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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2006

OR



| ̈ | 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 333-126486



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Gregg Appliances, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Indiana                                                        |  | 35-1049508                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|4151 East 96thStreet Indianapolis, IN                          |  | 46240                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (317) 848-8710



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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.  x  Yes ̈No

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 ̈Accelerated Filer ̈Non-accelerated filer  x

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

The number of shares of Gregg Appliances, Inc.s common stock outstanding as of November 14, 2006 was 14,245,800.



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##### Table of Contents

GREGG APPLIANCES, INC. AND SUBSIDIARIES

Report on Form 10-Q

Three Months Ended September 30, 2006

Index



|         |  |                       |  |                                                                                                                |  |     
|-------- |  | --------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                       |  |                                                                                                                |  | Page
|Part I.  |  | Financial Information |  |                                                                                                               
|         |  |                       | 
|         |  | Item 1.               |  | Condensed Consolidated Financial Statements:                                                                   |  |     
|         |  |                       | 
|         |  |                       |  | Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2006 and 2005 |  | 3   
|         |  |                       | 
|         |  |                       |  | Condensed Consolidated Balance Sheets as of September 30, 2006 and March 31, 2006                              |  | 4   
|         |  |                       | 
|         |  |                       |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2006 and 2005           |  | 5   
|         |  |                       | 
|         |  |                       |  | Notes to Condensed Consolidated Financial Statements                                                           |  | 6   
|         |  |                       | 
|         |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 13  
|         |  |                       | 
|         |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                                                     |  | 20  
|         |  |                       | 
|         |  | Item 4.               |  | Controls and Procedures                                                                                        |  | 20  
|         |  |                      
|Part II. |  | Other Information     |  |                                                                                                               
|         |  |                       | 
|         |  | Item 1.               |  | Legal Proceedings                                                                                              |  | 21  
|         |  |                       | 
|         |  | Item 2.               |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                    |  | 21  
|         |  |                       | 
|         |  | Item 6.               |  | Exhibits                                                                                                       |  | 21  



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##### Table of Contents

Part I: Financial Information



|ITEM 1. | Condensed Consolidated Financial Statements
|------- | -------------------------------------------

GREGG APPLIANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



|                                             |  |                            |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|-------------------------------------------- |  | -------------------------- | ------- | - | ------------------ | - | ------- | ------------------ |  | - | ------------------ | - |  | - | ------- | -
|                                             |  | Three Months Ended         |         |   | Six Months Ended   |  
|                                             |  | September 30, 2006         |         |   | September 30, 2005 |   |         | September 30, 2006 |  |   | September 30, 2005 |  
|                                             |  | (Unaudited) (In Thousands) |        
|Net sales                                    |  | $                          | 237,718 |   |                    | $ | 212,897 |                    |  | $ | 440,966            |   |  | $ | 397,914 |  
|Cost of goods sold                           |  |                            | 161,830 |   |                    |   | 147,535 |                    |  |   | 302,607            |   |  |   | 269,283 |  
|                                             |  |                            |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Gross profit                                 |  |                            | 75,888  |   |                    |   | 65,362  |                    |  |   | 138,359            |   |  |   | 128,631 |  
|Selling, general and administrative expenses |  |                            | 55,673  |   |                    |   | 53,491  |                    |  |   | 105,944            |   |  |   | 102,768 |  
|Net advertising expense                      |  |                            | 10,022  |   |                    |   | 9,124   |                    |  |   | 20,004             |   |  |   | 18,334  |  
|Restructuring and asset impairment charges   |  |                            |        |   |                    |   | 1,320   |                    |  |   |                   |   |  |   | 1,320   |  
|                                             |  |                            |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Income from operations                       |  |                            | 10,193  |   |                    |   | 1,427   |                    |  |   | 12,411             |   |  |   | 6,209   |  
|                                             |  |                            |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Other expense (income):                      |  |                            |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Interest expense                             |  |                            | 4,523   |   |                    |   | 4,812   |                    |  |   | 9,153              |   |  |   | 9,538   |  
|Interest income                              |  |                            | (10     | ) |                    |   | (80     | )                  |  |   | (15                | ) |  |   | (169    | )
|Gain related to early extinguishment of debt |  |                            | (127    | ) |                    |   |        |                    |  |   | (295               | ) |  |   |        |  
|                                             |  |                            |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Total other expense                          |  |                            | 4,386   |   |                    |   | 4,732   |                    |  |   | 8,843              |   |  |   | 9,369   |  
|                                             |  |                            |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Income (loss) before income taxes            |  |                            | 5,807   |   |                    |   | (3,305  | )                  |  |   | 3,568              |   |  |   | (3,160  | )
|Income tax expense                           |  |                            | 2,281   |   |                    |   | 852     |                    |  |   | 1,419              |   |  |   | 957     |  
|                                             |  |                            |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  
|Net income (loss)                            |  | $                          | 3,526   |   |                    | $ | (4,157  | )                  |  | $ | 2,149              |   |  | $ | (4,117  | )
|                                             |  |                            |         |   |                    |   |         |                    |  |   |                    |   |  |   |         |  

