tapes. We believe that our rental asset purchasing system allows us to efficiently plan and stock each store’s rental asset inventory, thereby improving performance and reducing exposure from excess inventory.

Store Replenishment. Store replenishment covers three main areas for controlling a store’s inventory.

Selection Management. Selection management constantly analyzes store-specific sales, traits and seasonal trends to determine title selection and inventory levels for each individual store. By forecasting annual sales of products and consolidating recommendations from store management, the system enables us to identify overstocked or understocked items, prompt required store actions and optimize inventory levels. The system tailors each store’s individual inventory to the market, utilizing over 1,200 product categories, configurations and product status.

Model Stock Calculation/Ordering. Model stock calculation uses store-specific sales, seasonal trends and sophisticated-sales curve fitting to forecast orders. It also accounts for turnaround time from a vendor or our distribution center and tracks historical missed sales to adjust orders to adequately fulfill sales potential. Orders are currently calculated on a weekly basis and transmitted by all stores to the corporate office to establish a source vendor for the product.

4

Inventory Management. Inventory management systems interface with other store systems and accommodate electronic receiving and returns to maintain perpetual inventory information. Cycle counting procedures allow us to perform all physical inventory functions, including the counting of each store’s inventory up to two times per year. The system provides feedback to assist in researching any variances.

Store Systems. Each store has a dedicated server within the store for processing information connected through a wide area network. This connectivity provides consolidation of individual transactions and allows store management and corporate office associates easy access to the information needed to make informed decisions. Transactions at the store are summarized and used to assist in staff scheduling, loss prevention and inventory control. All point of sale transactions utilize scanning technology, which allows for maximum customer efficiency at checkout.

Accounting and Finance. Our financial accounting software allows us to prepare a variety of management reports covering store and corporate performance. Detailed financial information for each store, as well as for warehouse units, which include our distribution and returns facilities, and the corporate office, are generated on a monthly basis.

Warehouse Management. Our warehouse management system provides for increased product picking and shipping efficiencies, faster product introduction and movement from dock to store shipment. The increased level of detail reporting in our new system allows us to refine product movement within the four walls, effectively manage the cost per unit transactions, and increase on-hand accuracy. It has simplified data sharing across the enterprise, and includes event management, analysis and reporting capabilities.

Distribution and Vendors

Our distribution center is located in a 149,000 square foot facility adjacent to our corporate headquarters in Amarillo, Texas. This central location and the local labor pool enable us to realize relatively low transportation and labor costs. The distribution center is utilized primarily for receiving, storing and distributing approximately 38,000 products offered in substantially every store. The distribution center also is used in distributing large purchases, including forward buys, closeouts and other bulk purchases. In addition, the distribution facility is used to receive, process and ship items to be returned to manufacturers and distributors, as well as the rebalancing of merchandise inventories among our stores. This facility currently provides inventory to all Hastings stores and is designed to support our anticipated rate of expansion and growth for at least the next several years. We ship products weekly to each Hastings store, facilitating quick and responsive inventory replenishment. Approximately 27% of our total product, based on store receipts, is distributed through the distribution center. Approximately 73% of our total product is shipped directly from vendors to the stores.

Our information systems and corporate infrastructure facilitate our ability to purchase products directly from manufacturers, which contributes to our low-pricing structure. In fiscal 2006, we purchased the majority of our products directly from manufacturers, rather than through distributors. Our top three vendors accounted for approximately 18% of total products purchased during fiscal 2006. While selections from a particular artist or author generally are produced by a single studio or publisher, we strive to maintain vendor relationships that can provide alternate sources of supply. Products we purchase are generally returnable to the supplying vendor. Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – General” for a description of our returns process.

5

Store Operations

Most of our stores employ one store manager, one assistant store manager, and one book manager. Store managers and assistant store managers are responsible for the execution of all operational, merchandising and marketing strategies for the store in which they work. Stores also generally have department leaders, who are individually responsible for their respective music, software, video, customer service and stocking departments. Hastings stores are generally open daily from 10:00 a.m. to 11:00 p.m. However, several stores are open 9:00 a.m. to 11:00 p.m. or 10:00 a.m. to 10:00 p.m. The only days our stores are closed are Thanksgiving and Christmas.

Competition

Hastings competes, within our trading areas, with all mass and specialty music, book, video, and video game retailers. Additionally, Hastings competes with video and video game rental stores and both Internet retail and rental businesses operating in our core product categories.

Trademarks and Servicemarks

We believe our trademarks and servicemarks, including the marks “Hastings Books Music Video;” “Hastings Your Entertainment Superstore;” “Hard Back Café” word mark only, word mark with design in color, and word mark with design in black and white; “Hastings Discover Your Entertainment” word mark with design in color and word mark in black and white have significant value and are important to our marketing efforts. We have registered each of the above as servicemarks with the United States Patent and Trademark Office (“USPTO”). We are currently claiming common law rights in the marks “Buy Sell Trade Rent,” “Hastings Hard Back Café,” “Hastings Hard Back Coffee Café,” and “Hastings Your Entertainment Superstore Hard Back Café.” We maintain a policy of pursuing registration of our principal marks and vigorously opposing any infringement of our marks.

Associates

We refer to our employees as associates because of the critical role they play in the success of each Hastings store and the Company as a whole. As of January 31, 2007, we employed approximately 5,962 associates, of which 2,011 are full-time and 3,951 are part-time associates. Of this number, approximately 5,475 were employed at retail stores, 221 were employed at our distribution center and 266 were employed at our corporate offices. None of our associates is represented by a labor union or subject to a collective bargaining agreement. We believe that our relations with our associates are good.

6

Executive Officers of the Company

Below is certain information about the executive officers of Hastings Entertainment, Inc.

Name	Age	Position
John H. Marmaduke	59	Chairman of the Board, President and Chief Executive Officer
Alan Van Ongevalle	39	Senior Vice President of Merchandising
Dan Crow	60	Vice President of Finance and Chief Financial Officer
Kevin Ball	50	Vice President of Marketing
Phil McConnell	44	Vice President of Product
John Hintz	42	Vice President of Information Technology

All executive officers are chosen by the Board of Directors and serve at the Board’s discretion. Information concerning the business experience of our executive officers is as follows:

John H. Marmaduke, age 59, has served as President and Chief Executive Officer of the Company since July 1976 and as Chairman of the Board since October 1993. Mr. Marmaduke served as President of the Company’s former parent company, Western Merchandisers, Inc. (“Western”), from 1982 through June 1994, including the years 1991 through 1994 when Western was a division of Wal-Mart Stores, Inc. Mr. Marmaduke also serves on the board of directors of the Interactive Entertainment Merchants Association. Mr. Marmaduke has been active in the entertainment retailing industry with the Company and its predecessor company for over 30 years.

Alan Van Ongevalle, age 39, has served as Senior Vice President of Merchandising of the Company since February 2007. From February 2003 until February 2005, Mr. Van Ongevalle served as Vice President of Information Technology and Distribution. From August 2002 to February 2003, Mr. Van Ongevalle served as Vice President of Marketing and Distribution. From May 2000 to August 2002, Mr. Van Ongevalle served as Vice President of Marketing. From August 1999 to May 2000, Mr. Van Ongevalle served as the Senior Director of Marketing and as Director of Advertising from September 1998 to August 1999. Mr. Van Ongevalle joined Hastings in November 1992 and held various store operation management positions including Store Manager, Director of New Stores and the Southern Kansas area through September 1998.

Dan Crow, age 60, has served as Vice President of Finance and Chief Financial Officer of the Company since October 2000. From July of 2000 to October 2000, Mr. Crow served as Vice President of Finance. Mr. Crow is a member of the American Institute of Certified Public Accountants and Financial Executives International.

Kevin Ball, age 50, has served as Vice President of Marketing of the Company since May of 2004. From 2001 to 2004, Mr. Ball served as Vice President of Marketing at Organized Living, a specialty retailer of home organization products, headquartered in Kansas City. From 2000 to 2001, Mr. Ball held the position of Vice President of Marketing at Crown Books in Washington, D.C. and from 1995 to 2000 was the Director of Marketing at Trans World Entertainment in Albany, N.Y.

Phil McConnell, age 44, has served as Vice President of Product of the Company since June 2006. Mr. McConnell most recently served for nine years as Vice President of Merchandising, VMI Services for Alliance Entertainment Corporation (AEC), the largest wholesale distributor of prerecorded music and movies in the nation. Previously, Mr. McConnell served in senior merchandising positions with Best Buy and Circuit City.

John Hintz, age 42, has served as Vice President of Information Technology of the Company since February 2007. Mr. Hintz previously served as Senior Director of Application Development since August 2006. From February 2006 to August 2006, he served as the Director of Application Development. From August 2003 to August 2006, he served as Director of Retail Technologies. He was promoted to Director of Store Systems in August of 2001. Mr. Hintz joined Hastings in 1987 as a store associate.

7

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. The public may read and copy any materials we file with the SEC at the SEC’s public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is (www.sec.gov).

The address of our Internet web site is (www.gohastings.com) and through the links on the Investor Relations portion of our web site, we make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other items filed with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Such material is made available through our web site as soon as reasonably practicable after we electronically file with or furnish the material to the SEC. In addition, links to press releases, our board committee charters and our code of ethics for financial and other executive officers are posted in the Investor Relations section of our web site.

ITEM 1A. RISK FACTORS.

CAUTIONARY STATEMENTS

An investment in the Company involves significant risks and uncertainties. The cautionary statements and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected.

Our business is highly seasonal.

As is the case with many retailers, a significant portion of our revenues, and an even greater portion of our operating profit, is generated in the fourth fiscal quarter, which includes the holiday selling season. As a result, a substantial portion of our annual earnings has been, and will continue to be, dependent on the results of this quarter. Less than satisfactory net sales for such period could have a material adverse effect on the Company’s financial condition or results of operations for the year and may not be sufficient to cover any losses that may have been incurred in the first three quarters of the year. We experience reduced rental activity in the spring because customers spend more time outdoors. Major world or sporting events, such as the Super Bowl, the Olympic Games or the World Series, also have a temporary adverse effect on revenues. Future operating results may be affected by many factors, including variations in the number and timing of store openings, the number and popularity of new book, music and video titles, the cost of the new release or “best renter” titles, changes in comparable-store revenues, competition, marketing programs, increases in the minimum wage, weather, special or unusual events, and other factors that may affect our operations.

Our business is dependent on consumer spending patterns.

Revenues generated from the sale and rental of books, music, videos and other products we carry have historically been dependent upon discretionary consumer spending, which may be affected by general economic conditions, natural energy prices, interest rates, consumer confidence and other factors beyond our control. A decline in consumer spending on the buying and/or rental of the products we offer could have a material adverse effect on our financial condition and results of operations and our ability to fund our expansion strategy.

Intense competition from traditional retail sources and the Internet may adversely affect our business.

We operate in highly competitive industries. For all of our product categories, we compete directly with national store operators, as well as regional chains and stores, specialty retailers dealing in our products, independent single store operators, discount stores, warehouse and mail order clubs, and mass merchandisers. In addition, the Internet

8

is a significant channel for retailing for most of the product categories that we offer. In particular, the retailing of books, music and video over the Internet is highly competitive. In addition, we face competition from companies engaged in the business of selling books, music and movies and the renting of movies via electronic means, including the downloading of music content and in-home video delivery. An increase in competition in the physical or electronic markets in which we operate could have a material effect on our operations.

Our business could be negatively impacted if the in-store video retailer distribution window is reduced or eliminated.

A competitive advantage that in-store video retailers currently enjoy over most other movie distribution channels, except theatrical release, is the early timing of the in-store video retailer “distribution window.” After the initial theatrical release of a movie, studios generally make their movies available to in-store video retailers (for rental and retail, including by mass merchant retailers) for specified periods of time. 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 in-store video retailers varies, but has traditionally ranged from 45 to 60 days for domestic video stores. Thereafter, movies are made sequentially available to television distribution channels.

Our business could be negatively affected if (i) in-store video retailer distribution windows were no longer the first following the theatrical release; (ii) the length of the in-store video retailer distribution windows were shortened; or (iii) the in-store video retailer distribution windows were no longer as exclusive as they are now because newly released movies would be made available earlier on these other forms of non-theatrical movie distribution. As a result, consumers would no longer need to wait until after the in-store video retailer distribution window to view a newly released movie on these other distribution channels.

We believe that the studios have a significant interest in maintaining a viable in-store video retail industry. However, the order, length and exclusivity of each window for each distribution channel is determined solely by the studio releasing the movie, and we cannot predict future decisions by the studios, or the impact, if any, of those decisions. In addition, any consolidation or vertical integration of media companies to include both content providers and digital distributors could pose a risk to the continuation of the distribution window.

Our business is subject to changes in current rental video studio pricing policies.

Recent studio pricing for movies released to in-store video retailers has impacted our video business. Historically, studio pricing was based on whether or not a studio desired to promote a movie for both rental and sale to the consumer, or primarily for rental, from the beginning of the in-store video distribution window. In order to promote a movie title for rental, the title would be released to in-store video retailers at a price that was too high to allow for an affordable sales price by the retailer to the consumer at the beginning of the retail in-store video distribution window. As rental demand subsided, the studio would reduce pricing in order to then allow for reasonably priced sales to consumers. Currently, substantially all DVD titles are released at a price to the in-store video retailer that is low enough to allow for an affordable sales price by the retailer to the consumer from the beginning of the retail in-store video distribution window. This low sell-through pricing policy has led to increasing competition from other retailers, including mass merchants and online retailers, who are able to purchase DVDs for sale to consumers at the same time as traditional in-store video retailers, like Hastings, which purchase DVDs for rental. In addition, some retailers sell movies at lower prices in order to increase overall traffic to their stores or businesses, and mass merchants may be more willing to sell at lower prices, and in some instances, below wholesale. These factors have increased consumer interest in purchasing DVDs, which has reduced the significance of the VHS rental window.

We believe that the increased consumer purchases are due in part to consumer interest in building DVD libraries of classic movies and personal favorites and that the studios will remain dependent on the traditional in-store video retailer to generate revenues for the studios from titles that are not classics or current box office hits. Approximately 60% of most studios’ revenues derive from their home entertainment divisions. We therefore believe the importance of the video rental industry to the studios will continue to be a factor in studio pricing decisions. However, we cannot control or predict studio pricing policies with certainty, and we cannot assure you that consumers will not, as a result of further decreases in studio sell-through pricing and/or sustained or further

9

depressed pricing by competitors, increasingly desire to purchase rather than rent movies. Personal DVD libraries could also cause consumers to rent or purchase fewer movies in the future. Our profitability could therefore be negatively affected if, in light of any such consumer behavior, we were unable to (i) grow our rental business, (ii) replace gross profits from generally higher-margin rentals with gross profits from increased sales of generally lower-margin sell-through product; or (iii) otherwise positively affect gross profits, such as through price increases or cost reductions. Our ability to achieve one or more of these objectives is subject to risks, including the risk that we may not be able to compete effectively with other DVD retailers, some of whom may have competitive advantages such as the pricing flexibility described above or favorable consumer perceptions regarding value.

Regardless of the wholesale pricing environment, the extent of our profitability is dependent on our ability to enter into and maintain arrangements with the studios that effectively balance copy depth and cost considerations. Each type of arrangement provides different advantages and challenges for us. The ability to negotiate preferred terms under revenue sharing agreements for the procurement of DVD or video game titles is crucial to our operations. Our profitability could be negatively affected if studios were to make other changes in their wholesale pricing policies and revenue-sharing agreements.

Our business could be negatively impacted by new technology that provides alternate methods of video delivery.

Advances in technologies such as video-on-demand or certain changes in consumer behavior driven by these or other technologies and methods of delivery, could have a negative effect on our business. In particular, our business could be impacted if (i) newly released movies were to be made widely available by the studios to these technologies at the same time or before they are made available to in-store video retailers for rental; and (ii) these technologies were to be widely accepted by consumers. In addition, advances in direct broadcast satellite and cable technologies may adversely affect public demand for video store rentals. If direct broadcast satellite and digital cable were to become more widely available and accepted, this could cause a smaller number of movies to be rented if viewers were to favor the expanded number of conventional channels and expanded content, including movies, specialty programming and sporting events, offered through these services. If this were to occur, it could have a negative effect on our video store business. Direct broadcast satellite providers transmit numerous channels of programs by satellite transmission into subscribers’ homes. Also, cable providers are taking advantage of digital technology to transmit many additional channels of television programs over cable lines to subscribers’ homes.

We rely on certain key personnel.

Management believes that the Company’s continued success will depend, to a significant extent, upon the efforts and abilities of Mr. John H. Marmaduke, Chairman, President and Chief Executive Officer. The loss of the services of Mr. Marmaduke could have a material adverse effect on our operations. We maintain a “key man” term life insurance policy on Mr. Marmaduke for $10 million. In addition, our success depends, in part, on our ability to retain key management and attract other personnel to satisfy our current and future needs. The inability to retain key management personnel or attract additional qualified personnel could have a material adverse effect on our operations.

Our growth is dependent on our ability to execute our expansion strategy.

Our growth strategy is dependent principally on our ability to open new stores and remodel, expand and/or relocate certain of our existing stores and operate them profitably. In general, the rate of our expansion depends, among other things, on general economic and business conditions affecting consumer confidence and spending, the availability of qualified management personnel and our ability to manage the operational aspects of our growth. It also depends upon the availability of adequate capital, which in turn depends in a large part upon the cash flow generated from operations.

Our future results will depend, among other things, on the success in implementing our expansion strategy. If stores are opened more slowly than expected, sales at new stores reach targeted levels more slowly than expected (or fail to reach targeted levels) or related overhead costs increase in excess of expected levels, our ability to successfully implement our expansion strategy would be adversely affected.

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Changes to information technology systems may disrupt the supply chain.

We use a number of computerized information systems to manage our new release allocations, selection management, merchandise planning, pricing, markdowns, and inventory replenishment at each store and at our distribution facility. These major systems collectively support our supply chain. Through continuing processes of review and evaluation the Company is implementing modifications, enhancements, and upgrades to its information technology systems. In some cases these changes include replacing legacy systems with successor systems. There are inherent risks associated with modifying or replacing these core systems, including timely accurate movement and processing of data, which could possibly result in supply chain disruptions. We believe that the appropriate processes and procedures are in place through our software development life cycle (“SDLC”), design, testing, and staging implementation, along with obtaining appropriate commercial contracts and application documentation with third-party vendors supplying such replacement technologies. There can be no assurances that we will successfully modify, integrate, or launch these new systems or changes as planned or that they will occur without supply chain or other disruptions or without impacts on inventory valuation. These disruptions or impacts, if not anticipated and appropriately mitigated, could have a negative effect on our financial condition and results of operations.

Our business is dependent upon renewing or entering into new leases on favorable terms.

All of the Company’s stores are located in leased premises. If the cost of leasing existing stores increases, the Company cannot assure that it will be able to maintain its existing store locations as leases expire. In addition, the Company may not be able to enter into new leases on favorable terms or at all, or it may not be able to locate suitable alternative sites or additional sites for new store expansion in a timely manner. The Company’s revenues and earnings may decline if the Company fails to maintain existing store locations, enter into new leases, locate alternative sites or find additional sites for new expansion.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

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ITEM 2. PROPERTIES.

     As of January 31, 2007, we operated 154 stores in 20 states located as indicated in the following table:

Name of State	Number of Stores
Alabama		1
Arkansas		11
Arizona		7
Colorado		4
Georgia		1
Idaho		9
Indiana		1
Iowa		1
Kansas		10
Kentucky		1
Missouri		7
Montana		6
Nebraska		4
New Mexico		16
Oklahoma		12
Tennessee		6
Texas		43
Utah		2
Washington		9
Wyoming		3
Total		154

Currently, we lease sites for all our stores. These sites typically are located in pre-existing, stand-alone buildings or strip shopping centers. Our primary market areas are medium-sized communities with populations generally less than 250,000. We have developed a systematic approach using our site selection criteria to evaluate and identify potential sites for new stores. Key demographic criteria for stores include community population, community and regional retail sales, personal and household disposable income levels, education levels, median age, and proximity of colleges or universities. Other site selection factors include current competition in the community, visibility, available parking, ease of access and other neighbor tenants.

We actively manage our existing stores and from time to time close under-performing stores. We did not close any stores during fiscal 2006 or 2005.

The terms of our store leases vary considerably. We strive to maintain maximum location flexibility by entering into leases with long initial terms and multiple short-term extension options. We have been able to enter into leases with these terms in part because we generally bear a substantial portion of the cost of preparing the space for a store.

The following table sets forth as of January 31, 2007 the number of stores that have current lease terms that will expire during each of the following fiscal years and the associated number of stores for which we have options to extend the lease term:

	Number of Stores		Options
Fiscal Year 2007		16		16
Fiscal Year 2008		15		14
Fiscal Year 2009		32		29
Fiscal Year 2010		16		12
Fiscal Year 2011		16		13
Thereafter		59		54
Total		154		138

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We have not experienced any significant difficulty renewing or extending leases on a satisfactory basis.

Our headquarters and distribution center are located in Amarillo, Texas in a leased facility consisting of approximately 45,000 square feet for office space and 149,000 square feet for the distribution center. The leases for this property terminate in September 2008, and we have the option to renew these leases through March 2020.

ITEM 3. LEGAL PROCEEDINGS.