See accompanying notes to condensed consolidated financial statements.



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GREGG APPLIANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                              |  |                                   |          |   |                |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | -------- | - | -------------- | - | -------- | -
|                                                                                                                                                              |  | September 30, 2006                |          |   | March 31, 2006 |  
|                                                                                                                                                              |  | (Unaudited)                       |         
|                                                                                                                                                              |  | (In thousands, except share data) |         
|ASSETS                                                                                                                                                        |  |                                   |          |   |                |   |          |  
|Current assets:                                                                                                                                               |  |                                   |          |   |                |   |          |  
|Cash and cash equivalents                                                                                                                                     |  | $                                 | 7,430    |   |                | $ | 2,301    |  
|Accounts receivable  trade, less allowances of $171 and $181, respectively                                                                                   |  |                                   | 12,515   |   |                |   | 7,024    |  
|Accounts receivable  other                                                                                                                                   |  |                                   | 11,704   |   |                |   | 8,862    |  
|Merchandise inventories                                                                                                                                       |  |                                   | 114,235  |   |                |   | 98,807   |  
|Prepaid expenses and other current assets                                                                                                                     |  |                                   | 3,804    |   |                |   | 4,572    |  
|Deferred income taxes                                                                                                                                         |  |                                   | 9,095    |   |                |   | 1,560    |  
|                                                                                                                                                              |  |                                   |          |   |                |   |          |  
|Total current assets                                                                                                                                          |  |                                   | 158,783  |   |                |   | 123,126  |  
|                                                                                                                                                              |  |                                   |          |   |                |   |          |  
|Net property and equipment                                                                                                                                    |  |                                   | 51,535   |   |                |   | 50,986   |  
|Deposits                                                                                                                                                      |  |                                   | 632      |   |                |   | 2,862    |  
|Deferred financing costs, net                                                                                                                                 |  |                                   | 8,513    |   |                |   | 9,821    |  
|Deferred income taxes                                                                                                                                         |  |                                   | 87,579   |   |                |   | 96,522   |  
|Other                                                                                                                                                         |  |                                   | 329      |   |                |   | 447      |  
|                                                                                                                                                              |  |                                   |          |   |                |   |          |  
|                                                                                                                                                              |  |                                   | 148,588  |   |                |   | 160,638  |  
|                                                                                                                                                              |  |                                   |          |   |                |   |          |  
|Total assets                                                                                                                                                  |  | $                                 | 307,371  |   |                | $ | 283,764  |  
|                                                                                                                                                              |  |                                   |          |   |                |   |          |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                         |  |                                   |          |   |                |   |          |  
|Current liabilities:                                                                                                                                          |  |                                   |          |   |                |   |          |  
|Accounts payable  third party                                                                                                                                |  | $                                 | 2,790    |   |                | $ | 3,319    |  
|Accounts payable  vendors                                                                                                                                    |  |                                   | 80,786   |   |                |   | 52,011   |  
|Line of credit                                                                                                                                                |  |                                   |         |   |                |   |         |  
|Customer deposits                                                                                                                                             |  |                                   | 15,592   |   |                |   | 14,912   |  
|Accrued liabilities                                                                                                                                           |  |                                   | 31,430   |   |                |   | 31,949   |  
|                                                                                                                                                              |  |                                   |          |   |                |   |          |  
|Total current liabilities                                                                                                                                     |  |                                   | 130,598  |   |                |   | 102,191  |  
|                                                                                                                                                              |  |                                   |          |   |                |   |          |  
|Long-term liabilities:                                                                                                                                        |  |                                   |          |   |                |   |          |  
|Long-term debt                                                                                                                                                |  |                                   | 167,491  |   |                |   | 178,242  |  
|Other long-term liabilities                                                                                                                                   |  |                                   | 12,355   |   |                |   | 8,485    |  
|                                                                                                                                                              |  |                                   |          |   |                |   |          |  
|Total longterm liabilities                                                                                                                                   |  |                                   | 179,846  |   |                |   | 186,727  |  
|                                                                                                                                                              |  |                                   |          |   |                |   |          |  
|Total liabilities                                                                                                                                             |  |                                   | 310,444  |   |                |   | 288,918  |  
|                                                                                                                                                              |  |                                   |          |   |                |   |          |  
|Stockholders deficit:                                                                                                                                        |  |                                   |          |   |                |   |          |  
|Preferred stock; no par value; 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2006 and March 31,
2006                     |  |                                   |         |   |                |   |         |  
|Common stock; no par value; 52,500,000 shares authorized; 14,245,800 and 14,254,800 shares issued and outstanding as of September 30,
2006 and March 31, 2006 |  |                                   | 113,752  |   |                |   | 113,809  |  
|Accumulated deficit                                                                                                                                           |  |                                   | (116,610 | ) |                |   | (118,744 | )
|                                                                                                                                                              |  |                                   |          |   |                |   |          |  
|                                                                                                                                                              |  |                                   | (2,858   | ) |                |   | (4,935   | )
|Note receivable for common stock                                                                                                                              |  |                                   | (215     | ) |                |   | (219     | )
|                                                                                                                                                              |  |                                   |          |   |                |   |          |  
|Total stockholders deficit                                                                                                                                   |  |                                   | (3,073   | ) |                |   | (5,154   | )
|                                                                                                                                                              |  |                                   |          |   |                |   |          |  
|Total liabilities and stockholders deficit                                                                                                                   |  | $                                 | 307,371  |   |                | $ | 283,764  |  
|                                                                                                                                                              |  |                                   |          |   |                |   |          |  