During fiscal 2005, we were named as a defendant in lawsuits in the states of New Mexico and Texas alleging that our extended viewing fees for movie and game rentals are illegal under the Uniform Commercial Code. On October 27, 2005, the Company petitioned the court for summary judgment in one such lawsuit pending in the state of New Mexico. On November 28, 2005, the judge granted the Company’s petition for summary judgment and dismissed all pending claims in that lawsuit. The plaintiff subsequently appealed the court’s summary judgment. The plaintiff in the other lawsuit, which was filed in the state of Texas, filed an amended petition wherein he abandoned all but one claim. On May 15, 2006, he filed a motion for class certification.

The Company settled all litigation regarding the matters described above, including the dropping of the motion for class certification, with prejudice for $85,000 in February 2007. At January 31, 2007, the settlement was accrued.

We are also involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of the security holders during the fourth quarter of fiscal 2006.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

     The shares of Hastings Entertainment, Inc. common stock are listed and traded on The Nasdaq National Market (Nasdaq) under the symbol “HAST.” Our common stock began trading on June 12, 1998, following our initial public offering. The following table contains, for the periods indicated, the high and low sales prices per share of our common stock as reported on the Nasdaq:

	High		Low
2006:
First Quarter	$	6.24	$	4.75
Second Quarter	$	8.00	$	5.51
Third Quarter	$	8.17	$	5.60
Fourth Quarter	$	8.40	$	5.43
2005:
First Quarter	$	8.47	$	5.99
Second Quarter	$	6.80	$	5.05
Third Quarter	$	6.59	$	5.26
Fourth Quarter	$	5.80	$	4.34

As of March 31, 2007, there were approximately 319 holders of record of our Common Stock.

The payment of dividends is within the discretion of the Board of Directors and will depend on our earnings, capital requirements, and our operating and financial condition, among other factors. Our current revolving credit facility restricts the payment of dividends. In view of such restrictions, it is unlikely that we will pay a dividend in the foreseeable future.

A summary of our purchases of shares of our common stock for the three months ended January 31, 2007 is as follows:

					Total number of
					shares		Approximate
					purchased as		dollar value of
					part of publicly		shares that may
	Total number		Average		announced		yet be purchased
	of shares		price paid		plans or		under the plans or
Period	purchased (1)		per share		programs		programs (2)
November 1 to November 30, 2006		—	$	—		—		N/A
December 1 to December 31, 2006		18,500		7.13		18,500		N/A
January 1 to January 31, 2007		24,100		6.12		24,100		N/A
Total		42,600	$	6.56		42,600	$	4,055,772

(1)

All share purchases were open-market purchases made under a repurchase plan publicly announced in a press release dated September 28, 2001. Our Board of Directors initially authorized the repurchase of up to $5.0 million of our common stock. Since that time, the Board of Directors has approved additional increases in the amounts of $2.5 million on April 4, 2005; $5.0 million on March 15, 2006; and $2.5 million on October 3, 2006. Each such authorization to increase amounts was publicly announced in a press release. The purchases satisfied the conditions of the safe harbor of Rule 10b-18 under the Securities Exchange Act of 1934.

(2)

A total of 1,877,063 shares have been purchased under the repurchase plan at a total cost of approximately $10.9 million, or approximately $5.81 per share.

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Comparison of Cumulative Five Year Total Return

	Fiscal Years Ended
	January 31,		January 31,		January 31,		January 31,		January 31,		January 31,
	2002		2003		2004		2005		2006		2007
Hastings	$	100.00	$	79.09	$	86.36	$	150.00	$	97.27	$	107.27
S&P 500 Index		100.00		75.71		100.08		104.52		113.26		127.26
Nasdaq Composite		100.00		68.30		106.83		106.64		119.22		127.40

The graph above compares the cumulative total shareholder return on our common stock for the last five years with the cumulative total return on the S&P 500 Index and the Nasdaq Composite Index over the same period. The graph assumes the investment of $100 in Hastings common stock, the S&P 500 Index and the Nasdaq Composite Index on January 31, 2002 and the reinvestment of all dividends.

With respect to equity compensation plan information, please refer to Item 11 of this Annual Report.

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ITEM 6. SELECTED FINANCIAL DATA.

The data set forth below should be read in conjunction with Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and the Company’s Financial Statements and notes thereto.

	Fiscal Year
(In thousands, except per share and square foot data)	2006			2005			2004			2003			2002
Income Statement Data:
Merchandise revenue	$	454,142		$	444,291		$	440,596		$	404,977		$	395,548
Rental asset revenue		94,190			93,640			101,420			103,341			99,846
Total revenues		548,332			537,931			542,016			508,318			495,394
Merchandise cost of revenue		326,025			314,328			322,632			299,055			294,647
Rental asset cost of revenue		33,862			34,458			36,266			37,727			39,893
Total cost of revenues		359,887			348,786			358,898			336,782			334,540
Gross profit		188,445			189,145			183,118			171,536			160,854
Selling, general and administrative expenses (1)		177,467			176,684			171,293			162,616			158,025
Pre-opening expenses		94			92			409			277			479
Operating income		10,884			12,369			11,416			8,643			2,350
Interest expense		(3,260	)		(2,616	)		(1,918	)		(2,048	)		(1,987	)
Interest income (2)		—			—			—			—			1,291
Other, net		642			399			293			324			237
Income before income taxes		8,266			10,152			9,791			6,919			1,891
Income tax expense (benefit) (3)		3,247			4,457			3,982			(1,358	)		—
Net income	$	5,019		$	5,695		$	5,809		$	8,277		$	1,891
Basic income per share	$	0.45		$	0.50		$	0.51		$	0.73		$	0.17
Diluted income per share	$	0.44		$	0.49		$	0.49		$	0.72		$	0.16
Weighted-average common shares outstanding – basic		11,244			11,421			11,411			11,327			11,343
Weighted-average common shares outstanding – diluted		11,518			11,667			11,942			11,483			11,779
Other Data:
Depreciation (4)	$	35,636		$	38,209		$	41,917		$	38,675		$	40,223
Capital expenditures (5)	$	18,566		$	17,097		$	24,729		$	22,093		$	26,969
Store Data:
Total selling square footage at end of period		3,121,737			3,101,627			3,039,582			2,915,884			2,846,955
Comparable-store revenues increase (decrease) (6)		1.8	%		(1.4	%)		5.0	%		1.9	%		5.0	%

	January 31,
	2007		2006		2005		2004		2003
Balance Sheet Data:
Working capital (7)	$	71,941	$	52,508	$	52,404	$	39,756	$	52,829
Total assets	$	257,498	$	254,661	$	251,299	$	233,491	$	234,014
Total long-term debt, including current maturities on capital lease obligations	$	41,922	$	28,151	$	37,029	$	28,775	$	45,699
Total shareholders’ equity	$	97,553	$	94,693	$	89,774	$	83,946	$	75,583

16

(1)	We recorded pre-tax charges of $2.6 million in fiscal 2002 related to the settlement of shareholder class action lawsuits. These charges reduced net income by $2.6 million or approximately $0.22 per diluted share.
(2)	We recorded interest income of approximately $1.3 million in the second quarter of fiscal 2002 as a result of interest earned on income tax refunds for amended returns filed for fiscal years 1995 through 1998. As a result, net income was increased by approximately $0.11 per diluted share.
(3)	The results for fiscal year 2003 reflect an income tax benefit of approximately $1.4 million, or $0.12 per diluted share, primarily due to the reversal of a valuation allowance of approximately $4.4 million previously applied against our deferred tax assets.
(4)	Includes amounts associated with our rental asset cost depreciation.
(5)	Includes purchases of property, equipment, and improvements, as well as purchases of retail locations.
(6)	Stores included in the comparable-store revenues calculation are those stores that have been open for a minimum of 60 weeks. Also included are stores that are remodeled or relocated. Sales via the internet are not included and closed stores are removed from each comparable period for the purpose of calculating comparable-store revenues.
(7)	Working capital is calculated as total current assets less total current liabilities.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

The following discussion should be read in conjunction with our consolidated financial statements and the related notes thereto and “Item 6. Selected Financial Data” appearing elsewhere in this Annual Report on Form 10-K.

Overview

Hastings Entertainment is a leading multimedia entertainment retailer that that buys, sells, trades, and rents various home entertainment products, including books, music, software, periodicals, new and used CDs, DVDs, video games and videocassettes, video game consoles, and DVD players, as well as consumables and boutique products such as apparel, t-shirts, action figures, posters, and greeting cards through its entertainment stores and its Internet web site. As of January 31, 2007, we operated 154 stores averaging approximately 20,000 square feet in medium-sized markets located in 20 states, primarily in the Western and Midwestern United States. Each of the stores is leased from a third party, is wholly-owned by us and is operated under the name of Hastings.

Our operating strategy is to enhance our position as a multimedia entertainment retailer by expanding and remodeling existing stores, opening new stores in selected markets, and offering our products through our Internet web site. References herein to fiscal years are to the twelve-month periods that end in January of the following calendar year. For example, the twelve-month period ended January 31, 2007 is referred to as fiscal 2006.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the disclosure of contingent liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We believe the following critical accounting policies affect our more significant estimates and assumptions used in the preparation of our financial statements. Our significant estimates and assumptions are reviewed, and any required adjustments are recorded, on a monthly basis.

Lower of Cost or Market for Merchandise Inventory. Our merchandise inventories are recorded at the lower of cost, which approximates the first-in, first-out (“FIFO”) method, or market. As with any retailer, economic conditions, cyclical customer demand and changes in purchasing or distribution can affect the carrying value of inventory. As circumstances warrant, we record lower of cost or market inventory adjustments. In some instances, these adjustments can have a material effect on the financial results of an annual or interim period. In order to determine such adjustments, we evaluate the age, inventory turns and estimated fair value and returnability of merchandise inventory by product category and record an adjustment if estimated market value is below cost. Through merchandising and an automated-progressive markdown program, we quickly take the steps necessary to increase the sell-off of slower moving merchandise to eliminate or lessen the effect of these adjustments.

Returns Process. Merchandise inventory owned by us is generally returnable based upon return agreements with our merchandise vendors. We continually return merchandise to vendors based on, among other factors, current and projected sales trends, overstock situations, authorized return timelines or changes in product offerings. At the end of any reporting period, cost accruals are required for inventory that has been returned to vendors, is in the process of being returned to vendors, or has been identified to be returned to vendors. These costs can include freight, valuation and quantity differences, and other fees charged by a vendor. In order to appropriately match the costs associated with the return of merchandise with the process of returning such merchandise, we utilize an allowance for cost of inventory returns. To accrue for such costs and estimate this allowance, we utilize historical experience adjusted for significant estimated or contractual modifications. Certain adjustments to the allowance can have a material effect on the financial results of an annual or interim period.

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Rental Asset Depreciation. We have established depreciation policies with respect to our rental assets that allow for the matching of product costs with the related revenues. These policies require that we make significant estimates based upon our experience as to the ultimate revenue and the timing of the revenue to be generated by our rental product. We utilize an accelerated method of depreciation because it approximates the pattern of demand for the product, which is generally higher when the product is initially released for rental by the studios and declines over time. In establishing salvage values for our rental product, we consider the sales prices and volume of our previously rented product and other used product.

Based upon these estimates, we currently depreciate the cost of our rental assets on an accelerated basis over six months or nine months, except for rental assets purchased for the initial stock of a new store, which are being depreciated on a straight-line basis over 36 months. Rental assets, which include VHS, DVDs, Books on CD, and video games, are depreciated to salvage values ranging from $2.50 to $10. Rental assets purchased for less than established salvage values are not depreciated.

We also review the carrying value of our rental assets to ensure that estimated future cash flows exceed the carrying value. We record adjustments to the value of previously rented product primarily for estimated obsolete or excess product based upon changes in our original assumptions about future demand and market conditions. If future demand or actual market conditions are less favorable than those estimated by management, additional adjustments, including adjustments to useful lives or salvage values, may be required. We continually evaluate the estimates surrounding the useful lives and salvage values used in depreciating our rental assets. Changes to these estimates resulting from changes in consumer demand, changes in our customer preferences or the price or availability of retail products may materially impact the carrying value of our rental assets and our rental margins.

For example, as discussed in Note 1 to the consolidated financial statements, during the fourth quarter of 2006, we reevaluated our estimates surrounding the useful life and salvage value of our rental assets due to recent changes in our rental business. Beginning with the fourth quarter of 2006, we changed the estimated useful life of rental video games from six months to nine months to better reflect the product’s extended rental life. In addition, we increased the salvage value on rental video games from $4 to $10 to better match the recovery rate on higher cost games released on new gaming systems. All other rental assets, which include DVDs, VHS units, and Books on CD, continue to be depreciated on an accelerated basis over six months to salvage values of either $2.50 for VHS units or $4.00 for DVD units and Books on CD. These changes in estimates related to our rental assets decreased our cost of rental revenues by approximately $0.2 million, or $0.02 per diluted share, for the year ended January 31, 2007. As our business continues to change, we will continue to evaluate the reasonableness of the estimates surrounding our rental assets.

The costs of rental product purchased pursuant to revenue-sharing arrangements typically include a lower initial product cost and a percentage of the net rental revenues to be shared with studios over an agreed period of time. Additionally, certain titles have performance guarantees. Any up-front costs exceeding the designated salvage value are amortized on an accelerated basis and revenue-sharing payments pursuant to the applicable arrangement are expensed as the related revenue is earned. The Company analyzes titles that are subject to performance guarantees and recognizes an estimated expense for under-performing titles throughout the applicable period based upon the Company’s analysis of the estimated shortfall. The Company revises these estimates on a monthly basis, according to actual results.

Store Closing Reserve. On a quarterly basis, and in the normal course of business, we evaluate our store base to determine if we need to close or relocate a store(s). Management will evaluate, among other factors, current and future profitability, market trends, age of store and lease status. The primary expense items associated with the closure of a store relate to the net present value of minimum lease payments (the present value of remaining lease payments under an active lease) and the accelerated depreciation of leasehold improvements and other assets not remaining in our possession.

19

In accordance with SFAS No. 146, we recognize lease termination costs at the time the store is closed or relocated. The amount recorded can fluctuate based on the age of the closing store, term and remaining years of the lease and the number of stores being closed or relocated. We actively pursue sublease tenants on all closed or relocated stores and, as part of the final estimation of store closing liability, the impact of any sublease income is estimated. The net of the described charges and sublease income estimates can have a material effect on the financial results of an annual or interim period.

Impairment or Disposal of Long-Lived Assets. In accordance with SFAS No. 144, we evaluate poor performing stores on a quarterly basis to determine whether projected future cash flows over the remaining initial lease term are sufficient to recover the carrying value of the fixed asset investment in each individual store. If projected future cash flows are less than the carrying value of the fixed asset investment, an impairment charge is recognized if the carrying value is less than the fair value of such assets. The carrying value of leasehold improvements as well as certain other property and equipment is subject to impairment write-down.

Revenue Recognition. We generate revenue primarily from retail sales and rental of our products. Merchandise and rental revenues are recognized at the point of sale or rental or at the time merchandise is shipped to the customer. Revenues are presented net of estimated returns and exclude all taxes. Customers may return certain merchandise for exchange or refund within our policies, and an allowance has been established to provide for projected returns. There are no provisions for uncollectible amounts since payment is received at the time of sale. We, as with most retailers, also offer gift cards for sale. Deferred revenue, a current liability, is recognized at the time a gift card is sold with the costs of designing, printing and distributing the cards recorded as an expense as incurred. The deferred revenue liability is relieved and revenue is recognized upon the redemption of the gift cards. From time to time we will offer sales incentives to customers, in the form of rebates. Revenue is reduced by the amount of estimated redemptions, based on experience of similar types of rebate offers, and a deferred revenue liability is established. The deferred revenue liability is relieved when the customer has completed all criteria necessary to file a valid rebate claim. Any remaining portion of deferred revenue is recorded as revenue following the termination of the extended redemption period and following completion of all outstanding rebate claims. The Company reduces its revenue and recognizes a reserve for the estimated utilization of early return credits received by renters for early return of rentals. The liability is relieved upon the redemption of these early return credits. Additionally, we promote the exchange of multiple used products for new product by our customers.

Comparable-Store Revenue. Stores included in the comparable-store revenues calculation are those stores that have been open for a minimum of 60 weeks. Also included are stores that are remodeled or relocated. Sales via the internet are not included and closed stores are removed from each comparable period for the purpose of calculating comparable-store revenues.

Vendor Allowances. In 2003, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF 02-16”), which addresses the accounting for cash consideration received from a vendor by a reseller for various vendor-funded allowances, including cooperative advertising support. The EITF determined that cash consideration received from a vendor should be presumed to be a reduction of the prices of vendor’s products and, therefore, should be shown as a reduction in the cost of goods sold when recognized in the reseller’s income statements. The only exception to this rule is if the reimbursement is for specific, incremental identifiable costs. If the amount of cash consideration received exceeds the cost being reimbursed, that excess amount should be characterized as a reduction of cost of goods sold when recognized in the reseller’s income statements. In accordance with EITF 02-16, a portion of our vendor advertising allowances have been recorded as a reduction of merchandise inventory and rental assets and will be recognized in cost of revenues as inventory is sold and as rental assets are rented. Certain amounts that we receive from vendors, such as cooperative advertising payments, are considered reimbursement for specific, identifiable costs and therefore continue to be recorded as a reduction of SG&A.

20

Results of Operations

     The following tables present our statement of operations data, expressed as a percentage of revenue, and the number of stores open at the end of period for the three most recent fiscal years.

	Fiscal Year
	2006			2005			2004
Merchandise revenue		82.8	%		82.6	%		81.3	%
Rental asset revenue		17.2			17.4			18.7
Total revenues		100.0			100.0			100.0
Merchandise cost of revenue		71.8			70.7			73.2
Rental asset cost of revenue		36.0			36.8			35.8
Total cost of revenues		65.6			64.8			66.2
Gross profit		34.4			35.2			33.8
Selling, general and administrative expenses		32.4			32.8			31.6
Pre-opening expenses		—			0.1			0.1
		32.4			32.9			31.7
Operating income		2.0			2.3			2.1
Other income (expense):
Interest expense		(0.6	)		(0.5	)		(0.4	)
Interest income		—			—			—
Other, net		0.1			0.1			0.1
		(0.5	)		(0.4	)		(0.3	)
Income before income taxes		1.5			1.9			1.8
Income tax expense		0.6			0.8			0.7
Net income		0.9	%		1.1	%		1.1	%

	Fiscal Year
	2006		2005		2004
Hastings Stores:
Beginning number of stores		153		152		148
Openings		1		1		5
Closings		—		—		(1	)
Ending number of stores		154		153		152

21

Fiscal 2006 Compared to Fiscal 2005

Revenues. Total revenues for fiscal 2006 increased $10.4 million, or 1.9%, to $548.3 million compared to $537.9 million for the prior year. The following is a summary of our revenue results (dollars in thousands):

	Fiscal Year Ended January 31,
	2007						2006					Increase/(Decrease)
				Percent of					Percent of
	Revenues			Total			Revenues		Total			Dollar		Percent
Merchandise revenue	$	454,142			82.8	%	$	444,291		82.6	%	$	9,851		2.2	%
Rental revenue		94,190			17.2	%		93,640		17.4	%		550		0.6	%
Total revenues	$	548,332			100.0	%	$	537,931		100.0	%	$	10,401		1.9	%
Comparable-store revenues:
Total		1.8	%
Merchandise		2.2	%
Rental		0.2	%

Below is a summary of the comparable-store revenues (“Comp”) results for our merchandise categories:

	Fiscal Year Ended January 31,
	2007			2006
Music		-6.2	%		-1.8	%
Books		0.0	%		-0.2	%
Video for sale		12.9	%		1.9	%
Video games		9.0	%		5.2	%
Boutique		1.4	%		5.2	%

Music Comps decreased 6.2%, which was primarily attributable to fewer premier artist CD releases as well as decreased sales of used CDs. These declines were partially offset by increased sales of music hardware, including iPods and other MP3 players. Book Comps were essentially flat. Strong sales of mass market and used books offset the negative impact of fewer new-release hardback sales primarily attributable to the release of the sixth book in the Harry Potter series in fiscal 2005 but no series releases in fiscal 2006. Video for sale Comps rose 12.9% due to increased sales of new release DVDs, DVD box sets and used DVDs. Video game Comps rose 9.0% on strong hardware sales due to the release of the new Nintendo Wii and Sony PS3 gaming systems as well as strong sales of Microsoft XBOX 360 games. Our Boutique Comp increase of 1.4% was headlined by increases in action figures and prepaid phone cards, partially offset by decreased sales of apparel. Our video Comp increase, including the rental and sell-through revenues from all video and video game products, was 7.2% for the fiscal year ended January 31, 2007.

Generally, it is difficult for us to project future Comp sales. Our Comp sales are to a great extent dependent upon the quantity and quality of new releases from the studios, publishers, and hardware manufacturers. However, for fiscal 2007, we are projecting a positive total Comp in the low single digits.

Rental asset Comps increased 0.2% from the same period last year due to improved marketing initiatives and a stronger slate of box office titles. Rental Comps were boosted by DVD Movies, which increased 11.7% from the same period last year, but offset by Video Game rentals, which declined 11.5% as the industry prepared for the release of new gaming systems in the fourth quarter and released fewer hot titles.

Gross Profit. For the fiscal year ended January 31, 2007, total gross profit dollars decreased approximately $0.7 million, or 0.4%, to $188.4 million from $189.1 million for the prior fiscal year. Our merchandise gross profit rate decreased to 28.2% from 29.3% for the last fiscal year, primarily as a result of decreased merchandise margin rates and increased costs associated with merchandise shrinkage and returned product. Rental gross margin rates increased to 64.0% from 63.2% for the prior year, primarily due to stronger sales and improved buying practices

22

which focused on increasing revenue sharing agreements which have a lower per unit cost. As a percentage of total revenues, gross profit decreased to 34.4% for the fiscal year compared to 35.2% for the prior fiscal year.

Selling, General and Administrative expenses (“SG&A”). SG&A increased approximately $0.8 million to $177.5 million for the fiscal year ended January 31, 2007, compared to $176.7 million for the prior fiscal year. As a percentage of total revenues, SG&A decreased to 32.4% for the fiscal year ended January 31, 2007, from 32.8% for the fiscal year ended January 31, 2006. SG&A costs included $2.4 million in increased utilities and occupancy costs associated with the operation of a greater number of new, expanded and relocated superstores; $0.8 million related to two severance agreements; and $0.7 million in increased supplies costs due to the Company’s branding initiative. These increased costs were partially offset by reduced store labor costs of $3.3 million.

Interest Expense. As a percentage of total revenues, interest expense rose to 0.6% in fiscal 2006, compared to 0.5% in fiscal 2005, due to higher debt levels and rising interest rates.

Income Taxes. For fiscal 2006, the Company recorded income tax expense of approximately $3.2 million, resulting in an effective tax rate of 39.3%. In the prior fiscal year, the Company recorded income tax expense of approximately $4.5 million, resulting in an effective tax rate of 43.9%. The Company recorded a $0.6 million provision for a state income tax settlement in fiscal 2005, which increased the effective tax rate by 5.5%.

Fiscal 2005 Compared to Fiscal 2004

Revenues. Total revenues for fiscal 2005 decreased $4.1 million, or 0.8%, to $537.9 million compared to $542.0 million for the prior year. The following is a summary of our revenue results (dollars in thousands):

	Fiscal Year
	2005						2004					Increase/(Decrease)
				Percent of					Percent of
	Revenues			Total			Revenues		Total			Dollar			Percent
Merchandise revenue	$	444,291			82.6	%	$	440,596		81.3	%	$	3,695			0.8	%
Rental revenue		93,640			17.4	%		101,420		18.7	%		(7,780	)		-7.7	%
Total revenues	$	537,931			100.0	%	$	542,016		100.0	%	$	(4,085	)		-0.8	%
Comparable-store revenues:
Total		-1.4	%
Merchandise		0.1	%
Rental		-7.5	%

Below is a summary of the Comp results for our merchandise categories:

	Fiscal Year
	2005	2004
Music	-1.8%	1.8%
Books	-0.2%	1.5%
Video for sale	1.9%	15.4%
Video games	5.2%	29.6%
Boutique	5.2%	9.8%

Our video Comp decrease, including the rental and sell-through revenues from all video and video game products, was –1.5% for the fiscal year ended January 31, 2006. In response to consumers’ migration from VHS to DVDs, we reduced our inventory of VHS units from approximately 1.2 million at January 31, 2005, to approximately 0.7 million units at January 31, 2006. Furthermore, the Company plans no additional purchases of VHS units for Fiscal 2006 and beyond.

23

Music Comps decreased 1.8%, primarily due to fewer new CD sales from premier artists, fewer cassette sales, and fewer sales of used CDs. These declines were offset partially by increased sales of music hardware, including iPods and other MP3 players. Book Comps fell 0.2% as a result of a slight decrease in the sales of new releases. Video for sale Comps rose 1.9% due to increased sales of DVDs, partially offset by declining sales of VHS. Video game Comps rose 5.2% on increased sales of new and used hardware. Our Boutique Comp increase of 5.2% was headlined by increases in sales of t-shirts and action figures.

Rental asset Comps decreased 7.5% from the last year reflecting continued in-store rental weakness industry-wide.

Gross Profit. For the fiscal year ended January 31, 2006, total gross profit dollars increased approximately $6.0 million, or 3.3%, to $189.1 million from $183.1 million for last year. Our merchandise gross profit rate increased to 29.3% from 26.8% for the prior year, primarily as a result of improved merchandise margin rates, increased efficiencies in our Distribution Center, and lower costs associated with merchandise shrinkage and returned product. Rental gross margin rates decreased to 63.2% from 64.2% in the prior year, primarily due to changing industry conditions in fiscal 2005, including weak title releases, both in video and video games, which lead our rental revenues to decrease more than anticipated relative to our product purchases. As a percentage of total revenues, total gross profit increased to 35.2% for fiscal year 2006 compared to 33.8% for the prior year.

Selling, General and Administrative expenses (“SG&A”). SG&A increased approximately $5.4 million to $176.7 million for the fiscal year ended January 31, 2006, compared to $171.3 million for the prior year, due to $1.1 million in additional advertising, $0.7 million in costs associated with the documentation of controls and procedures related to the pending adoption of Section 404 of the Sarbanes-Oxley Act, severance payouts of approximately $0.5 million, and additional costs associated with the operation of a greater number of new, expanded and relocated superstores. As a percentage of total revenues, SG&A increased to 32.8% for the fiscal year ended January 31, 2006, compared to 31.6% for the fiscal year ended January 31, 2005.

Interest Expense. As a percentage of total revenues, interest expense rose to 0.5% in fiscal 2005, compared to 0.4% in fiscal 2004, due to rising interest rates.

Income Taxes. For fiscal 2005, the Company recorded income tax expense of approximately $4.5 million, resulting in an effective tax rate of 43.9%. In the prior fiscal year, the Company recorded income tax expense of approximately $4.0 million, resulting in an effective tax rate of 40.9%. The Company’s effective tax rate rose in fiscal 2005 due to increases in state income tax rates.

24

Liquidity and Capital Resources

We generate cash from operations exclusively from the sale of merchandise and the rental of products and we have substantial operating cash flow because most of our revenue is received in cash and cash equivalents. Other than our principal capital requirements arising from the purchase, warehousing and merchandising of inventory and rental products, opening new stores and expanding existing stores and updating existing and implementing new information systems technology, we have no anticipated material capital commitments, except for the stock buyback programs more fully discussed below. Our primary sources of working capital are cash flow from operating activities, trade credit from vendors and borrowings under our amended revolving credit facility. We believe our cash flow from operations and borrowings under our amended revolving credit facility will be sufficient to fund our ongoing operations, new stores and store expansions through fiscal 2007.

At January 31, 2007, total outstanding debt (including capital lease obligations) was $41.9 million. We project our outstanding debt levels for fiscal 2007 to be similar to that at January 31, 2007.

Consolidated Cash Flows

Operating Activities. Net cash flows from operating activities decreased $9.7 million, or 45.8%, to $11.5 million in fiscal 2006 from $21.2 million in fiscal 2005. The decrease was primarily the result of decreased accounts payable, decreased accrued expenses, and lower rental asset depreciation expense, partially offset by decreased merchandise inventories.

Investing Activities. Net cash used in investing activities increased $1.5 million, or 8.8%, from $17.1 million in fiscal 2005 to $18.6 million in fiscal 2006. This increase was the result of increased capital expenditures resulting from new and remodeled store openings during the year.

Financing Activities. Cash provided by or used in financing activities is primarily associated with borrowings and payments made under our revolving credit facility (described below under “Capital Structure”). For fiscal 2006, cash provided by financing activities was $7.3 million compared to cash used in financing activities of $7.2 million for fiscal 2005, resulting from net borrowings on our revolving credit facility during fiscal 2006 of approximately $13.9 million compared to net repayments for fiscal 2005 of approximately $8.4 million. The effect of the Company’s increased borrowings on net cash provided by financing activities was partially offset by the $4.2 million in purchases of treasury stock in fiscal 2006, as compared to $2.1 million in purchases of treasury stock in fiscal 2005.

On September 18, 2001, we announced a stock repurchase program of up to $5.0 million of our common stock. Since that time, the Board of Directors has approved additional increases in the amounts of $2.5 million on April 4, 2005; $5.0 million on March 15, 2006; and $2.5 million on October 3, 2006. During fiscal year 2006, we purchased a total of 595,600 shares of common stock at a cost of approximately $4.2 million, or $7.05 per share. As of January 31, 2007, a total of 1,877,063 shares had been purchased under the program at a cost of approximately $10.9 million, for an average cost of approximately $5.81 per share. As of January 31, 2007, approximately $4.1 million remains available for repurchases under the stock repurchase program.

25

Capital Structure. On July 11, 2005, February 28, 2006, and February 27, 2007, we executed amendments to our syndicated secured Loan and Security Agreement with Fleet Retail Finance, Inc. and The CIT Group/Business Credit, Inc, (the “Facility”). In connection with the February 27, 2007 amendment, CIT Group/Business, Inc. assigned its entire interest under the Loan and Security Agreement to Fleet Retail Group LLC. The amount outstanding under the Facility is limited by a borrowing base predicated on eligible inventory, as defined in the Facility, and certain rental assets, net of accumulated depreciation less specifically defined reserves and after the February 27, 2007 amendment, is limited to a ceiling of $100 million, less a $10 million availability reserve. The Facility permits borrowings at various interest-rate options based on the prime rate or London Interbank Offered Rate (“LIBOR”) plus applicable margin depending upon the level of our minimum availability. The borrowing base under the Facility is limited to an advance rate of 65% of eligible inventory and certain rental assets net of accumulated amortization less specifically defined reserves, which can be adjusted to reduce availability under the Facility. Lenders may increase specifically defined reserves to reduce availability in the event of adverse changes in our industry that are projected to impact the value of our assets pledged as collateral. The Facility contains no financial covenants, restricts the payment of dividends and includes certain other debt and acquisition limitations, allows for the repurchase of up to $30 million of our common stock and requires a minimum availability of $10 million at all times. The Facility is secured by substantially all of the assets of the Company and our subsidiaries and is guaranteed by each of our consolidated subsidiaries. Per the amendment executed on February 28, 2006, the Facility matures on August 29, 2011. At January 31, 2007, we had $36.2 million in excess availability, after the $10 million availability reserve, under the Facility. However, excess availability may be reduced in the future as changes in the borrowing base occur or the lenders increase availability reserves. The average rate of interest being charged under the Facility for fiscal years ending January 31, 2007 and 2006 was 7.0% and 5.6%, respectively.

We utilize standby letters of credit to support certain insurance policies. The aggregate amount of the letters of credit at January 31, 2007 was approximately $1.0 million, which reduces the excess availability under the Facility.

At January 31, 2007, our minimum lease commitments for fiscal 2007 were approximately $24.0 million. The present value of total existing minimum operating lease commitments for fiscal years 2008 through 2026 discounted at 9.0% was approximately $77.5 million as of January 31, 2007.

26

Contractual Obligations and Off-Balance Sheet Arrangements. Current accounting standards require us to disclose our material obligations and commitments to make future payments under contracts, such as debt and lease agreements. We disclose our contractual long-term debt repayment in Note 6 and our current and future operating payments in Note 7 to the consolidated financial statements. In the ordinary course of business, we routinely enter into commitments for various aspects of our operations, such as warehouse and office equipment. However, we do not believe that these commitments will have a material effect on our financial condition, results of operations or cash flows. As of January 31, 2007, other than operating leases and standby letters of credit, we had not entered into any off-balance sheet arrangements or third-party guarantees, nor is it our business practice to do so.

The following summarizes our contractual obligations at January 31, 2007, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

			Less than		1 to 3		3 to 5		More than
Contractual Obligations	Total		1 year		Years		Years		5 Years
Long-term debt (principal only) (1)	$	41,922		—		—		41,922		—
Operating leases		144,184		24,002		38,675		25,799		55,708
Revenue sharing (2)		960		960		—		—		—
Total	$	187,066		24,962		38,675		67,721		55,708

(1)

Based on our internal forecasts, we estimate interest payments for FY 2007 to be approximately $3.3 million.

(2)

As of January 31, 2007, we were a party to revenue-sharing arrangements with various studios. These agreements include minimum purchase requirements, based upon the box office results of the title, at a lower initial product cost as compared to non-revenue sharing purchases. In addition, these contracts require net rental revenues to be shared with the studios over an agreed period of time. We have included amounts owed and an estimate of our contractual obligation under these agreements for performance guarantees and minimum purchase requirements for the period in which they can reasonably be estimated, which is approximately two months in the future. Although these contracts may extend beyond the estimated two-month period, we cannot reasonably estimate these amounts due to the uncertainty of purchases that will be made under these agreements. The amounts presented above do not include revenue sharing accruals for rental revenues recorded during fiscal 2006.

27

Seasonality and Inflation

Our business is highly seasonal, with significantly higher revenues and operating income realized during the fourth quarter, which includes the holiday selling season. Below is a tabular presentation of revenues and operating income by quarter, which illustrates the seasonal effects of our business:

Fiscal year 2006:	Quarter
	First			Second			Third			Fourth
Total revenues	$	131,412		$	123,094		$	119,636		$	174,190
Operating income (loss)
% of full year:	$	3,749		$	588		$	(2,787	)	$	9,334
Total revenues		24.0	%		22.4	%		21.8	%		31.8	%
Operating income (loss)		34.4	%		5.4	%		(25.6	%)		85.8	%

Fiscal year 2005:	Quarter
	First			Second			Third			Fourth
Total revenues	$	129,124		$	122,726		$	114,587		$	171,494
Operating income (loss)
% of full year:	$	1,623		$	1,721		$	(3,818	)	$	12,843
Total revenues		24.0	%		22.8	%		21.3	%		31.9	%
Operating income (loss)		13.1	%		13.9	%		(30.8	%)		103.8	%

See Footnote 14 to the Consolidated Financial Statements for additional information.

We do not believe that inflation has materially impacted net income during the past three years. Substantial increases in costs and expenses could have a significant impact on our operating results to the extent such increases are not passed along to customers.

28

Recent Accounting Pronouncements

In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, Accounting for Income Taxes” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective beginning February 1, 2007 with the cumulative effect of the change in accounting principle recorded as an adjustment to beginning retained earnings. The Company is in the process of evaluating the provisions of FIN 48 but does not anticipate that adoption will have a material impact on its consolidated balance sheets or statements of operations, shareholders’ equity and cash flows.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

In the ordinary course of our business, we are exposed to certain market risks, primarily changes in interest rates. Our exposure to interest rate risk consists of variable rate debt based on the lenders’ base rate or LIBOR plus a specified percentage at our option. The annual impact on our results of operations of a 100 basis point interest rate change on the January 31, 2007 outstanding balance of the variable rate debt, after adjustment for the interest rate hedge agreement, would be approximately $0.3 million. After an assessment of these risks to our operations, we believe that the primary market risk exposures (within the meaning of Regulation S-K Item 305) are not material and are not expected to have any material adverse impact on our financial position, results of operations or cash flows for the next fiscal year.

29

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

HASTINGS ENTERTAINMENT, INC.
Index to Consolidated Financial Statements
and Financial Statement Schedule

	Page
Report of Independent Registered Public Accounting Firm		31
Consolidated Balance Sheets as of January 31, 2007 and 2006		32
Consolidated Statements of Operations for the years ended January 31, 2007, 2006 and 2005		33
Consolidated Statements of Shareholders’ Equity for the years ended January 31, 2007, 2006 and 2005		34
Consolidated Statements of Cash Flows for years ended January 31, 2007, 2006 and 2005		35
Notes to Consolidated Financial Statements		36
Schedule
Financial Statement Schedule II — The Financial Statement Schedule filed as part of this report is listed under Part IV, Item 15. Exhibits and Financial Statement Schedules.		58

30

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Hastings Entertainment, Inc. and subsidiaries

We have audited the accompanying consolidated balance sheets of Hastings Entertainment, Inc. and subsidiaries as of January 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended January 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hastings Entertainment, Inc. and subsidiaries at January 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for share-based payments in accordance with Statement of Financial Accounting Standard No 123 (R), Share-Based Payments.

/s/ Ernst & Young LLP

Fort Worth, Texas
April 12, 2007

31

HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

January 31, 2007 and 2006
(In thousands, except share data)

	January 31,
	2007			2006
Assets
Current assets
Cash and cash equivalents	$	3,837		$	3,617
Merchandise inventories		167,277			165,049
Deferred income taxes		3,891			4,234
Prepaid expenses and other current assets		10,633			7,016
Total current assets		185,638			179,916
Rental assets, net of accumulated depreciation of $22,604 and $26,501 at
January 31, 2007 and 2006, respectively		11,931			12,606
Property and equipment, net		57,422			60,013
Deferred income taxes		1,765			1,492
Intangible assets, net		411			454
Other assets		331			180
	$	257,498		$	254,661
Liabilities and Shareholders’ Equity
Current liabilities
Current maturities on capital lease obligations	$	—		$	94
Trade accounts payable		76,518			88,991
Accrued expenses and other current liabilities		37,179			38,323
Total current liabilities		113,697			127,408
Long-term debt, excluding current maturities on capital lease obligations		41,922			28,057
Other liabilities		4,326			4,503
Shareholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued		—			—
Common stock, $.01 par value; 75,000,000 shares authorized;		119			119
11,944,544 shares in fiscal 2006 and 2005 issued;
11,011,353 in fiscal 2006 and
11,383,172 shares in fiscal 2005, outstanding
Additional paid-in capital		36,906			36,076
Retained earnings		66,485			61,466
Other comprehensive income		67			141
Treasury stock, at cost		(6,024	)		(3,109	)
		97,553			94,693
	$	257,498		$	254,661

See accompanying notes to consolidated financial statements.

32

HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Years Ended January 31, 2007, 2006 and 2005
(In thousands, except per share data)

	Fiscal Year
	2006			2005			2004
Merchandise revenue	$	454,142		$	444,291		$	440,596
Rental asset revenue		94,190			93,640			101,420
Total revenues		548,332			537,931			542,016
Merchandise cost of revenue		326,025			314,328			322,632
Rental asset cost of revenue		33,862			34,458			36,266
Total cost of revenues		359,887			348,786			358,898
Gross profit		188,445			189,145			183,118
Selling, general and administrative expenses		177,467			176,684			171,293
Pre-opening expenses		94			92			409
Operating income		10,884			12,369			11,416
Other income (expense):
Interest expense		(3,260	)		(2,616	)		(1,918	)
Other, net		642			399			293
Income before income taxes		8,266			10,152			9,791
Income tax expense		3,247			4,457			3,982
Net income	$	5,019		$	5,695		$	5,809
Basic income per share	$	0.45		$	0.50		$	0.51
Diluted income per share	$	0.44		$	0.49		$	0.49

See accompanying notes to consolidated financial statements.

33

HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

Years ended January 31, 2007, 2006 and 2005

(In thousands, except share data)

					Additional					Other
	Common Stock				Paid-in			Retained		Comprehensive			Treasury Stock						Total Shareholders’
	Shares		Amount		Capital			Earnings		Income			Shares			Amount			Equity
Balances at January 31, 2004		11,944,544		119		36,598			49,962		—			580,932			(2,733	)		83,946
Issuance of stock to directors		—		—		25			—		—			(7,344	)		35			60
Purchase of treasury stock		—		—		—			—		—			140,600			(904	)		(904	)
Exercise of stock options		—		—		(241	)				—			(225,213	)		1,104			863
Net income		—		—		—			5,809		—			—			—			5,809
Balances at January 31, 2005		11,944,544		119		36,382			55,771		—			488,975			(2,498	)		89,774
Issuance of stock to directors		—		—		2			—		—			(4,655	)		26			28
Purchase of treasury stock		—		—		—			—		—			344,440			(2,069	)		(2,069	)
Exercise of stock options		—		—		(425	)		—		—			(267,388	)		1,432			1,007
Other stock-based compensation		—		—		117			—		—			—			—			117
Comprehensive income:
Net income		—		—		—			5,695		—			—			—			5,695
Unrealized gain on interest rate cap, net of $98 in deferred taxes		—		—		—			—		141			—			—			141
Total comprehensive income		—		—		—			—		—			—			—			5,836
Balances at January 31, 2006		11,944,544		119		36,076			61,466		141			561,372			(3,109	)		94,693
Issuance of stock to directors		—		—		17			—		—			(13,741	)		83			100
Purchase of treasury stock		—		—		—			—		—			595,600			(4,237	)		(4,237	)
Exercise of stock options and other		—		—		758			—		—			(210,040	)		1,239			1,997
Other stock-based compensation		—		—		55			—		—			—			—			55
Comprehensive income:
Net income		—		—		—			5,019		—			—			—			5,019
Unrealized loss on interest rate cap, net of $55 in deferred taxes		—		—		—			—		(74	)		—			—			(74	)
Total comprehensive income																				4,945
Balances at January 31, 2007		11,944,544	$	119	$	36,906		$	66,485	$	67			933,191		$	(6,024	)	$	97,553

See accompanying notes to consolidated financial statements.