See accompanying notes to condensed consolidated financial statements.



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GREGG APPLIANCES, INC. AND SUBSIDIARIES.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                         |  |                            |         |   |                    |   |         |  
|---------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------ | - | ------- | -
|                                                                                         |  | Six Months Ended           |        
|                                                                                         |  | September 30, 2006         |         |   | September 30, 2005 |  
|                                                                                         |  | (Unaudited) (In thousands) |        
|Operating activities:                                                                    |  |                            |         |   |                    |   |         |  
|Net income (loss)                                                                        |  | $                          | 2,149   |   |                    | $ | (4,117  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                            |         |   |                    |   |         |  
|Depreciation and amortization                                                            |  |                            | 5,983   |   |                    |   | 5,167   |  
|Amortization of deferred financing costs                                                 |  |                            | 782     |   |                    |   | 780     |  
|Accretion of original issue discount                                                     |  |                            | 249     |   |                    |   | 226     |  
|Stock-based compensation                                                                 |  |                            | 33      |   |                    |   |        |  
|Loss on disposal of assets                                                               |  |                            | 58      |   |                    |   | 48      |  
|Gain on early extinguishment of debt                                                     |  |                            | (295    | ) |                    |   |        |  
|Deferred income taxes                                                                    |  |                            | 1,408   |   |                    |   | 923     |  
|Restructuring and asset impairment charges                                               |  |                            |        |   |                    |   | 1,320   |  
|Changes in operating assets and liabilities:                                             |  |                            |         |   |                    |   |         |  
|Accounts receivable  trade                                                              |  |                            | (5,491  | ) |                    |   | (2,346  | )
|Accounts receivable  other                                                              |  |                            | (2,882  | ) |                    |   | (6,330  | )
|Merchandise inventories                                                                  |  |                            | (15,428 | ) |                    |   | (19,036 | )
|Prepaid expenses and other current assets                                                |  |                            | 886     |   |                    |   | 547     |  
|Deferred commissions                                                                     |  |                            |        |   |                    |   | 448     |  
|Deposits                                                                                 |  |                            | 2,230   |   |                    |   | 5,084   |  
|Accounts payable  third parties                                                         |  |                            | (529    | ) |                    |   | 8,867   |  
|Accounts payable  vendors                                                               |  |                            | 23,431  |   |                    |   | 24,862  |  
|Deferred revenue on extended maintenance agreements                                      |  |                            | (16     | ) |                    |   | (2,749  | )
|Customer deposits                                                                        |  |                            | 680     |   |                    |   | 948     |  
|Other accrued liabilities                                                                |  |                            | (512    | ) |                    |   | (3,195  | )
|Other longterm liabilities                                                              |  |                            | 2,775   |   |                    |   | 303     |  
|                                                                                         |  |                            |         |   |                    |   |         |  
|Net cash provided by operating activities                                                |  |                            | 15,511  |   |                    |   | 11,750  |  