34

HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended January 31, 2007, 2006 and 2005

(In thousands)

	Fiscal Year
	2006			2005			2004
Cash flows from operating activities:
Net income	$	5,019		$	5,695		$	5,809
Adjustments to reconcile net income to net cash provided by operating activities:
Rental asset depreciation expense		15,771			18,472			22,842
Purchases of rental assets		(28,689	)		(28,900	)		(35,142	)
Property and equipment depreciation expense		19,865			19,737			19,075
Amortization expense		43			88			88
Loss on rental assets lost, stolen and defective		1,224			672			1,221
Loss on disposal or impairment of property and equipment, excluding rental assets		1,295			1,463			835
Deferred income taxes		70			(2,220	)		1,427
Non-cash compensation		155			145			60
Changes in operating assets and liabilities:
Merchandise inventories		10,138			1,240			(3,077	)
Other current assets		(3,617	)		(71	)		151
Trade accounts payable		(9,379	)		420			4,010
Accrued expenses and other liabilities		22			4,810			725
Other assets and liabilities, net		(402	)		(342	)		(671	)
Net cash provided by operating activities		11,515			21,209			17,353
Cash flows from investing activities:
Purchase of property, equipment and improvements		(18,566	)		(17,097	)		(24,729	)
Net cash used in investing activities		(18,566	)		(17,097	)		(24,729	)
Cash flows from financing activities:
Borrowings under revolving credit facility		585,927			556,224			574,643
Repayments under revolving credit facility		(572,062	)		(564,583	)		(566,170	)
Payments under long-term debt and capital lease obligations		(94	)		(210	)		(219	)
Purchase of treasury stock		(4,237	)		(2,069	)		(904	)
Change in cash overdraft		(3,094	)		2,489			—
Proceeds from exercise of stock options and other		831			928			697
Net cash provided by (used in) financing activities		7,271			(7,221	)		8,047
Net increase (decrease) in cash		220			(3,109	)		671
Cash at beginning of year		3,617			6,726			6,055
Cash at end of year	$	3,837		$	3,617		$	6,726

See accompanying notes to consolidated financial statements.

35

(1) Operations and Summary of Significant Accounting Policies

(a)	General
	Hastings Entertainment, Inc. and subsidiaries operate a chain of retail stores in 20 states, primarily in the Western and Midwestern United States. Revenues are generated from the sale of new and used music, books, DVDs, videogames, and videocassettes, as well as new software, periodicals, consumables, and accessory products. In addition, our revenues include the rental of DVDs, video games and videocassettes.
(b)	Basis of Consolidation
	The consolidated financial statements present the results of Hastings Entertainment, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
(c)	Basis of Presentation
	We consider our retail and internet operations to be separate operating segments for purposes of determining reportable segments based on the criteria of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. We determined that the Internet segment was immaterial for segment reporting purposes. Therefore, we combine both operating segments into one reporting segment.
	Our fiscal years ended January 31, 2007, 2006 and 2005 are referred to as fiscal 2006, 2005 and 2004, respectively.
(d)	Cash and Cash Equivalents
	The Company considers all credit card receivables of $1.2 million and $1.0 million for fiscal 2006 and 2005, respectively, from MasterCard, Visa, Discover, and American Express, and all highly liquid investments with an original maturity date of three months or less to be cash equivalents. Negative cash balances are reclassified to trade accounts payable.
(e)	Revenue Recognition
	Merchandise and rental asset revenue are recognized at the point of sale or rental or at the time merchandise is shipped to the customer. Additionally, revenues are presented net of estimated returns and exclude all sales taxes. An allowance has been established to provide for projected merchandise returns.
	Gift card liabilities are recorded at the time of sale of such cards with the costs of designing, printing and distributing the cards recorded as expense as incurred. The liability is relieved and revenue is recognized upon redemption of the gift cards.
	The Company reduces its revenue through reserves for the estimated utilization of early return credits received by renters for early return of rentals. The liability is relieved upon the redemption of these early return credits.

36

(f)	Merchandise Inventories
	Merchandise inventories are recorded at the lower of cost, which approximates the first-in, first-out (“FIFO”) method, or market. Amounts are presented net of the allowance for shrinkage and obsolescence.
	Expenses included in cost of revenues include cost of product purchased from vendors; rental asset depreciation expense; shrinkage; inventory markdowns and write-offs; freight charges; receiving costs; inspection costs; and internal transfer costs. In addition, the Company includes in cost of goods sold all expenses associated with our distribution center, including freight, warehouse personnel costs, supplies, maintenance, depreciation, occupancy, property tax, and utility costs; as well as costs associated with our returns center, including vendor refused product, handling charges, return fees, freight, return center personnel costs, supplies, maintenance, depreciation, rent, and utilities. We include occupancy costs for retail locations in SG&A expenses.
	The Company transfers rental assets that have been converted to previously viewed titles for sale, from ‘Property and equipment’ to ‘Merchandise inventories.’ The transfer to ‘Merchandise Inventories’ is recorded at the time of conversion, which is the first date the product is available for sale. During fiscal 2006, 2005, and 2004, $12.4 million, $10.8 million, and $12.2 million, respectively, were transferred from rental assets to merchandise inventory at the lower of net book value or market.

37

(g)	Property and Equipment
	Property and equipment are recorded at cost and depreciated using the straight-line method, except for rental assets, which are depreciated using an accelerated depreciation method. Furniture, fixtures, equipment and software are depreciated over their estimated useful lives of three to seven years. Leasehold improvements are amortized over the shorter of the related lease term or their estimated useful lives. Rental assets, except for the initial purchases of new stores, are depreciated using an accelerated method over six months or nine months. The initial purchases of rental assets for new stores are depreciated over 36 months using the straight-line method. Rental assets, which include VHS, DVDs, Books on CD, and video games, are depreciated to salvage values ranging from $2.50 to $10. Rental assets purchased for less than established salvage values are not depreciated.
	Beginning with the fourth quarter of 2006, we changed the estimated useful life of rental video games from six months to nine months to better reflect the product’s extended rental life. In addition, we increased the salvage value on rental video games from $4 to $10 to better match the recovery rate on higher cost games released on new gaming systems. All other rental assets, which include DVDs, VHS units, and Books on CD, continue to be depreciated on an accelerated basis over six months to salvage values of either $2.50 for VHS units or $4.00 for DVD units and Books on CD. These changes in estimates related to our rental assets decreased our cost of rental revenues by approximately $0.2 million, or $0.02 per diluted share, for the year ended January 31, 2007.
	Expenditures for maintenance, repairs and renewals that do not materially prolong the original useful lives of assets are charged to expense as incurred.
	Property recorded pursuant to capital lease obligations is stated at the present value of the minimum lease payments at the inception of each lease, not in excess of fair value, and amortized on a straight-line basis over the related lease term.
	In accordance with SFAS No. 144, we evaluate poor performing stores on a quarterly basis to determine whether projected future cash flows over the remaining initial lease term are sufficient to recover the carrying value of the fixed asset investment in each individual store. If projected future cash flows are less than the carrying value of the fixed asset investment, an impairment charge is recognized if the carrying value is less than the fair value of such assets. The carrying value of leasehold improvements as well as certain other property and equipment is subject to impairment write-down.

38

(h)	Financial Instruments
	The carrying amount of long-term debt approximates fair value as of January 31, 2007 and 2006 due to the instruments bearing interest at variable market rates. The carrying amount of accounts payable approximates fair value because of its short maturity period.
(i)	Stock Based Compensation
	Prior to February 1, 2006, the Company applied the disclosure-only provisions of SFAS 123, Accounting for Stock-Based Compensation (“SFAS 123”). In accordance with the provisions of SFAS 123, the Company applied APB 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations in accounting for its plans and, accordingly, did not recognize compensation expense for these plans because all options were issued at exercise prices equal to or greater than the market value at date of grant.
	Effective February 1, 2006, the Company adopted SFAS 123 (revised 2004), Share-Based Payments (“SFAS 123R”), which revises SFAS 123 and supersedes APB 25. SFAS 123R requires all share-based payments to employees to be recognized in the financial statements based on their fair values using an option-pricing model, such as the Black-Scholes model, at the date of grant. The Company has elected to use the modified prospective method for adoption, which requires compensation expense to be recorded for all unvested stock options and restricted shares beginning in the first quarter of adoption.
	The Company recognized approximately $55,000, before income taxes, related to the adoption of SFAS 123R in fiscal 2006. See Note 12 below for further information on share-based compensation.
(j)	Advertising Costs
	Advertising costs for newspaper, television and other media are expensed as incurred. Advertising expenses, net of allowances from vendors, for the fiscal years 2006, 2005, and 2004 were $7.7 million, $7.8 million and $6.7 million, respectively.
	We receive payments and credits from vendors pursuant to cooperative advertising programs and display allowances. During fiscal years 2006, 2005 and 2004, we received a total of approximately $9.0 million, $7.8 million and $6.6 million, respectively for such payments and credits. To the extent such payments are a reimbursement for specific, identifiable costs, such amounts are recorded as a reduction in SG&A expenses at the time the associated advertisement is publicly released. The remainder of these payments and allowances are recorded as a reduction of merchandise inventory and the cost of rental assets in accordance with Emerging Issues Task Force Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF 02-16”).
(k)	Pre-opening Costs
	Pre-opening expenses include human resource costs, travel, rent, advertising, supplies and certain other costs incurred prior to a store’s opening and are expensed as incurred.
(l)	Income Per Share
	Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is similarly computed, but includes the effect, when dilutive, of our weighted average number of stock options outstanding.

39

(m)	Use of Management Estimates
	The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(n)	Impact of Recently Issued Accounting Standards
	In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, Accounting for Income Taxes” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective beginning February 1, 2007 with the cumulative effect of the change in accounting principle recorded as an adjustment to beginning retained earnings. The Company is in the process of evaluating the provisions of FIN 48 but does not anticipate that adoption will have a material impact on its consolidated balance sheets or statements of operations, shareholders’ equity and cash flows.

40

(2)	Merchandise Inventories
	Merchandise inventories consist of the following:

	January 31,
	2007		2006
Books	$	64,721	$	67,973
Videos		55,024		48,973
Music		40,135		41,657
Other		11,862		9,950
		171,742		168,553
Less allowance for inventory shrinkage and obsolescence		4,465		3,504
	$	167,277	$	165,049

	During fiscal 2006 and 2005, we purchased approximately 18% and 19%, respectively, of all products (defined herein as merchandise inventories and rental assets) from three vendors.
(3)	Property and Equipment
	Property and equipment consist of the following:

	January 31,
	2007		2006
Furniture, equipment and software	$	143,522	$	135,569
Leasehold improvements		63,755		61,863
Buildings and land		258		258
Work in progress		621		255
Property under capital leases		—		1,246
		208,156		199,191
Less accumulated depreciation		150,734		139,178
Property and equipment, net	$	57,422	$	60,013

41

(4)	Accrued Expenses and Other Current Liabilities
	Accrued expenses and other current liabilities consist of the following:

	January 31,
	2007		2006
Allowance for cost of inventory returns	$	1,586	$	1,276
Deferred gift card revenue		16,354		14,769
Salaries, vacation, bonus and benefits		7,664		7,371
Short term lease obligations		1,209		1,077
Sales taxes payable		2,062		1,923
Federal income tax payable		2,138		5,254
Other accrued expenses		6,166		6,653
Total	$	37,179	$	38,323

Merchandise inventories that are not sold can normally be returned to the vendors. The allowance for cost of inventory returns represents estimated costs related to merchandise returned or to be returned to vendors for which credit from the vendor is pending. Because the amount of credit to be received requires estimates, it is reasonably possible that our estimate of the ultimate settlement with our vendors may change in the near term.

In the ordinary course of business, we accrue estimated amounts for settlements with certain vendors related to disputed merchandise purchases and returns. Because the ultimate settlement amount requires estimates, it is reasonably possible that our estimate of the ultimate settlement with our vendors may change in the near term. During fiscal 2006, 2005, and 2004 we reduced merchandise cost of revenues by approximately $1.6 million, $2.2 million, and $2.1 million, respectively, related to favorable differences between actual settlements with vendors as compared to amounts accrued.

42

(5)	Store Closing Reserve
	From time to time and in the normal course of business, we evaluate our store base to determine if we need to close a store. Such evaluations include consideration of, among other factors, current and future profitability, market trends, age of store and lease status.
	Amounts in “Accrued expenses and other current liabilities” and “Other liabilities” at January 31, 2007 and 2006 include accruals for the net present value of future minimum lease payments, net of estimated sublease income, and other costs attributable to closed or relocated stores. Expenses related to store closings are included in SG&A expenses in our consolidated statement of operations.
	The following table provides a rollforward of reserves that were established for these charges for fiscal 2006, 2005 and 2004:

	Future Lease
	Payments			Other Costs			Total
Balance at January 31, 2004	$	2,015		$	13		$	2,028
Additions to provision		143			—			143
Changes in estimates		(94	)		79			(15	)
Cash outlay, net		(781	)		(92	)		(873	)
Balance at January 31, 2005		1,283			—			1,283
Additions to provision		253			—			253
Changes in estimates		191			8			199
Cash outlay, net		(1,018	)		(8	)		(1,026	)
Balance at January 31, 2006		709			—			709
Additions to provision		176			—			176
Changes in estimates		243			—			243
Cash outlay, net		(452	)		—			(452	)
Balance at January 31, 2007	$	676		$	—		$	676

As of January 31, 2007, the reserve balance, which is net of estimated sublease income, is expected to be paid over the next five years.

43

(6)	Long-term Debt
	Long-term debt and capitalized lease obligations consist of the following:

	January 31,
	2007		2006
Revolving credit facility	$	41,922	$	28,057
Capitalized lease obligations		—		94
		41,922		28,151
Less current maturities		—		94
	$	41,922	$	28,057

On July 11, 2005, February 28, 2006, and February 27, 2007, we executed amendments to our syndicated secured Loan and Security Agreement with Fleet Retail Finance, Inc. and The CIT Group/Business Credit, Inc, (the “Facility”). In connection with the February 27, 2007 amendment, CIT Group/Business, Inc. assigned its entire interest under the Loan and Security Agreement to Fleet Retail Group LLC. The amount outstanding under the Facility is limited by a borrowing base predicated on eligible inventory, as defined in the Facility, and certain rental assets, net of accumulated depreciation less specifically defined reserves and after the February 27, 2007 amendment, is limited to a ceiling of $100 million, less a $10 million availability reserve. The Facility permits borrowings at various interest-rate options based on the prime rate or London Interbank Offering Rate (LIBOR) plus applicable margin depending upon the level of our minimum availability. The borrowing base under the Facility is limited to an advance rate of 65% of eligible inventory and certain rental assets net of accumulated amortization less specifically defined reserves, which can be adjusted to reduce availability under the Facility. Lenders may increase specifically defined reserves to reduce availability in the event of adverse changes in our industry that are projected to impact the value of our assets pledged as collateral. The Facility contains no financial covenants, restricts the payment of dividends and includes certain other debt and acquisition limitations, allows for the repurchase of up to $30 million of our common stock and requires a minimum availability of $10 million at all times. The Facility is secured by substantially all of the assets of the Company and our subsidiaries and is guaranteed by each of our consolidated subsidiaries. Unless the Facility is amended and the maturity extended, the Facility matures on August 29, 2011, at which time any remaining outstanding amounts would be due. At January 31, 2007, we had $36.2 million in excess availability, after the $10 million availability reserve, under the Facility. However, excess availability may be reduced in the future as changes in the borrowing base occur or the lenders increase availability reserves. The average rate of interest being charged under the Facility for fiscal years ending January 31, 2007 and 2006 was 7.0% and 5.6%, respectively.

We utilize standby letters of credit to support certain insurance policies. The aggregate amount of the letters of credit at January 31, 2007 was approximately $1.0 million, which reduces the excess availability under the Facility.

The aggregate maturities of long-term debt and capitalized lease obligations for years subsequent to fiscal 2006 are as follows:

2007	$	—
2008		—
2009		—
2010		—
2011		41,922
Thereafter		—
	$	41,922

44

(7)

Leases

We lease retail space under operating leases with terms ranging from three to 15 years, with certain leases containing renewal options. Renewal options are typically for five years and contain lease terms similar to those of the original lease. Lease agreements generally provide for minimum rentals. Some leases also include additional contingent rental amounts based upon specified percentages of sales above predetermined levels. Operating leases are accounted for in conformity with FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period, which requires rental costs associated with operating leases that are incurred during a construction period to be recognized as rental expense. Rental expense for operating leases is comprised of the following:

	Fiscal Year
	2006			2005			2004
Minimum rentals	$	23,759		$	22,474		$	20,962
Contingent rentals		491			588			648
Less sublease income		(109	)		(95	)		(87	)
Rental expense	$	24,141		$	22,967		$	21,523

Future minimum lease payments under non-cancelable operating leases as of January 31, 2007 are:

2007	$	24,002
2008		21,107
2009		17,568
2010		13,766
2011		12,033
Thereafter		55,708
Total minimum lease payments		144,184
Less sublease income		1,330
Net minimum lease payments under operating leases	$	142,854

45

(8)	Income Taxes
	Income tax expense is comprised of the following:

	Fiscal Year
	2006		2005			2004
Current federal	$	2,883	$	5,759		$	1,970
Current state and local		294		918			586
Deferred federal, state, and local		70		(2,220	)		1,426
	$	3,247	$	4,457		$	3,982

The difference between expected federal income tax expense (computed by applying the statutory rate of 35% to income before income taxes) and actual income tax expense is as follows:

	Fiscal Year
	2006		2005		2004
Computed “expected” income tax expense	$	2,893	$	3,553	$	3,427
State and local income taxes, net of federal income tax effect		300		583		509
Other		54		321		46
	$	3,247	$	4,457	$	3,982

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

	Fiscal Year
	2006			2005
Deferred tax assets:
Gift cards	$	1,182		$	1,056
Abandoned leases		260			273
Deferred rent and lease incentives		1,776			1,875
Inventories		983			2,078
Property and equipment		6,299			4,822
Other		1,248			1,100
Total deferred tax assets		11,748			11,204
Deferred tax liabilities:
Rental assets		(6,092	)		(5,478	)
Total deferred tax liabilities		(6,092	)		(5,478	)
Net deferred tax assets	$	5,656		$	5,726

46

(9)	Income Per Share
	The computations of basic and diluted income per share are as follows:

	Fiscal Year
	2006		2005		2004
Net income	$	5,019	$	5,695	$	5,809
Average shares outstanding:
Basic		11,244		11,421		11,411
Effect of stock options		274		246		531
Diluted		11,518		11,667		11,942
Income per share:
Basic	$	0.45	$	0.50	$	0.51
Diluted	$	0.44	$	0.49	$	0.49

	Options to purchase 184,156 shares of Common Stock at exercise prices ranging from $6.82 to $13.64 per share outstanding at January 31, 2007; 726,980 shares of Common Stock at exercise prices ranging from $6.095 per share to $14.03 per share outstanding at January 31, 2006; and 523,556 shares of Common Stock at exercise prices ranging from $7.30 per share to $14.03 per share outstanding at January 31, 2005, were not included in the computation of diluted income per share because their inclusion would have been antidilutive.
(10)	401k and ASOP
	Our 401k plan permits full-time employees who have attained age 21 and part-time employees who have worked a minimum of 1,000 hours in a year and have attained age 21 to participate in the 401k plan and elect to contribute up to 25% of their salary, subject to federal limitations, to the plan. Employer contributions include a quarterly guaranteed match of 25% of employee contributions up to a maximum of 6% deferral of compensation and are allocated solely to those employees who are participating in the plan and are employed on the last day of the plan quarter or who became disabled, died, or retired during the plan quarter. Also included is a discretionary match based on specific criteria reviewed every fiscal six-month period by management and approved by the Board of Directors. This discretionary match is allocated solely to those employees who are participating in the plan and are employed on the last day of the six-month period.
	Our Associate Stock Ownership Plan (ASOP) permits full-time employees who have attained age 21 and completed one year of service and part-time employees who have worked a minimum of 1,000 hours in a year and have attained age 21 to participate in the ASOP. Employer contributions are determined at the discretion of management. The Board of Directors has determined that the level of contributions will be made based on attaining operational profit goals as set by the Board of Directors. The contribution is based on a percentage of participants’ eligible compensation. Common shares held by the ASOP were 552,896, 490,997, and 459,864 at January 31, 2007, 2006, and 2005, respectively. Shares issued and held under the ASOP plan are included as outstanding shares for the purposes of calculating income per share.
	Amounts expensed related to the 401k and ASOP Plans were $0.7 million, $1.3 million, and $0.6 million for fiscal 2006, 2005, and 2004, respectively.

47

11)	Shareholders’ Equity
	We have seven stock option plans: the 1991 and 1994 Stock Option Plans; the 1996, 2002, and 2006 Incentive Stock Plans; and the 1996 and 2002 Outside Directors Plans (for non-employee directors). A total of 505,900 shares may be granted under each of the 1991 and 1994 Stock Option Plans, 632,375 shares may be granted under the 1996 Incentive Stock Plan, 500,000 shares may be granted under each of the 2002 and 2006 Incentive Stock Plans, 101,180 shares may be granted under the 1996 Outside Directors Plan and 200,000 shares may be granted under the 2002 Outside Directors Plan. As of January 31, 2007, we had 665,411 options available for future grants under all stock option plans.
	The 1991 and 1994 Stock Option Plans and the 1996, 2002, and 2006 Incentive Stock Plans authorize the award of both incentive stock options and non-qualified stock options to purchase common stock to officers, other associates and directors of the Company. The exercise price per share of incentive stock options may not be less than the market price of our common stock on the date the option is granted. The term of each option is determined by the Board of Directors and generally will not exceed ten years from the date of grant. In general, each option award vests at 20% per year over five years.
	The 1996 Incentive Stock Plan also authorizes the granting of stock appreciation rights, restricted stock, dividend equivalent rights, stock awards, and other stock-based awards to officers, other associates, directors, and consultants of the Company. There have been no grants of these awards under this plan.
	We also have a management stock purchase plan that authorizes the issuance of up to 227,655 shares of common stock, pursuant to agreements providing for the purchase of restricted stock units (“RSU’s”). The cost of each RSU is equal to 75% of the fair market value of the common stock of the Company on the date the RSU is awarded. During fiscal years 2006, 2005 and 2004, there were no RSU’s awarded under the Plan. Compensation expense is recognized using the straight-line method over three years, which is the vesting period of the RSU’s. Under this methodology, we recorded approximately $0, $0 and $18 of compensation expense related to RSU’s in fiscal year 2006, 2005 and 2004, respectively. As of January 31, 2007, 2006 and 2005, there were no RSU’s outstanding under the plan.

48

12)	Stock Based Compensation
	Prior to February 1, 2006, we accounted for stock-based compensation in accordance with Accounting Principles Board Opinion (“APB”) No. 25 “Accounting for Stock Issued to Employees” (“APB No. 25”) and followed the disclosure-only provisions of Statement of Financial Accounting Standard (“SFAS”) No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Accordingly, compensation expense was not recognized in our consolidated statement of operations in connection with stock options that were granted under our stock-based compensation plan.
	Effective with our fiscal year beginning February 1, 2006, we adopted SFAS No. 123(R) “Share-Based Payment” (“SFAS No. 123(R)”), which no longer permits use of the intrinsic value method under APB No. 25. We used the modified prospective method to adopt SFAS No. 123(R), which requires that compensation expense be recorded for all stock-based compensation granted on or after February 1, 2006, as well as the unvested portion of previously granted options. On January 27, 2006, our Board of Directors (the Board”) approved a resolution to vest all stock options outstanding as of that date. The Board decided to fully vest these options, many of which had exercise prices that were higher than the Company’s stock price, to minimize the expense to our consolidated financial statements upon adoption of SFAS No. 123(R). This acceleration of vesting affected 587,609 unvested stock options. As a result, there is no compensation expense associated with stock options granted prior to February 1, 2006 in the consolidated statements of operations. Effective with the current fiscal year, compensation expense will be recognized for amortization of the fair value of stock options granted during fiscal 2006 and fiscal years thereafter. The Company recognized approximately $55,000, before income taxes, related to the adoption of SFAS 123R in fiscal 2006.
	Under the modified prospective method, the financial statements for periods prior to February 1, 2006, will not include compensation cost calculated under the fair value method. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands) prior to February 1, 2006:

	Fiscal Year
	2005			2004
Net income, as reported	$	5,695		$	5,809
Add: Stock-based compensation included in reported net income, net of tax		81			35
Less: Stock-based compensation expense determined under fair value based method, net of tax		(1,523	)		(687	)
Pro forma net income	$	4,253		$	5,157
Income per share:
Basic, as reported	$	0.50		$	0.51
Basic, pro forma	$	0.37		$	0.45
Diluted, as reported	$	0.49		$	0.49
Diluted, pro forma	$	0.36		$	0.44

Under the Company’s stock plans, options may be granted to directors, officers and employees at the fair market value of the Company’s common stock on the date of grant. Stock option grants generally vest ratably over five years and expire within ten years after the date of grant. Shares issued upon exercise of options are issued from treasury shares. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, which is consistent with the valuation techniques that were previously utilized for options in footnote disclosures required under SFAS No. 123.

49

The following assumptions were used in the calculation of fair value:

	Fiscal Year
	2006			2005			2004
Expected dividend yield		—			—			—
Risk-free interest rate		4.79	%		4.27	%		2.71	%
Expected life in years (using short-cut method)		4.92			4.98			5.28
Historical Volatility		.51			.60			.62

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

				Weighted-average
				exercise price
	Options			(in dollars)
Outstanding at January 31, 2004		1,917,452		$	5.71
Granted		310,493			6.03
Exercised		(225,213	)		3.10
Forfeited and expired		(115,517	)		4.92
Outstanding at January 31, 2005		1,887,215		$	6.12
Granted		144,680			5.52
Exercised		(267,388	)		3.47
Forfeited and expired		(160,640	)		6.20
Outstanding at January 31, 2006		1,603,867		$	6.50
Granted		107,680			7.39
Exercised		(210,040	)		3.96
Forfeited and expired		(453,006	)		10.78
Outstanding at January 31, 2007		1,048,501		$	5.26
Options available for grant at January 31, 2007		665,411

The total intrinsic value of stock options exercised for the fiscal years ended January 31, 2007 and 2006 was $674,241 and $729,711, respectively. The total fair value of stock options granted for the fiscal years ended January 31, 2007 and 2006 was $372,752 and $437,938, respectively.

50

At January 31, 2007, the options outstanding and options exercisable, and their related weighted-average exercise price, and the weighted-average remaining contractual life for the ranges of exercise prices are shown in the table below.

					Weighted-
			Weighted-		average	Aggregate
			average exercise		remaining	intrinsic value (in
	Options		price (in dollars)		contractual life	thousands)
Range: $1.33 to $4.99
Options outstanding and exercisable at January 31, 2007		436,498	$	3.26	4.72 years	$	1,151,061
Range: $5.00 to $9.99
Options outstanding and exercisable at January 31, 2007		485,113	$	6.24	6.08 years	$	71,833
Options outstanding and unexercisable at January 31, 2007		105,150	$	7.39	8.84 years		—
Price: $10.00 to $13.64
Options outstanding and exercisable at January 31, 2007		21,740	$	13.09	0.77 years		—

At January 31, 2007, 2006 and 2005, the number of options exercisable was 943,351; 1,603,867; and 959,076, respectively, and the weighted-average exercise price of those options was $5.26, $6.50 and $7.55, respectively.

The per share weighted-average exercise price and the per share weighted-average fair value of stock options at the date of grant, using the Black-Scholes option-pricing model is as follows (in dollars):

	Weighted Average Exercise price for						Weighted Average Fair value for
	Fiscal Year						Fiscal Year
	2006		2005		2004		2006		2005		2004
Options granted at market price	$	7.29	$	5.52	$	5.99	$	3.64	$	3.03	$	3.34
Options granted at prices exceeding market price	$	7.94	$	—	$	6.31	$	3.06	$	—	$	2.98
Total options granted	$	7.39	$	5.52	$	6.03	$	3.55	$	3.03	$	3.31

51

(13)	Supplemental Cash Flow Information
	Cash payments for interest during fiscal 2006, 2005 and 2004 totaled $3.5 million, $2.6 million and $2.1 million, respectively. Cash payments for income taxes during fiscal 2006, 2005 and 2004 totaled $6,099,222; $3,513,481; and $259,780, respectively.
(14)	Commitments and Contingencies
	The Company is obligated to pay certain studios minimum amounts associated with certain revenue-sharing agreements related to rental assets. As of January 31, 2007, such minimum future payments approximated $960,000, which are expected to be paid during fiscal 2007.
	During fiscal 2005, we were named as a defendant in lawsuits in the states of New Mexico and Texas alleging that our extended viewing fees for movie and game rentals are illegal under the Uniform Commercial Code. On October 27, 2005, the Company petitioned the court for summary judgment in one such lawsuit pending in the state of New Mexico. On November 28, 2005, the judge granted the Company’s petition for summary judgment and dismissed all pending claims in that lawsuit. The plaintiff subsequently appealed the court’s summary judgment. The plaintiff in the other lawsuit, which was filed in the state of Texas, filed an amended petition wherein he abandoned all but one claim. On May 15, 2006, he filed a motion for class certification.
	The Company settled all litigation regarding the matters described above, including the dropping of the motion for class certification, with prejudice for $85,000 in February 2007. At January 31, 2007, the settlement was accrued.
	We are also involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our financial position, results of operations or cash flows.

52

(15) Interim Financial Results (Unaudited)

	Quarter
Fiscal year 2006:	First			Second			Third			Fourth
Total revenues	$	131,412		$	123,094		$	119,636		$	174,190
Total cost of revenues		84,790			79,641			77,836			117,620
Selling, general and administrative expenses		42,873			42,786			44,572			47,236
Pre-opening expenses		—			79			15			—
Operating income (loss)		3,749			588			(2,787	)		9,334
Interest (expense) and other income, net		(595	)		(265	)		(845	)		(913	)
Income (loss) before taxes		3,154			323			(3,632	)		8,421
Income tax expense (benefit)		1,229			144			(1,432	)		3,306
Net income (loss)		1,925			179			(2,200	)		5,115
Basic income (loss) per share	$	0.17		$	0.02		$	(0.20	)	$	0.46
Diluted income (loss) per share	$	0.17		$	0.02		$	(0.20	)	$	0.45

	Quarter
Fiscal year 2005:	First			Second			Third			Fourth
Total revenues	$	129,124		$	122,726		$	114,587		$	171,494
Total cost of revenues		85,086			77,625			73,538			112,537
Selling, general and administrative expenses		42,327			43,376			44,867			46,114
Pre-opening expenses		88			4			—			—
Operating income (loss)		1,623			1,721			(3,818	)		12,843
Interest (expense) and other income, net		(392	)		(607	)		(712	)		(506	)
Income (loss) before taxes		1,231			1,114			(4,530	)		12,337
Income tax expense (benefit)		477			443			(1,799	)		5,336
Net income (loss)		754			671			(2,731	)		7,001
Basic income (loss) per share	$	0.07		$	0.06		$	(0.24	)	$	0.61
Diluted income (loss) per share	$	0.06		$	0.06		$	(0.24	)	$	0.61

53

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

As required by Exchange Act Rules 13a-15 and 15d-15, an evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of January 31, 2007 to determine whether our disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed by us in our reports filed or submitted under the Exchange Act is (a) accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure, and (b) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

There has not been any change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

54

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required by this item will be set forth in our Proxy Statement for our 2007 Annual Meeting of Shareholders, to be filed within 120 days after the end of fiscal 2006 (our “Proxy Statement”), under the heading “Proposal No. 1: Election of Two Directors,” which information is incorporated herein by reference. The information required by this item regarding our executive officers is set forth under the heading “Executive Officers of the Company” in Part I of this Form 10-K, which information is incorporated herein by reference.

Section 16(a) Beneficial Ownership Reporting Compliance

The information required by this item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 will be set forth in our Proxy Statement under the heading “Compliance with Section 16(a) of the Securities Exchange Act of 1934,” which is incorporated herein by reference.

Code of Ethics and Other Corporate Governance Information

Information regarding our Code of Ethics and the name of the individual determined by the board to be the “audit committee financial expert” is included in our Proxy Statement, under the heading “Proposal No. 1: Election of Two Directors,” which information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item will be set forth in our Proxy Statement under the headings “Executive Compensation,” “Executive Compensation — Director Compensation,” “Executive Compensation - - Employee Contracts and Change of Control Arrangements,” and “Executive Compensation - Compensation Committee Interlocks and Insider Participation,” which information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by this item will be set forth in our Proxy Statement under the headings, “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information,” which information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by this item will be set forth in our Proxy Statement under the heading “Certain Relationships and Related Transactions,” which information is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this item will be set forth in our Proxy Statement under the heading “Principal Accountant Fees and Services,” which information is incorporated herein by reference.

55

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) 1. The following consolidated financial statements of the Company are included in Part II, Item 8:

Report of Independent Registered Public Accounting Firm	31
Consolidated Balance Sheets as of January 31, 2007 and 2006	32
Consolidated Statements of Operations for the years ended January 31, 2007, 2006 and 2005	33
Consolidated Statements of Shareholders’ Equity for the years ended January 31, 2007, 2006 and 2005	34
Consolidated Statements of Cash Flows for the years ended January 31, 2007, 2006 and 2005	35
Notes to Consolidated Financial Statements	36
2. The following financial statement schedule and other information required to be filed by Items 8 and 15(d) of Form 10-K are included in Part IV:
Financial Statement Schedule II — Valuation and Qualifying Accounts and Reserves	58

	All other schedules are omitted because they are not applicable, not required or the required information is included in the Consolidated Financial Statements and notes thereto.
3.	The following exhibits are filed herewith or incorporated by reference as indicated as required by Item 601 of Regulation S-K. The exhibits designated by an asterisk are management contracts and/or compensatory plans or arrangements required to be filed as exhibits to this report.

Exhibit
Number				Description
3.1		(1	)	Third Restated Articles of Incorporation of the Company.
3.2		(1	)	Amended and Restated Bylaws of the Company.
4.1		(2	)	Specimen of Certificate of Common Stock of the Company.
4.2		(1	)	Third Restated Articles of Incorporation of the Company (see 3.1 above).
4.3		(1	)	Amended and Restated Bylaws of the Company (see 3.2 above).
10.1		(1	)	Form of Indemnification Agreement by and between the Company and its directors and executive officers.
10.2	*	(1	)	Hastings Amended 1996 Incentive Stock Plan.
10.3	*	(2	)	Hastings 1994 Stock Option Plan.
10.4	*	(2	)	Hastings 1991 Stock Option Plan.
10.5	*	(1	)	Hastings Entertainment, Inc. Associates’ 401(k) Plan and Trust.
10.6	*	(1	)	Hastings Employee Stock Ownership Plan Trust Agreement.
10.7	*	(2	)	Chief Executive Officer Stock Option, as amended.
10.8	*	(1	)	Corporate Officer Incentive Plan.
10.9	*	(1	)	Management Stock Purchase Plan.
10.10	*	(1	)	Management Incentive Plan.
10.11	*	(1	)	Salary Incentive Plan.
10.12	*	(1	)	Hastings Entertainment, Inc. Stock Option Plan for Outside Directors.
10.13	*	(3	)	Agreement, dated January 31, 2001 between John H. Marmaduke and the Company
10.14		(4	)	Lease Agreement, dated August 3, 1994, as amended, between Omni Capital Corporation and the Company, for warehouse space located at Sunset Center in Amarillo, Texas.
10.15		(1	)	Lease Agreement, dated May 28, 1992, between the City of Amarillo and the Company for space located at 1900 W. 7th Avenue in Amarillo, Texas.
10.16	*	(2	)	Stock Grant Plan for Outside Directors.

56

Exhibit
Number				Description
10.17	*	(2	)	Form of Employment Agreement by and between the Company and certain of its executives.
10.18		(5	)	Amended Lease Agreement, dated October 13, 1999, between Omni Capital Corporation and the Company, for office space located at Sunset Center in Amarillo, Texas.
10.19		(6	)	Loan and Security Agreement, dated August 29, 2000 between Hastings Entertainment, Inc. and Fleet Retail Finance, Inc., Agent.
10.20		(7	)	International Swap Dealers Association, Inc. Master Agreement between Hastings Entertainment, Inc. and Fleet National Bank.
10.21		(8	)	Amended Loan and Security Agreement, dated December 9, 2003, between Hastings Entertainment, Inc. and Fleet Retail Finance, Inc., Agent.
10.22		(9	)	Severance Agreement and Release with Robert Berman, dated March 19, 2005.
10.23		(9	)	Amended Loan and Security Agreement, dated July 11, 2005, between Hastings Entertainment, Inc. and Fleet Retail Group, LLC., Agent, and CIT Group/Business Credit, Inc., Co-Agent.
10.24		(9	)	Severance Agreement and Release with Steve Hicks, dated December 16, 2005.
10.25		(9	)	Amended Loan and Security Agreement, dated February 28, 2006, between Hastings Entertainment, Inc. and Fleet Retail Group, LLC., Agent, and CIT Group/Business Credit, Inc., Co-Agent. Severance Agreement and Release with David Moffatt, dated April 5, 2006.
10.26		(10	)	Severance Agreement and Release with David Moffatt, dated April 5, 2006.
10.27		(10	)	Employment Agreement with Michael Rigby, dated December 5, 2005.
10.28		(10	)	Amended Loan and Security Agreement, dated February 27, 2007, between Hastings Entertainment, Inc. and Fleet Retail Group, LLC., Agent, and CIT Group/Business Credit, Inc., Co-Agent.
21.1		(2	)	Subsidiaries of the Company.
23.1		(10	)	Consent of Ernst & Young LLP.
24.1		(10	)	Powers of Attorney (included on signature page).
31.1		(10	)	Certification of Chief Executive Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-14(a).
31.2		(10	)	Certification of Chief Financial Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-14(a).
32.1		(10	)	Certification of Chief Executive Officer and Chief Financial Officer of Registrant Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)	Previously filed as an exhibit to the Company’s Registration Statement on Form S-1, dated March 18, 1998 (File No. 333-47969) and with a corresponding exhibit number herein and are incorporated herein by reference.
(2)	Previously filed as an exhibit to the Company’s Registration Statement on Form S-1/A, dated May 19, 1998 (File No. 333-47969) and with a corresponding exhibit number herein and are incorporated herein by reference.
(3)	Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2001, and incorporated herein by reference.
(4)	Previously filed as an exhibit to the Company’s Registration Statement on Form S-1/A, dated June 11, 1998 (File No. 333-47969) and with a corresponding exhibit number herein and are incorporated herein by reference.
(5)	Previously filed as an exhibit to the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended January 31, 2000, and incorporated herein by reference.
(6)	Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q, as amended, for the quarterly period ended July 31, 2000, and incorporated herein by reference.
(7)	Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2002, and incorporated herein by reference.
(8)	Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004, and incorporated herein by reference.
(9)	Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2006, and incorporated herein by reference.
(10)	Filed herewith.

57

Financial Statement Schedule II –

HASTINGS ENTERTAINMENT, INC.
Valuation and Qualifying Accounts and Reserves
Years Ended January 31, 2007, 2006 and 2005
(Amounts in thousands)

	Fiscal Year
	2006			2005			2004
Reserves deducted from assets:
Allowance for shrinkage and inventory obsolescence:
Balance at the beginning of period	$	3,889		$	3,055		$	3,405
Additions charged to costs and expenses		12,957			11,759			12,345
Deductions for write-offs		(11,930	)		(10,925	)		(12,695	)
Balance at end of period	$	4,916		$	3,889		$	3,055
Reserves added to liabilities:
Allowance for costs of inventory returns:
Balance at the beginning of period	$	1,276		$	2,057		$	3,658
Additions charged to costs and expenses		5,241			4,198			5,776
Deductions for write-offs and payments		(4,931	)		(4,979	)		(7,377	)
Balance at end of period	$	1,586		$	1,276		$	2,057

58

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:

	HASTINGS ENTERTAINMENT, INC.
Date: April 20, 2007	By:	/s/ Dan Crow
		Dan Crow
		Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

POWER OF ATTORNEY

Each person whose signature appears below hereby authorizes and constitutes John H. Marmaduke and Dan Crow, and each of them singly, his true and lawful attorneys-in-fact with full power of substitution and redistribution, for him and in his name, place and stead, in any and all capacities to sign and file any and all amendments to this report with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, and he hereby ratifies and confirms all that said attorneys-in-fact or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ John H. Marmaduke	Chairman of the Board, President and	April 19, 2007
John H. Marmaduke	Chief Executive Officer
	(Principal Executive Officer)
/s/ Danny W. Gurr	Director	April 19, 2007
Danny W. Gurr
/s/ Daryl L. Lansdale	Director	April 19, 2007
Daryl L. Lansdale
/s/ Ann S. Lieff	Director	April 19, 2007
Ann S. Lieff
/s/ Frank O. Marrs	Director	April 19, 2007
Frank O. Marrs
/s/ Jeffrey G. Shrader	Director	April 19, 2007
Jeffrey G. Shrader

59

EX-10.26

Exhibit 10.26

SEVERANCE AGREEMENT AND RELEASE

     This Severance Agreement and Release (“Agreement”) is entered into as of the 10^th day of March, 2006 (the “Effective Date”). The parties to this Agreement are Hastings Entertainment, Inc. (“Hastings” or the “Company”) and Dave Moffatt (“Moffatt”).

Recitals

     1. Moffatt was employed by Hastings as Vice President Human Resources and has been separated from the Company effective as of March 10, 2006.

     2. Hastings and Moffatt do not anticipate that there will be any dispute between them or legal claims arising out of Moffatt’s employment or subsequent separation from the Company, but nevertheless desire to settle fully and finally any and all differences, causes of action, claims, or disputes that might otherwise arise out of Moffatts’ employment with the Company.

Agreement

     IN CONSIDERATION OF THE MUTUAL PROMISES CONTAINED HEREIN, IT IS AGREED AS FOLLOWS:

1. Continuation of Pay. Hastings will continue to pay Moffatt his regular base salary of $ 135,200 per annum without any break in pay, from March 10, 2006, through September 10, 2007. Payments will be made in equal installments in arrears every two weeks of each month, beginning April 13, 2006, and will be issued through the Company’s payroll less all applicable taxes and withholding. Moffatt will also receive bonuses payable through the period ending September 10, 2007, as if Moffatt was still employed through that date, payable when bonuses earned during that period are paid to other corporate officers. Moffatt shall also be paid for one hundred twenty (120) hours of accrued but unused vacation time, on or before April 13, 2006, and shall also receive the following payments or contributions as of March 10, 2006 with no additional accrual.

ASOP match	$	4,786.29
40IK 4th Qtr. match	$	475.80
40IK discretionary match	$	1,011.52

     The bonus payable for the period beginning August 1, 2007 and ending January 31^st, 2008 shall be prorated based upon the number of days between August 1, 2007 and September 10, 2007 that fall within the award period and the total number of days in the award period. All bonuses shall be computed based upon 40% of annual base salary and assume that 100% of the performance targets are met, regardless of actual results.

2. Agreement Confidentiality. Moffatt represents and agrees that the existence, terms and conditions of this Agreement shall be kept strictly and completely confidential subject only to the following exceptions:

A. Moffatt may tell, on condition of confidentiality, his immediate family, appropriate governmental agencies, such as the Internal Revenue Service, Bankruptcy trustee, his

SEVERANCE AGREEMENT AND RELEASE -Moffatt
Severance Agreement Release — Moffatt 3-28-06

Page 1

investment adviser, attorneys, and accountant; and any other person he is required to tell by law or must do so to effectuate this Agreement.

B.

Moffatt may disclose relevant information regarding the terms and conditions of this Agreement in response to a validly executed and served subpoena or other court order. However, in so responding. Moffatt will advise the court and all interested parties of the existence and substance of this confidentiality agreement and will take all reasonable steps necessary to limit his disclosure of confidential information governed by this Agreement. Moffatt will further advise (in any reasonable manner given the circumstances) Hastings of his receipt of subpoena or court order within three business days.

     The phrase, “terms and conditions of this Agreement” means those terms and conditions that appear on the face of the Agreement and any and all discussions, information and documentation used, generated and/or relied upon in producing this Agreement. Except to the extent necessary to enforce this Agreement, it is further agreed that neither this Agreement nor any part thereof is to be used or admitted into evidence in any proceeding of any character, judicial or otherwise, now pending or hereafter instituted.

     3. Release. In consideration of the severance pay, severance benefits, and other promises contained herein, and as a material inducement to Hastings to enter into this Agreement, Moffatt hereby irrevocably and unconditionally releases, acquits, forever discharges, and agrees to hold harmless Hastings and its agents, assigns, directors, officers, employees, representatives, attorneys, divisions, subsidiaries, affiliates and all persons acting by, through, under, or in concert with any of them (hereinafter “the releasees”), from any and all claims, causes of action, demands or liabilities whatsoever, whether known or unknown or suspected to exist by Moffatt that he ever had or may now have against the releasees, or any of them, including, without limitation, any claims, causes of action, demands, or liabilities in connection with either Moffatt’s employment with the Company or his resignation from the Company. This Agreement expressly covers, but is not limited to, any claims that Moffatt may have raised under any state or federal statutory or common law prohibiting discrimination in employment on the basis of age, gender, disability, race, national origin, religion, “whistleblower” or on any other basis prohibited by law including claims arising under Title VII of the Civil Rights Act of 1964, Section 21.051 of the Texas Labor Code, and the Americans with Disabilities Act, except as otherwise specifically stated herein.

     In addition and in consideration of the promises contained in this Agreement, Moffatt hereby waives, releases and forever discharges, and agrees that he will not in any manner institute, prosecute, or pursue, any complaint, claim, charge, demand, or suit, whether in law or in equity, which asserts or could assert at common law or any statute, rule or any grounds whatsoever, any claim or claims under the federal Age Discrimination in Employment Act, 29 U.S.C. §621et seq., against any one or all of the releasees with respect to any event, matter, claim, damage, or injury, whether known or unknown, arising out of his employment and resignation of employment with the Company and its subsidiaries and/or the execution of this Agreement.

     4. COBRA. Moffatt hereby acknowledges that Hastings or its authorized designee has advised him that pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) he has the right, if Moffatt elects COBRA coverage, to elect continued coverage under the Company’s group health plan at his own expense, provided that Hastings will pay the premium cost of such coverage for Moffatt and his wife for the lesser of (i) six months, or (ii) the date Moffatt becomes eligible for coverage as a full-time employee elsewhere. Such election must be made no later than sixty (60) days after his resignation. Documentation and instructions for making a COBRA election will be subsequently provided to Moffatt in a timely manner.

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     5. No Admission of Fault on Behalf of Hastings. This Agreement shall not in any way be construed as an admission by Hastings, its agents, employees, directors, officers, representatives, or assigns, or its subsidiaries, of any act of wrongdoing whatsoever against Moffatt or any other person.

     6. Complete Agreement. This Agreement sets forth the entire agreement between the parties hereto and fully supersedes any and all prior agreements or understandings between the parties hereto pertaining to the subject matter hereof.

     7. Acknowledgment of Right to Seek Counsel. Moffatt acknowledges that he has a complete and unequivocal right to seek legal advice and/or representation from any attorney of his choice regarding the matters set forth in this Agreement. Moffatt acknowledges that he has either consulted with counsel and is satisfied with the representation he received with respect to this Agreement, or he acknowledges that he has knowingly and voluntarily waived his right to seek legal representation.

     8. Choice of Forum and Venue. The terms of this Agreement shall be construed in accordance with the laws of the State of Texas. Any proceeding brought to enforce or interpret this Agreement shall be brought in Potter County, Texas which shall be the exclusive forum.

     9. Time to Sign and Revoke Agreement. In accordance with the Older Workers Benefit Protection Act, 29 U.S.C. §626(f)(1), Moffatt acknowledges and agrees that he has the right to examine the terms of this Agreement for twenty-one (21) calendar days from the date he first received this Agreement before executing the Agreement, but has chosen to waive the right to any additional time to review the Agreement past the date he has signed it.

     Moffatt understands that for a period of seven (7) calendar days after he executes this Agreement he has the right to revoke it and this Agreement shall not become effective and enforceable until after the passage of this seven day period without Moffatt having revoked it. Non-revocation shall be evidenced by an executed copy of the attached Statement of Non-Revocation. This Agreement may not be revoked after the seven day period.

     10. Confidentiality and Non-Disclosure Following Termination. Moffatt acknowledges and stipulates that: 1) during the time he worked for Hastings, he was placed in a position to become acquainted with Hastings’ Proprietary and Confidential Information (defined below); 2) the use or disclosure of Proprietary and Confidential Information by Moffatt, except as expressly authorized by Hastings, is prohibited and would seriously damage Hastings; 3) in addition to being given access to Proprietary and Confidential Information Moffatt received material benefits as a result of his employment, including compensation and experience; and 4) in addition to the foregoing, Moffatt agrees as follows:

A. Moffatt and his immediate family shall not, without the prior written consent of Hastings or as required by subpoena or order of a court of competent jurisdiction or governmental body or agency, directly or indirectly:

(i) disclose, divulge, furnish or make accessible to any person, or copy, take or use in any manner, any of the Proprietary and Confidential Information of Hastings;

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(ii)	take any action that might reasonably or forcseeably be expected to compromise the confidentiality or proprietary nature of any of the Proprietary and Confidential Information of Hastings;
(iii)	fail to follow the reasonable guidelines established by Hastings from time to time and furnished to Moffatt regarding the confidential and proprietary nature of the Proprietary and Confidential Information; or
(iv)	discuss or disclose information relating to his employment or matters or issues relating to the Company.

B.	Moffatt agrees to return all documents, discs, files, software, compilations of information, or any other materials provided or made available to him by Hastings (including all copies of any such material) that contain Proprietary and Confidential Information as defined by this Agreement.
C.	“Proprietary and Confidential Information” means all of the data, documents, materials, information and ideas of Hastings, including, without limitation: any and all applicant and employee records and information, customer and vendor records and information, operation methods and information, marketing information and strategies, accounting and financial information, internal publications and memoranda, goodwill, this Agreement and its contents, computer systems, software, and other matters considered proprietary or confidential by Hastings. Proprietary and Confidential Information shall not include: (i) any information or material that Moffatt can establish has become publicly available; (ii) any information or material required to be disclosed by subpoena or order of a court of competent jurisdiction or government agency or body; or (in) any otherwise confidential information or material that Hastings’ Board of Directors allows to be disclosed by Moffatt, as evidenced by the Board’s written consent for such disclosure.
D.	Subject to the requirements regarding proprietary and Confidential Information, Hastings agrees that Moffatt is not subject to any covenant not to compete.

     11. Assignment of Intellectual Property.

A.

Moffatt agrees that any idea, innovation, concept, useful article, software, program, database, system, modification to an existing system or program, or other analytical tool he created or developed as part of his employment with Hastings (collectively referred to as “Development”) shall be the sole exclusive property of Hastings, and Moffatt agrees that he retains no intellectual property rights in any such Development. As such, Moffatt expressly assigns to Hastings all right, title and interest in any and all Developments, made or conceived solely or jointly by Moffatt, whether or not such Developments are patentable, copyrightable, or protectable in any other manner, that relate in any way to the business or operations of Hastings.

B.

The assignment of any Development only applies to any Development(s) created while Moffatt was employed by Hastings.

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C. To the extent Moffatt claims that any Development was his own intellectual property prior to the date he began his employment with Hastings, Moffatt agrees to list such Development below, with a brief description that is sufficient to allow the parties to easily identify what Moffatt claims as his own. Moffatt claims the following Development(s) as his own creation prior to the date he began his employment with Hastings, and does not assign his right, title and interest in such Development(s) to Hastings:

None

. (Write “NONE” if no prior Developments exist).

     12. Right to Injunctive Relief and Other Remedies. If it is determined that Moffatt has breached any of the covenants contained in paragraphs 3, 10, and 11, Hastings may obtain an injunction prohibiting such breach. Moffatt expressly stipulates and agrees that his obligations under this Agreement are specifically enforceable by temporary and permanent injunctive relief. Moffatt further agrees that Hastings shall not be required to post a bond in order to obtain injunctive relief against Moffatt for violating any of the covenants contained in paragraphs 3,10, and 11, or if a bond is required by law or by any court of competent jurisdiction, Moffatt hereby agrees to a bond in the lowest amount permitted by law. Nothing in this paragraph shall be deemed to deny Hastings the right to seek damages, or any other remedy that may be available, in addition to the injunctive provided herein.

     13. Notices. All communications and notices between the parties hereto shall be given at the following addresses:

Hastings Entertainment, Inc.

c/o                                            ,                                            

3601 Plains Blvd.

Amarillo, Texas 79102

Dave Moffatt

2011 3^rd Ave.

Canyon, Tx 79015

Notice under this Agreement will be considered to have been accomplished on the date the party deposits in the United States Mail a copy of the notice at issue, which must be properly addressed using the addresses identified in this paragraph, postage prepaid with adequate postage thereon.

     14. INDEMNITY. MOFFATT AGREES TO INDEMNIFY, RELEASE, DEFEND AND HOLD HARMLESS HASTINGS AND ITS EMPLOYEES, AFFILIATES, AND ASSIGNS FROM ANY AND ALL LIABILITY, CLAIMS, LOSSES, COSTS, ATTORNEYS’ FEES AND/OR DAMAGES OF ANY SORT THAT ARISE OR RESULT FROM THE BREACH OF ANY WARRANTIES OR REPRESENTATIONS MADE IN THIS AGREEMENT.

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     HASTINGS AGREES TO INDEMNIFY, RELEASE, DEFEND AND HOLD HARMLESS MOFFATT FROM ANY AND ALL LIABILITY, CLAIMS, LOSSES, COSTS, ATTORNEYS’ FEES AND/OR DAMAGES OF ANY SORT THAT ARISE OR RESULT FROM THE PERFORMANCE OF MOFFATT DUTIES CONDUCTED IN GOOD FAITH WHILE ACTING ON HASTINGS’ BEHALF OR THE BREACH OF ANY WARRANTIES OR REPRESENTATIONS MADE BY IT IN THIS AGREEMENT.

     BY SIGNING BELOW, MOFFATT ACKNOWLEDGES THAT HE HAS READ AND CAREFULLY CONSIDERED THIS AGREEMENT AND UNDERSTANDS THAT IT IS A FULL RELEASE OF ALL CLAIMS KNOWN OR UNKNOWN EXCEPT AS STATED HEREIN. MOFFATT ACKNOWLEDGES AND AFFIRMS THAT HE HAS HAD AN OPPORTUNITY TO ASK QUESTIONS CONCERNING THIS AGREEMENT AND HE HAS HAD HIS QUESTIONS ANSWERED TO HIS COMPLETE SATISFACTION. MOFFATT ACKNOWLEDGES THAT HE IS SIGNING THIS AGREEMENT FREELY AND VOLUNTARILY.

HASTINGS ENTERTAINMENT, INC.,
a Texas corporation
By:	[ILLEGIBLE]
Title:	Chairman President CEO
	on Behalf of the corporation
EMPLOYEE
/s/ Dave Moffatt
DAVE MOFFATT
3-29-06
Date

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     HASTINGS AGREES TO INDEMNIFY, RELEASE, DEFEND AND HOLD HARMLESS MOFFATT FROM ANY AND ALL LIABILITY, CLAIMS, LOSSES, COSTS, ATTORNEYS’ FEES AND/OR DAMAGES OF ANY SORT THAT ARISE OR RESULT FROM THE PERFORMANCE OF MOFFATT DUTIES CONDUCTED IN GOOD FAITH WHILE ACTING ON HASTINGS’ BEHALF OR THE BREACH OF ANY WARRANTIES OR REPRESENTATIONS MADE BY IT IN THIS AGREEMENT.

     BY SIGNING BELOW, MOFFATT ACKNOWLEDGES THAT HE HAS READ AND CAREFULLY CONSIDERED THIS AGREEMENT AND UNDERSTANDS THAT IT IS A FULL RELEASE OF ALL CLAIMS KNOWN OR UNKNOWN EXCEPT AS STATED HEREIN. MOFFATT ACKNOWLEDGES AND AFFIRMS THAT HE HAS HAD AN OPPORTUNITY TO ASK QUESTIONS CONCERNING THIS AGREEMENT AND HE HAS HAD HIS QUESTIONS ANSWERED TO HIS COMPLETE SATISFACTION. MOFFATT ACKNOWLEDGES THAT HE IS SIGNING THIS AGREEMENT FREELY AND VOLUNTARILY.

HASTINGS ENTERTAINMENT, INC., a Texas corporation
By:
Title:
	on Behalf of the corporation
EMPLOYEE
/s/ Dave Moffatt
DAVE MOFFATT
Date:	3.29.06

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STATEMENT OF NON-REVOCATION

     By signing below, I hereby verify that I have chosen not to revoke my Agreement to and execution of the “Severance Agreement and Release” dated 4.5.06 between myself and HASTINGS ENTERTAINMENT, INC. My signature below confirms my continued agreement to the terms of that Agreement in all its particulars including my release and waiver of any and all claims relating to my employment and voluntary resignation of employment with HASTINGS ENTERTAINMENT, INC.

/s/ Dave Moffatt	4.5.06
DAVE MOFFATT	Date
Print Name & Title: Dave Moffatt

NOTICE: DO NOT SIGN, DATE OR RETURN THIS DOCUMENT UNTIL EIGHT (8) DAYS AFTER YOU SIGN THE “SEVERANCE AGREEMENT AND RELEASE.”

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EX-10.27

Exhibit 10.27

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (the “Agreement”) is made the 5 day of Dec, 2005 (the “Effective Date”), by and between HASTINGS ENTERTAINMENT, INC., a Texas corporation (“Company”) and Michael Rigby (“Executive”).

WITNESSETH:

     WHEREAS, Company and its affiliates are engaged in the retail sale of books, music, videos, periodicals, and software and the rental of videos; and

     WHEREAS, Executive has expertise, experience and capability in the business of Company;

     WHEREAS, Executive has agreed to serve Company as its SVP Merchandising; and

     WHEREAS, Company desires to enter into this Agreement to provide severance and other benefits for Executive and obtain Executive’s agreements regarding confidentiality and post-employment restrictive covenants for Company; and

     WHEREAS, Executive is willing to provide such agreements to Company.

     NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which consideration is mutually acknowledged by the parties, it is hereby agreed as follows:

     1. Duties and Responsibilities. The duties and responsibilities of Executive are and shall continue to be of an executive nature as shall be required by Company in the conduct of its business. Executive’s powers and authority shall include all those presently delegated to him or such other duties and responsibilities as from time to time may be assigned to him. Executive recognizes, that during his employment hereunder, he owes an undivided duty of loyalty to Company, and agrees to devote substantially all of his business time, skills, efforts, and attention to the performance of said duties and responsibilities and to use his best efforts to promote and develop the business of Company.

     2. Employment Term. Executive’s employment shall continue until terminated by either party in accordance with Sections 4, 5, 6, or 7 herein. Except as may otherwise be expressly provided herein, regardless of the basis of any termination, Executive’s obligations under Sections 10, 11, 12, and 13 hereof shall continue. Anything to the contrary notwithstanding, two (2) years from and after the Effective Date either Company or Executive may terminate this Agreement upon thirty (30) days written notice to the other. In such event, the terms and provisions of this Agreement shall no longer be effective as to either party.

     3. Compensation and Benefits.

     (a) Base Salary. For services rendered by Employee under this Agreement, Company shall compensate Employee in the annual amount of $170,000 (“Base Salary”) payable in equal semi monthly installments during the term of this Agreement. This base salary will be reviewed on an annual basis commencing August 2006 and may be adjusted upwards or downwards.

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     (b) Bonus. For each fiscal year during the term of this Agreement, Employee shall be eligible for a bonus payable based on the Company’s Corporate Officer Incentive Plan (“COIP”) at a 75% base salary bonus level.

     (c) Withholding. All compensation shall be paid net of such withholdings as Employee requests or as are required by applicable law, rule or regulation. Company shall periodically review Employee’s Base Salary in an effort to assure Employee continued reasonable compensation for Employee’s services.

     (d) Stock Options. Ten Thousand (10,000) shares granted pursuant to Company’s stock option program guidelines.

     (e) Business Expenses. Employee is authorized to incur reasonable and necessary expenses for promoting the business of Company, including expenses for entertainment, travel and similar items in accordance with Company policy. Company will reimburse Employee for all such expenses upon the presentation by Employee, from time to time, of an itemized account of such expenditure in conformance with Company policy.

     (f) Housing and Relocation Expenses. Company will provide its standard relocation and moving expenses from your current residence in Parkland, Florida. Company will assist Employee with duplicate housing costs for a period equal to the lesser of twelve months or until Employee’s residence located in Parkland, Florida is sold. During such period Company will reimburse Employee for the lesser of your actual monthly principal, interest, taxes and insurance payments for the lesser of such costs in either Amarillo, Texas or Parkland, Florida. In addition, Company will reimburse your realtor sales commission not to exceed 6% in connection with the sale of your home in parkland, Florida. You agree to attempt to obtain a fee arrangement with a realtor providing for a 3-5% sales commission, if possible.

     (g) Benefits. Subject to meeting eligibility provisions, if any, Employee shall be entitled to such benefits as the Board of Directors of Company may from time to time establish generally for employees of the Company. Such benefits shall be generally consistent with the benefits provided by comparable firms within Company’s industry and shall include, without limitation, vacation pay, sick pay benefits and major medical coverage. The Company will also provide Employee with three (3) weeks of paid vacation per year and will pay for Employee’s attendance at reasonable trade organization meetings and seminars.

     4. Termination by Company; Special Compensation.

     (a) At any time, Company may terminate Executive’s employment for any reason. If Executive’s termination is other than pursuant to Section 5, Executive shall, subject to the other provisions of this Section 4, be entitled to the following Special Compensation (as that term is defined in this Section 4) in lieu of any benefits available under any and all Company separation plans or policies.

(b)	For purposes of this Agreement, “Special Compensation” shall entitle Executive:
	(i) to continue to receive for a period of eighteen (18) months from the date of termination (the “Severance Period”) monthly compensation at the rate equal to the monthly amount of his base annual salary in effect at the date of termination of employment;
	(ii) to receive a bonus, based on actual performance results, up to the 100% Performance

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Percentage under the COIP throughout the Severance Period provided that the amount, if any, payable under such plan for the award period including the last day of the Severance Period shall be pro rated based upon the number of months of the Severance Period that fall within the award period and the total number of months in such award period;

(iii) to continue to receive throughout the Severance Period any executive medical, dental, life, and qualified or nonqualified retirement benefits which the Executive was receiving or was entitled to receive at the time of termination, except that long term disability and short term disability benefits cease on the last day worked;

     (c) Company shall pay or cause to be paid the amounts payable under paragraph (b)(i) above in equal installments, monthly in arrears, and the amount payable under paragraph (b)(ii) in accordance with the terms of such plan. All payments pursuant to this Section shall be subject to applicable federal and state income and other withholding taxes.

     (d) In addition to the Special Compensation described above, Executive shall also be entitled to any vacation pay for vacation accrued by Executive in the calendar year of termination but not taken at the time of termination.

     (e) In the event Executive becomes employed full time during the Severance Period, Executive’s entitlement to continuation of the benefits described in paragraph (b)(iii) shall immediately cease, however, Executive shall retain any rights to continue medical insurance coverage under the COBRA continuation provisions of the group medical insurance plan by paying the applicable premium.

     (f) The payments and benefits provided for in this Section shall be in addition to all other sums then payable and owing to Executive hereunder and, except as expressly provided herein, shall not be subject to reduction for any amounts received by Executive for employment or services provided after termination of employment hereunder, and shall be in full settlement and satisfaction of all of Executive’s claims and demands.

     (g) In all events, Executive’s right to receive Special Compensation and/or other benefits pursuant to this Section shall cease immediately in the event Executive is reemployed by Company or an affiliate or Executive breaches any provision of Sections 10, 11, 12 or 13 hereof. In all cases, Company’s rights under Section 14 shall continue.

     (h) In the event that the Special Compensation is determined to be an “excess parachute payment” under section 280G of the Internal Revenue Code of 1986, as amended (the “Code”) or any successor provision, subject to the excise tax imposed by section 4999 of the Code or any successor provision (the “Excise Tax”), Company agrees to pay to Executive an additional sum (the “Gross Up”) in an amount such that the net amount retained by Executive, after receiving both the Special Compensation and the Gross Up and after paying: (i) any Excise Tax on the Payment and the Gross Up, and (ii) any Federal, state and local income taxes on the Gross Up, is equal to the amount of the Special Compensation.

     For purposes of determining the Gross Up, Executive shall be deemed to pay state and local income taxes at the highest marginal rate of taxation in his filing status for the calendar year in which the Special Compensation is to be made based upon Executive’s domicile on the date of the payment. The determination of whether such Excise Tax is payable and the amount of such Excise Tax shall be based upon the opinion of tax counsel selected by Company subject to the approval of Executive. If such opinion

3

is not finally accepted by the Internal Revenue Service, then appropriate adjustments shall be calculated (with Gross Up, if applicable) by such tax counsel based upon the final amount of Excise Tax so determined. The final amount shall be paid, if applicable, within thirty (30) days after such calculations are completed.

     5. Voluntary Resignation by Executive; Termination for Cause; Total Disability; Death. Upon termination of Executive’s employment by either Voluntary Resignation, or Termination for Cause (as those terms are defined in this Section 5), Executive shall have no right to compensation, severance pay or other benefits described herein but Executive’s obligations under Sections 10, 11, 12 and 13 hereof shall continue. Upon termination for total disability, Executives obligations under Sections 10, 11, 12, and 13 hereof shall continue.

(a)	Voluntary Resignation by Executive. At any time, Executive has the right, by written notice to Company, to terminate his services hereunder (“Voluntary Resignation”), effective as of sixty (60) days after such notice.
(b)	Termination for Cause by Company. At any time, Company has the right to terminate Executive’s employment for cause. Termination upon the occurrence of any of the following shall be deemed termination for cause (“Termination for Cause”):

(i) fails to follow any material requirement, instruction, order or mandate of any superior officer or the board of directors of Company;

(ii) commits any dishonest act towards Company, its officers, employees or Board of Directors;

(iii) engages in any activity involving fraud, dishonesty, moral turpitude or dereliction of duty; or

(iv) materially violates Company’s policies or procedures.

     Termination for failure to meet any material requirements, instruction, orders or mandates, or materially violating Company’s policies or procedures, unless willful, continuing and substantial, shall not be deemed a Termination for Cause. For Termination for Cause, written notice of the termination of Executive’s employment by Company shall be served upon Executive and shall be effective as of the date of such service. Such notice given by Company shall specify the act or acts of Executive underlying such termination.

     (c) Total Disability. Upon the total disability of Executive, as disability is defined in the disability policies and plans applicable to Executive, Executive shall have no right to compensation or severance pay described herein but shall be entitled to long term disability and other such benefits afforded under Company’s applicable policies and plans.

     (d) Death. Upon the death of Executive, Executive’s estate shall have no right to receive compensation or other severance pay described herein, but shall be entitled to receive any benefits afforded under Company’s applicable policies and plans.

     6. Resignation Following Constructive Discharge. If at any time, except in connection with a termination pursuant to Sections 4, 5, or 7, Executive is Constructively Discharged (as that term is

4

defined in this Section 6) then Executive shall have the right, by written notice to Company within sixty (60) days of such Constructive Discharge, to terminate his services hereunder, effective as of thirty (30) days after such notice. Executive shall in such event be entitled to the compensation and benefits as if such employment were terminated pursuant to Section 4 of this Agreement.

     For purposes of this Agreement, Executive shall be “Constructively Discharged” upon the occurrence of any one of the following events:

     (a) Executive is removed from his position with Company other than as a result of Executive’s appointment to a position of equal or superior scope and responsibility; or

     (b) Executive’s total compensation is reduced by more than 20% (other than across-the-board reductions similarly affecting all executive officers of Company).

     7. Effect of Change in Control.

     (a) Upon a Change in Control, Executive will be entitled to a payment (the “Change of Control Gross-Up”) for all unexercised incentive stock options, and shares owned immediately prior to the Change of Control that were acquired as a result of incentive stock options exercised within 12 months prior to the Change in Control and non-qualified options exercised within 18 months prior to the Change in Control. Payments will be determined separately for each option, and type of option, granted.

     The Change of Control Gross-Up shall be determined in accordance with the following formula:

(i) For all unexercised incentive stock options

G = [((P = E) x N) x (1-L)] ¸ (1-M)

Where	G = Change of Control Gross-Up Payment
	P = The price per share paid in the tender offer or merger agreement that results in the Change in Control. If no such tender offer or merger agreement occurs in connection with a Change in Control, then the price per share shall be determined by a majority of disinterested incumbent members of the Board of Directors of Company’s in office immediately prior to the Change in Control.
	E = The exercise price per share of the incentive stock option.
	N = The number of unexercised shares of such incentive stock option.
	L = The long term capital gains tax rate (expressed as a decimal) in effect for the calendar year in which the Change of Control Gross-Up is to be made.
	M = The highest marginal rate (expressed as a decimal) of taxation in the Executive’s filing status for the calendar year in which the Change of Control Gross-Up is to be made.

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     (ii) For all Incentive Stock Options exercised within the 12-month period prior to the Change in Control and owned by Executive immediately prior to the Change in Control.

	G = [((P - F) x Q) x (l-L)] ¸ (l-M)
Where	G = Change of Control Gross-Up Payment
	P = The price per share paid in the tender offer or merger agreement that results in the Change in Control. If no such tender offer or merger agreement occurs in connection with a Change in Control, then the price per share shall be determined by a majority of disinterested incumbent members of the Board of Directors of Company’s in office immediately prior to the Change in Control.
	F = The exercise price of such option.
	Q = The number of shares exercised in such Incentive Stock Option.
	L = The long term capital gains tax rate (expressed as a decimal) in effect for the calendar year in which the Change of Control Gross-Up is to be made.
	M = The highest marginal rate (expressed as a decimal) of taxation in the Executive’s filing status for the calendar year in which the Change of Control Gross-Up is to be made.

                  (iii) For all non-qualified stock options exercised within the 18-month period prior to the Change in Control and owned by Executive immediately prior to the Change in Control.

	G = [((P-V) x Q) x (l-L)] ¸ (l-M)
Where	G = Change of Control Gross-Up Payment
	P = The price per share paid in the tender offer or merger agreement that results in the Change in Control. If no such tender offer or merger agreement occurs in connection with a Change in Control, then the price per share shall be determined by a majority of disinterested incumbent members of the Board of Directors of Company in office immediately prior to the Change in Control.
	V = The fair market value of the stock at time of exercise of the non-qualified option (determined as of the closing price of the stock on the date such option is exercised).
	Q = The number of shares exercised in such Incentive Stock Option.
	L = The long term capital gains tax rate (expressed as a decimal) in effect for the calendar year in which the Change of Control Gross-Up is to be made.

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M = The highest marginal rate (expressed as a decimal) of taxation in the Executive’s Filing status for the calendar year in which the Change of Control Gross-Up is to be made.

     The Change in Control Gross-Up for unexercised incentive stock options shall be paid upon surrender and cancellation of the incentive stock options. The Change in Control Gross-Up for incentive stock options exercised in the 12-month period prior to the Change in Control and for non-qualified stock options exercised in the 18-month period prior to the Change in Control shall be paid upon the Change in Control.

     (b) “Change in Control” shall mean an event which shall be deemed to have occurred if: (i) a merger or consolidation of the Company with or into another corporation occurs in which the Company shall not be the surviving corporation (for purposes of this definition, the Company shall not be deemed the surviving corporation in any such transaction if, as the result thereof, it becomes a wholly- owned subsidiary of another corporation); (ii) a dissolution of the Company occurs; (iii) a transfer of all or substantially all of the assets or shares of stock of the Company in one transaction or a series of related transactions to one or more other persons or entities occurs; (iv) if any “person” or “group” as those terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other than Excluded Persons, becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities; or (v) during any period of two consecutive years commencing on or after January 1, 2000, individuals who at the beginning of the period constituted the Board cease for any reason to constitute at least a majority, unless the election of each director who was not a director at the beginning of the period has been approved in advance by directors representing at least two-thirds (2/3) of the directors then in office who were directors at the beginning of the period. The term “Excluded Persons” means each of John H. Marmaduke, the John H. Marmaduke Family Limited Partnership, the Stephen S. Marmaduke Family Limited Partnership, and the Estate of Sam Marmaduke, Deceased, and any person, entity, or group under the control of any of them, or a trustee or other fiduciary holding securities under an employee benefit plan of the Company.

     A Change of Control shall include any other transactions or series of related transactions occurring which have substantially the same effect as the transactions specified in any of the preceding clauses of this Section 7.

     (c) Except as otherwise specifically provided, amounts paid under this Section 7 shall be paid, if applicable, within thirty (30) days after such calculations are completed.

     8. Dispute Resolution. All disputes arising under this Agreement, other than those disputes relating to Executive’s alleged violations of Sections 10 through 13 herein, shall be submitted to arbitration by the American Arbitration Association of Dallas, Texas. Costs of arbitration shall be borne equally by the parties. The decision of the arbitrators shall be final and there shall be no appeal from any award rendered. Any award rendered may be entered as a judgment in any court of competent jurisdiction. In any judicial enforcement proceeding, the losing party shall reimburse the prevailing party for its reasonable costs and attorneys’ fees for enforcing its rights under this Agreement, in addition to any damages or other relief granted. This Section 8 does not apply to any action by Company to enforce Sections 10 through 13 of this Agreement and does not in any way restrict Company’s rights under Section 14 herein.

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     9. Enforcement. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by Company if Executive is successful pursuant to a legal judgment, arbitration or settlement.

     10. Confidential Information. Executive acknowledges that during the course of his employment he has learned or will learn or develop Confidential Information (as that term is defined in this Section 10). Executive further acknowledges that unauthorized disclosure or use of such Confidential Information, other than in discharge of Executive’s duties, will cause Company irreparable harm.

     For purposes of this Section, Confidential Information means trade secrets (such as technical and non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process) and other proprietary information concerning the business of Company, or its affiliates, including but not limited to: pricing and financial information; computer programs; unpatented inventions, discoveries or improvements; marketing, manufacturing, or organizational research and development; business plans; sales forecasts; personnel information, including the identity of other employees of Company, their responsibilities, competence, abilities, and compensation; current and prospective suppliers’ lists and information on suppliers; information concerning planned or pending acquisitions or divestitures; and information concerning purchases or leasing of major equipment or property, which information: (a) has not been made generally available to the public; and (b) is useful or of value to the current or anticipated business, or research or development activities of Company, or (c) has been identified to Executive as confidential by Company, either orally or in writing.

     Except in the course of his employment and in the pursuit of the business of Company or any of its subsidiaries or affiliates, Executive shall not, during the course of his employment, or for a period of eighteen (18) months following termination of his employment for any reason, directly or indirectly, disclose, publish, communicate or use on his behalf or another’s behalf, any proprietary information or data of Company or any of its subsidiaries or affiliates.

     Executive acknowledges that Company operates and competes nationally, and that Company will be harmed by unauthorized disclosure or use of Confidential Information regardless of where such disclosure or use occurs, and that therefore this confidentiality agreement is not limited to any single state or other jurisdiction.

     11. Non-Competition.

     (a) Scope. During the effectiveness of this Agreement (the “Term”), Employee shall devote substantially of his business, time, attention and energies to the business and interests of Company, and shall not be engaged (whether or not during normal business hours) in any other business or professional activity (whether or not such activity is pursued for gain, profit or other pecuniary advantage) without first obtaining the written consent of the Board of Directors of Company. During the Term of and for a period of two years after the expiration or termination of this Agreement, for any reason or for no reason at all, Employee shall not directly or indirectly:

          (i) Own, have any interest in or be, serve or act as an individual proprietor, partner, agent, stock holder, officer, employee, consultant, director, joint venturer, investor, lender, or in any other capacity whatsoever (other than as the holder of not more than one percent (1%) of the total outstanding stock of a publicly held company) of or with, or assist in any way, any corporation, partnership, firm or business enterprise at least 20% of whose sales (in dollar volume) are books, music

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or video sales or rentals (whether such book, music or video (including games) is new or pre-owned) (individually or in the aggregate with all affiliates thereof) and which does business anywhere in the United States.

          (ii) Solicit or induce, or attempt to induce, any employee or independent contracter of Company or any other person who shall be in the service of Company to terminate his or her employment with or otherwise cease his or her relationship with Company; or

          (iii) Solicit divert or take away, or attempt to solicit, divert or take away, the business or patronage of any of the clients, customers (whether any such customer has done business once or more than once), suppliers or accounts, or prospective clients, customers or accounts, or suppliers to Company.

     12. Inducement of Other Employees. For an eighteen (18) month period following termination of employment, Executive will not directly or indirectly solicit, induce or encourage any employee or agent of Company to terminate his relationship with Company.

     13. Return of Company’s Property. All notes, reports, sketches, plans, published memoranda or other documents created, developed, generated or held by Executive during employment concerning or related to Company’s business, and whether containing or relating to Confidential Information or not, are the property of Company and will be promptly delivered to Company upon termination of Executive’s employment for any reason whatsoever. During the course of employment, Executive shall not remove any of the above property containing Confidential Information, or reproductions or copies thereof, or any apparatus from Company’s premises without authorization.

     14. Remedies. Executive acknowledges that the restraints and agreements herein provided are fair and reasonable, that enforcement of the provisions of Sections 10, 11, 12 and 13 will not cause him undue hardship and that said provisions are reasonably necessary and commensurate with the need to protect Company and its legitimate and proprietary business interests and property from irreparable harm.

     Executive acknowledges that failure to comply with the terms of this Agreement will cause irreparable damage to Company. Therefore, Executive agrees that, in addition to any other remedies at law or in equity available to Company for Executive’s breach or threatened breach of this Agreement, Company is entitled to specifie performance or injunctive relief, without bond, against Executive to prevent such damage or breach, and the existence of any claim or cause of action Executive may have against Company will not constitute a defense thereto. Executive further agrees to pay reasonable attorney fees and costs of litigation incurred by Company in any proceeding relating to the enforcement of the Agreement or to any alleged breach thereof in which Company shall prevail in whole or in part.

     In the event of a breach or a violation by Executive of any of the covenants and provisions of this Agreement, the running of the Non-Compete Period (but not of Executive’s obligation thereunder), shall be tolled during the period of the continuance of any actual breach or violation.

     15. Entire Understanding. This Agreement constitutes the entire understanding between the parties relating to Executive’s employment hereunder and while this Agreement is in effect supersedes all prior written and oral understandings and agreements with respect to such matters.

     16.  No Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance,

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charge pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect.

     17.  Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto, Executive’s executors, administrators, legal representatives, heirs, successors, and assigns and the successors and assigns of Company. Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of Company, expressly and unconditionally to assume and agree to perform Company’s obligations under this Agreement, in the same manner and to the same extent that Company would be required to perform if no such succession or assignment had taken place.

     18. Partial Invalidity. The various provisions of this Agreement are intended to be severable and to constitute independent and distinct binding obligations. Should any provision of this Agreement be determined to be void and unenforceable, in whole or in part, it shall not be deemed to affect or impair the validity of any other provision or part thereof, and such provision or part thereof shall be deemed modified to the extent required to permit enforcement. Without limiting the generality of the foregoing, if the scope of any provision contained in this Agreement is too broad to permit enforcement to its full extent, but may be made enforceable by limitations thereon, such provision shall be enforced to the maximum extent permitted by law, and Executive hereby agrees that such scope may be judicially modified accordingly.

     19. Strict Construction. The language used in this Agreement will be deemed to be the language chosen by Company and Executive to express their mutual intent and no rule of strict construction shall be applied against any person.

     20. Waiver. The waiver of any party hereto of a breach of any provision of this Agreement by any other party shall not operate or be construed as a waiver of any subsequent breach.

     21. Notices. Any notice or other communication required or permitted to be given hereunder shall be determined to have been duly given to any party (a) upon delivery to the address of such party specified below if delivered personally or by courier; (b) upon dispatch if transmitted by telecopy or other means of facsimile, provided a copy thereof is also sent by regular mail or courier; or (c) within forty-eight (48) hours after deposit thereof in the U.S. mail, postage prepaid, for delivery as certified mail, return receipt requested, addressed, in any case to the party at the following address(es) or telecopy numbers:

If to Executive:	If to Company:
Michael Rigby	Hastings Entertainment, Inc.
C/o Hastings Entertainment, Inc.	P.O. Box 35350
P.O. Box 35350	Amarillo, TX 79120
Amarillo, TX 79120	Facsimile: (806) 351-2299
Facsimile: (806) 351-2299	Attention: Corporate Secretary

or to such other address(es) or telecopy number(s) as any party may designate by written notice in the aforesaid manner.

     22. Governing Law. This Agreement shall be governed by, and interpreted, construed and

10

enforced in accordance with, the laws of the State of Texas.

     23. Gender. Wherever from the context it appears appropriate, each term stated in either the singular of plural shall include the singular and the plural, and the pronouns stated in either the masculine, the feminine or the neuter gender shall include the masculine, feminine or neuter.

     24. Headings. The headings of the Sections of this Agreement are for reference purposes only and do not define or limit, and shall not be used to interpret or construe the contents of this Agreement.

     IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date above set forth.

HASTINGS ENTERTAINMENT, INC.
By:	/s/ John H. Marmaduke
	John H. Marmaduke, President
/s/ Michael Rigby
Michael Rigby

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EX-10.28

Exhibit 10.28

SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT

     This Sixth Amendment to Loan and Security Agreement (the “Sixth Amendment”) is made as of this 27^th day of February, 2007 by and among

     Fleet Retail Group, LLC, f/k/a Fleet Retail Group, Inc., f/k/a Fleet Retail Finance Inc. (the “Agent”), a Delaware limited liability company with its principal executive offices at 40 Broad Street, Boston, Massachusetts, for the Revolving Credit Lenders party to the Agreement (defined below), and

     The Revolving Credit Lenders party to the Agreement, and

     Hastings Entertainment, Inc. (the “Borrower”), a Texas corporation with its principal executive offices at 3601 Plains Boulevard, Amarillo, Texas 79102;

     in consideration of the mutual covenants herein contained and benefits to be derived here from.

WITNESSETH:

     WHEREAS, on August 29, 2000, the Agent, the Revolving Credit Lenders and the Borrower, among others, entered in a certain Loan and Security Agreement (as amended and in effect, the “Agreement”); and

     WHEREAS, contemporaneously herewith, The CIT Group/Business Credit, Inc. is assigning 100% of its interest in the Revolving Credit to Fleet Retail Group, LLC pursuant to that certain Assignment and Acceptance by and between The CIT Group/Business Credit, Inc. and Fleet Retail Group, LLC dated as of even date herewith; and

     WHEREAS, the Agent, the Revolving Credit Lenders and the Borrower desire to modify certain provisions of the Agreement as set forth herein.

     NOW, THEREFORE, it is hereby agreed among the Agent, the Revolving Credit Lenders and the Borrower as follows:

1. Capitalized Terms. All capitalized terms used herein and not otherwise defined shall have the same meaning herein as in the Agreement.

2. Amendments to Article 1. The provisions of Article 1 of the Agreement are hereby amended as follows:

a. The definition of “Base Margin” is hereby amended by inserting the following provisions at the end thereof:

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“Notwithstanding the foregoing provisions, commencing on the first day of the first Fiscal quarter immediately following the effective date of the Sixth Amendment, the Base Margin shall be the following percentages based upon the following criteria:

Level	Average Availability.	Base Margin
I	Greater than $35,000,000		0.00	%
II	Greater than $30,000,000 but less than or equal to $35,000,000		0.00	%
III	Greater than $20,000,000 but less than or equal to $30,000,000		0.00	%
IV	Less than or equal to $20,000,000		0.00	%

On the first day of each fiscal quarter, the Base Margin shall be adjusted based upon the Borrower’s aggregate daily Average Availability for the immediately preceding Fiscal quarter divided by the total number of days in such immediately preceding Fiscal quarter. Provided, however, upon the occurrence of an Event of Default, interest shall be determined in the manner set forth in Section 2-11(f).”

b. The definition of “Libor Margin” is hereby amended by inserting the following provisions at the end thereof:

“Notwithstanding the foregoing provisions, commencing on the first day of the first Fiscal quarter immediately following the effective date of the Sixth Amendment, the Libor Margin shall be the following percentages based upon the following criteria:

Level	Average Availability	Libor Margia
I	Greater than $35,000,000		1.00	%
II	Greater than $30,000,000 but less than or equal to $35,000,000		1.25	%
III	Greater than $20,000,000 but less than or equal to $30,000,000		1.50	%
IV	less than $20,000,000		1.75	%

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On the first day of each Fiscal quarter, the Libor Margin shall be adjusted based upon the Borrower’s aggregate daily Average Availability for the immediately preceding fiscal quarter divided by the total number of days in such immediately preceding Fiscal quarter. Provided, however, upon the occurrence of an Event of Default, the Libor Margin shall be immediately increased to the percentage set forth in Level IV above (even if the Average Availability requirements for another Level have been met), and interest shall be determined in the manner set forth in Section 2-11(f).”

c. The following new definition is hereby added to the Agreement:

“Sixth Amendment” Shall mean that certain Sixth Amendment to Loan and Security Agreement dated February 27, 2007 by and among the Borrower, the Agent and the Revolving Credit Lenders.

3. Amendment to Article 4. Section 4-19 of the Agreement is hereby amended by adding the words “following the effective date of the Sixth Amendment” after the words “$15 Million” in the second line thereof.

4. Amendments to Exhibits.

a.	Exhibit 2:2-22 is hereby deleted in its entirety, and is replaced by Exhibit 2:2-22 annexed hereto and incorporated herein by reference.
b.	The remaining Exhibits to the Agreement are true and accurate in all respects and there have been no changes thereto from the date on which such Exhibits were delivered to the Agent.

5. Ratification of Loan Documents. Except as provided herein, all terms and conditions of the Agreement and the other Loan Documents remain in full force and effect. The Borrower hereby ratifies, confirms, and reaffirms all representations, warranties, and covenants contained therein and hereby represents that no Events of Default exist under the Loan Documents. The Borrower further ratifies and confirms that any and all Collateral previously granted to the Agent for the ratable benefit of the Revolving Credit Lenders continues to secure the existing Liabilities as well as the Liabilities as amended hereby, and any future Liabilities.

6. Conditions to Effectiveness. This Sixth Amendment shall be become effective upon the satisfaction of the following conditions precedent:

a. This Sixth Amendment shall have been duly executed and delivered by each of the Borrower, the Revolving Credit Lenders and the Agent and shall be in full force and effect.

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b.	The Borrower shall have delivered to the Agent its Secretary’s Certificate with certified copies of (i) Incumbency Certificate; (ii) Specimen Signatures; and (iii) Resolutions.
c.	All proceedings in connection with the transactions contemplated by this Sixth Amendment and all documents incident thereto shall be reasonably satisfactory in substance and form to the Agent, and the Agent shall have received all information and such counterpart originals or certified or other copies of such documents as the Agent may reasonably request. Further, the Borrower shall have delivered to the Agent such additional documents which the Agent may reasonably request, including, without limitation, an amended and restated Revolving Credit Note in favor of Fleet Retail Group, LLC and a ratification by each guarantor of their respective guaranties.
d.	The Agent shall have received the Assignment and Acceptance between The CIT Group/Business Credit, Inc. and Fleet Retail Group, LLC.
e.	The Borrower shall have paid all reasonable costs and expenses of the Agent including, without limitation, all attorneys’ fees and expenses incurred by the Agent in connection with the Agreement, the Loan Documents, and the preparation, negotiation and execution of this Sixth Amendment.

7. Miscellaneous.

a.	This Sixth Amendment may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, and all of which together shall constitute one instrument.
b.	This Sixth Amendment expresses the entire understanding of the parties with respect to the transactions contemplated hereby. No prior negotiations or discussions shall limit, modify, or otherwise affect the provisions hereof.
c.	Any determination that any provision of this Sixth Amendment or any application hereof is invalid, illegal or unenforceable in any respect and in any instance shall not effect the validity, legality, or enforceability of such provision in any other instance, or the validity, legality or enforceability of any other provisions of this Sixth Amendment.
d.	The Borrower shall pay on demand all costs and expenses of the Agent, including, without limitation, reasonable attorneys’ fees in connection with the preparation, negotiation, execution and delivery of this Sixth Amendment.
e.	The Borrower warrants and represents that the Borrower has consulted with independent legal counsel of the Borrower’s selection in connection with this Sixth Amendment and is not relying on any representations or warranties of any

4

Revolving Credit Lender or the Agent or their respective counsel in entering into this Sixth Amendment.

f.

The Borrower acknowledges and agrees that the Borrower does not have any claims, counterclaims, offsets, or defenses against any Revolving Credit Lender or the Agent directly or indirectly relating to the Borrower’s relationship with, and/or the Borrower’s Liabilities, and to the extent that the Borrower has or ever had any such claims, counterclaims, offsets, or defenses against any of the Revolving Credit Lenders or the Agent, the Borrower affirmatively WAIVES the same. The Borrower, and for its representatives, successors and assigns, hereby RELEASES, and forever discharges the Revolving Credit Lenders and the Agent and their respective officers, directors, agents, servants, attorneys, and employees, and their respective representatives, successors and assigns, of, to, and from all known debts, demands, actions, suits, accounts, covenants, contracts, agreements, damages, and any and all claims, demands, or liabilities whatsoever, of every name and nature, both at law and in equity through the date hereof.

[remainder of page left intentionally blank]

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     IN WITNESS WHEREOF, the parties have hereunto caused this Sixth Amendment to be executed and their seals to be hereto affixed as of the date first above written.

HASTINGS ENTERTAINMENT, INC.
(“Borrower”)

By: [ILLEGIBLE]

Name: DAN CROW

Title: CFO

FLEET RETAIL GROUP, LLC
(“Agent”)

By: [ILLEGIBLE]

Name: MARK D. TWONEY

Title: U. P.

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EXHIBIT 2:2-22

REVOLVING CREDIT LENDERS’ COMMITMENTS

	Revolving Credit		Revolving Credit
Revolving Credit Lender	Dollar Commitment		Commitment Percentage
Fleet Retail Group, LLC		$100,000,000.00		100	%
Totals	$	100,000,000.00		100	%

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February 27, 2007

Fleet Retail Group, LLC, As Agent
40 Broad Street

Boston, Massachusetts 02108

     Re: Amendment to Loan Arrangement with Hastings Entertainment, Inc.

Gentlemen:

     Reference is made to a certain loan arrangement originally dated as of August 29, 2000 (the “Loan Arrangement”) entered into by and among Hastings Entertainment, Inc., a Texas corporation (the “Borrower”) and Fleet Retail Finance Inc., n/k/a Fleet Retail Group, LLC, as Agent (the “Agent”) and The CIT Group/Business Credit, Inc. (the “Co-Agent”) for a syndicate of Revolving Credit Lenders, and such Revolving Credit Lenders, pursuant to which such Revolving Credit Lenders established a revolving line of credit in the Borrower’s favor in accordance with the terms of a Loan and Security Agreement dated August 29, 2000 (as amended and in effect, the “Loan Agreement”). Unless otherwise defined herein, all capitalized terms used herein shall have the meaning set forth in the Loan Agreement.

     The undersigned have each guarantied the Liabilities of the Borrower pursuant to their respective Guaranties dated August 29, 2000 (singly, a “Guaranty” and collectively, the “Guaranties”).

     The Borrower, the Agent and the Revolving Credit Lenders desire to modify and amend the terms of the Loan Agreement pursuant the terms and conditions of a certain Sixth Amendment to Loan and Security Agreement of even date (the “Amendment”). The Agent and the Revolving Credit Lenders have indicated that they will not enter into such Amendment unless, among other things, the undersigned execute and deliver this letter. Therefore, to induce the Agent and the Revolving Credit Lenders to enter into the Amendment, the undersigned each hereby:

(a)	ratifies, confirms and reaffirms, all and singular, the terms and conditions of, and all warranties and representations set forth in, their respective Guaranties.
(b)	acknowledges, confirms and agrees that their respective Guaranties remain in full force and effect and shall in no way be limited or affected by the Amendment.
(c)	acknowledges and agrees that such Person has no offsets, defenses, or counterclaims against the Agent, or any Revolving Credit Lender with respect to such Person’s Guaranty or otherwise, and to the extent that any of the undersigned has any such offsets, defenses, or counterclaims, then such Person hereby WAIVES and RELEASES the same.

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     This letter shall take effect as a sealed instrument as of the date first written above.

	Very truly yours,
	HASTINGS COLLEGE STORES, INC.
Witness:
Stephanie Eslep	By: [ILLEGIBLE]
	Name: DAN CROW
	Title: CFO
	HASTINGS INTERNET, INC.
Witness:
Stephanie Eslep	By: [ILLEGIBLE]
	Name: DAN CROW
	Title: CFO
Witness:
Stephanie Eslep	HASTINGS PROPERTIES, INC.
	By: [ILLEGIBLE]
	Name: DAN CROW
	Title: CFO

Acknowledged and Agreed to:

Fleet Retail Group, LLC, as Agent
and Revolving Credit Lender

By:	/s/ Mark D. Tworey
Name:
Title:

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ASSIGNMENT AND ACCEPTANCE

Effective Date: February 27, 2007

     Re: Loan and Security Agreement dated August 29, 2000 (as amended and in effect, the “Loan Agreement”) between Fleet Retail Group, LLC (f/k/a Fleet Retail Finance Inc.), as agent for a syndicate of revolving credit lenders (the “Revolving Credit Lenders” referenced therein and the Revolving Credit Lenders, on the one hand, and Hastings Entertainment, Inc., on the other (Terms used herein which are defined in the Loan Agreement have the same meaning herein as in the Loan Agreement).

     Agreement By and Between:

     THE CIT GROUP/BUSINESS CREDIT, INC. (The “Assignor”) and

     FLEET RETAIL GROUP, LLC (The “Assignee”)

1.	Assignment and Assumption: The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, as of the Effective Date, 100% of the Assignor’s interest in the Revolving Credit.
2.	Representations By Assignor: The Assignor represents that the Assignor is the legal and beneficial owner of the interest being assigned hereby free and clear of any adverse claims.
3.	Exclusion of Warranties by Assignor: The Assignor:

a.	Makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this any Loan Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of any Loan Document or any other instrument or document furnished pursuant hereto.
b.	Makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any other Person primarily or secondarily liable in respect of any of the Liabilities, or the performance or observance by the Borrower or any other Person primarily or secondarily liable in respect of any of the Liabilities of any of their obligations under any Loan Documents or any other instrument or document furnished pursuant hereto or thereto.
c.	Attaches the Revolving Credit Note of which the Assignor is the holder and requests that the Agent cause the Borrower’s exchange of such Note for new

Revolving Credit Notes payable to the Assignor and the Assignee reflecting the assignment referenced above.

4. Assignee’s Representations Warranties and Agreements: The Assignee:

a.	Confirms that it has received a copy of the Loan Agreement (and any amendment thereto), the most recent financial statements then to have been delivered pursuant to the Loan Agreement, and such other documents and information as the Assignee has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance.
b.	Confirms and represents that, independently and without reliance upon the Assignor, the Agent, or any other Revolving Credit Lender and based on such documents and information as the Assignee deems appropriate, has made such Person’s own credit decision to join in the credit facility contemplated by the Loan Documents and to become a “Revolving Credit Lender”.
c.	Confirms and represents that the Assignee will continue to make such Person’s own credit decisions in taking or not taking action under the Loan Agreement and other Loan Documents independently and without reliance upon the Assignor, the Agent or any other Revolving Credit Lender and based on such documents and information as the Assignee shall deem appropriate at the time.
d.	Appoints and authorizes the Agent to take such action on behalf of the Assignee and to exercise such powers under the Loan Documents as are delegated to the Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto.
e.	Agrees that the Assignee will perform, in accordance with their terms, all of the obligations which, by the terms of the Loan Agreement and all other Loan Documents are required to be performed by it as a “Revolving Credit Lender” as if the Assignee had been a signatory thereto and to any amendments thereof.
f.	Represents and warrants that it is legally authorized to enter into this Assignment and Acceptance and to perform its obligations hereunder, under the Loan Agreement and under the Loan Documents.

5. Effect of Assignment and Assumption: Following delivery, acceptance and recording by the Agent of this Assignment and Acceptance, from and after the Effective Date:

a. The Assignee be a party to the Loan Agreement and the other Loan Documents (and any amendments thereto) and to the extent of the commitment assigned by this Assignment and Acceptance, have the rights and obligations of a Revolving Credit Lender thereunder.

b.	The Assignor shall be released from the Assignor’s obligations under the Loan Agreement and the other Loan Documents to the extent of the commitment assigned by this Assignment and Acceptance.
c.	The Agent shall make all payments in respect of the interest in the Revolving Credit Loans assigned hereby (including payments of principal, interest, and applicable fees) to the Assignee.
d.	The Assignor and Assignee shall make all appropriate adjustments in payments for periods prior to the Effective Date by the Agent or with respect to the making of this assignment directly between themselves.

6. Massachusetts Law: This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of The Commonwealth of Massachusetts.

     IN WITNESS WHEREOF, intending to be legally bound, each of the undersigned has caused this Assignment and Acceptance to be executed on its behalf by its officer thereunto duly authorized, as of the date first above written.

ASSIGNOR:
THE CIT GROUP/BUSINESS CREDIT, INC.
By:	/s/ Adrian Avalos
	Name:	Adrian Avalos
	Title:	Vice President
ASSIGNEE:
FLEET RETAIL GROUP, LLC
By:	/s/ Mark D. Twoncy
	Name:	Mark D. Twoncy
	Title:	VP

REVOLVING CREDIT NOTE	Fleet Retail Group, LLC
	Agent
Boston, Massachusetts	February 28, 2006
$40,000,000.00	Payee: The CIT Group / Business Credit, Inc.

     FOR VALUE RECEIVED, the undersigned, Hastings Entertainment, Inc., a Texas corporation with its principal executive offices at 3601 Plains Boulevard, Amarillo, Texas 79102 (the “Borrower”) promises to pay to the order of The CIT Group / Business Credit, Inc., a New York corporation with offices at 5420 LBJ Freeway (Suite 200), Dallas, Texas 75240 (with any subsequent holder, a “Revolving Credit Lender”) that amount which the Revolving Credit Lender has advanced towards the aggregate unpaid principal balance of Revolving Credit Loans made to or for the account of the Borrower pursuant to the Loan and Security Agreement dated August 29, 2000 as amended from time to time, including pursuant to that certain Fifth Amendment to Loan and Security Agreement of even date herewith (as such may be amended hereafter, the “Loan Agreement”) between Fleet Retail Group, LLC, f/k/a Fleet Retail Finance Inc., a Delaware limited liability company with its offices at 40 Broad Street Boston, Massachusetts 02109 (in Such capacity, the “Agent”), as agent for the ratable benefit of the “Revolving: Credit Lenders”, on the one hand, and the Borrower, on the other, with interest at the rate and payable in the manner stated therein. Capitalized terms used but not otherwise defined herein shall have the meanings assigned thereto in the Loan Agreement.

     This is a “Revolving Credit Note” (this “Note”) to which reference is made in the Loan Agreement and is subject to all terms and provisions thereof. The principal of, and interest on, this. Note shall be payable as provided in the Loan Agreement and shall be subject to Acceleration as provided therein.

     In the absence of manifest error, the Agent’s books and records concerning Revolving Credit Loans, the accrual of interest thereon, and the repayment of such Revolving Credit Loans, shall be prima facie evidence of the Indebtedness hereunder.

     No delay or omission by the Agent or any Revolving Credit Lender in exercising or enforcing any of the Agent’s or such Revolving Credit Lender’s powers, rights, privileges, remedies, or discretions hereunder shall operate as a waiver thereof on that occasion nor on any other occasion. No waiver of any Event of Default with respect hereto hereunder shall operate as a waiver of any other Event of Default hereunder, nor as a continuing waiver.

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     The Borrower, and each endorser and guarantor of this Note, respectively waives presentment, demand, notice, and protest, and also waives any delay on the part of the holder hereof. Each of the Borrower and any endorser or guarantor hereof assents to any extension or other indulgence (including, without limitation, the release or substitution of Collateral) permitted by the Agent with respect to this Note and/or any Collateral given to secure this Note.

     This Note shall be binding upon the Borrower, and each endorser and guarantor hereof, and upon their respective heirs, successors, assigns, and representatives, and shall inure to the benefit of the Lender and its successors, endorsees, and assigns.

     The Liabilities of the Borrower, and of any endorser or guarantor of this Note, are joint and several, provided, however, the release by the Agent or the Revolving Credit Lender of any one or more of the Borrower or endorsers or guarantors shall not release any other Person obligated on account of this Note. Each reference in this Note to the Borrower, any endorser, and any guarantor, is to such Person individually and also to all such Persons jointly. No Person obligated on account of this Note may seek contribution from any other Person also obligated unless and until all Liabilities to the Revolving Credit Lender of the Person from whom contribution is sought have been satisfied in full.

     This Note is delivered at the offices of the Agent in Boston, Massachusetts and shall be governed by the laws of The Commonwealth of Massachusetts, and shall take effect as a sealed instrument.

     This Revolving Credit Note hereby amends and restates in full that certain Revolving Credit Note dated August 29, 2000 from Borrower to Revolving Credit Lender.

     The Borrower makes the following waiver knowingly, voluntarily, and intentionally, and understands that the Agent and the Revolving Credit Lender in the establishment and maintenance of their respective relationship with the Borrower contemplated by this Note, is relying thereon: THE BORROWER, AND EACH ENDORSER AND GUARANTOR OF THIS NOTE TO THE EXTENT ENTITLED THERETO, RESPECTIVELY WAIVES ANY PRESENT OR FUTURE RIGHT IT MAY HAVE ON ACCOUNT OF OR IN RESPECT TO THE LIABILITIES, TO A TRIAL BY JURY IN ANY CASE OR CONTROVERSY IN WHICH THE AGENT AND/OR ANY REVOLVING CREDIT LENDER IS OR BECOMES A PARTY (WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE AGENT AND/OR ANY

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     REVOLVING CREDIT LENDER OR IN WHICH THE AGENT AND/OR ANY REVOLVING CREDIT LENDER IS JOINED AS A PARTY LITIGANT), THAT ARISES OUT OF, OR IS IN RESPECT TO, THIS NOTE, THE LOAN AGREEMENT OR ANY OTHER LOAN DOCUMENTS.

HASTINGS ENTERTAINMENT, INC.

The (“Borrower”)

By:	/s/ Daniel Crow
	Daniel Crow
	Senior Vice President

Marjorie B. Crider
mcrider@riemerlaw.com
(617) 880-3423 direct
(617)692-3423 direct fax

March 16, 2007

VIA FEDERAL EXPRESS

Dan Crow
V.P. Finance and Chief Financial Officer
Hastings Entertainment, Inc.
3601 Plains Blvd.
Amarillo, Texas 79102

     Re: Sixth Amendment to Loan and Security Agreement with Fleet Retail Group, LLC Dear Dan:

     Enclosed herewith please find the following original documents for your files in connection with the above matter:

1.	Sixth Amendment to Loan and Security Agreement;
2.	Confirmation of Guaranty;
3.	Assignment and Acceptance Agreement between The CIT Group/Business Credit, Inc. and Fleet Retail Group, LLC; and
4.	Revolving Credit Note dated February 28, 2006 payable to The CIT Group/Business Credit, Inc. (this Note is no longer in effect and may be destroyed or filed at your option).

     Please feel free to contact me with any questions regarding the above materials.

Very truly yours,

Marjorie B. Crider

MBC
Enclosures

cc: Mr. Mark Twomey (via email, w/out enclosures)
Jeff Shrader, Esq. (via email, w/out enclosures)
1001545.1

Riemer & Braunstein LLP
Three Center Plaza · Boston, MA 02108-2003

BOSTON NEW YORK BURLINGTON

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-137190, 333-137189, 333-137188, 333-127807, 333-60997, 333-61007, 333-90802, 333-90858, and 333-90860) of Hastings Entertainment, Inc. of our report dated April 12, 2007, with respect to the consolidated financial statements and schedule of Hastings Entertainment, Inc., included in this Annual Report (Form 10-K) for the year ended January 31, 2007.

Fort Worth, Texas
April 18, 2007

EX-31.1

Exhibit 31.1

Principal Executive Officer
Certification Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)

I, John H. Marmaduke, certify that:

1.	I have reviewed this annual report on Form 10-K of Hastings Entertainment, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 20, 2007	/s/ John H. Marmaduke
	John H. Marmaduke
	President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

Principal Financial Officer
Certification Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)

I, Dan Crow, certify that:

1.	I have reviewed this annual report on Form 10-K of Hastings Entertainment, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 20, 2007	/s/ Dan Crow
	Dan Crow
	Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. §1350, AS ADOPTED PURSUANT TO
§906 OF THE SARBANES-OXLEY ACT OF 2002

April 20, 2007

In connection with the filing of the annual report on Form 10-K of Hastings Entertainment, Inc., a Texas corporation (the “Company”), for the annual period ended January 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies that, to such officer’s knowledge:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

/s/ John H. Marmaduke John H. Marmaduke
President and Chief Executive Officer
(Principal Executive Officer)

/s/ Dan Crow Dan Crow
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

A signed original of this written statement required by §906 of the Sarbanes-Oxley Act of 2002 has
been provided to Hastings Entertainment, Inc. and will be retained by Hastings Entertainment, Inc.
and furnished to the Securities and Exchange Commission, or its staff, upon request.