|                                                                                         |  |                            |         |   |                    |   |         |  
|Investing activities:                                                                    |  |                            |         |   |                    |   |         |  
|Purchases of property and equipment                                                      |  |                            | (9,399  | ) |                    |   | (9,798  | )
|Proceeds from sale and leaseback transaction                                             |  |                            | 2,725   |   |                    |   |        |  
|Decrease in cash surrender value of life insurance                                       |  |                            |        |   |                    |   | 1,096   |  
|Deposit on future sale and leaseback transaction                                         |  |                            | 1,104   |   |                    |   |        |  
|Proceeds from sales of property and equipment                                            |  |                            | 124     |   |                    |   | 70      |  
|                                                                                         |  |                            |         |   |                    |   |         |  
|Net cash used in investing activities                                                    |  |                            | (5,446  | ) |                    |   | (8,632  | )
|                                                                                         |  |                            |         |   |                    |   |         |  
|Financing activities:                                                                    |  |                            |         |   |                    |   |         |  
|Net increase in bank overdrafts                                                          |  |                            | 5,344   |   |                    |   |        |  
|Repurchase of stock previously issued                                                    |  |                            | (105    | ) |                    |   |        |  
|Payment of financing costs                                                               |  |                            |        |   |                    |   | (503    | )
|Proceeds from issuance of common stock                                                   |  |                            |        |   |                    |   | 2,398   |  
|Payments received on notes receivable for issuance of common stock from GIC              |  |                            | 4       |   |                    |   |        |  
|Payment for early debt extinguishment                                                    |  |                            | (10,179 | ) |                    |   |        |  
|                                                                                         |  |                            |         |   |                    |   |         |  
|Net cash provided by (used in) financing activities                                      |  |                            | (4,936  | ) |                    |   | 1,895   |  
|                                                                                         |  |                            |         |   |                    |   |         |  
|Net increase in cash and cash equivalents                                                |  |                            | 5,129   |   |                    |   | 5,013   |  
|Cash and cash equivalents:                                                               |  |                            |         |   |                    |   |         |  
|Beginning of period                                                                      |  |                            | 2,301   |   |                    |   | 8,642   |  
|                                                                                         |  |                            |         |   |                    |   |         |  
|End of period                                                                            |  | $                          | 7,430   |   |                    | $ | 13,655  |  
|                                                                                         |  |                            |         |   |                    |   |         |  
|Supplemental disclosure of cash flow information:                                        |  |                            |         |   |                    |   |         |  
|Interest paid                                                                            |  | $                          | 8,309   |   |                    | $ | 8,084   |  
|Income taxes paid                                                                        |  |                            | 72      |   |                    |   | 35      |  
|Non-cash item-note receivable for common stock                                           |  |                            |        |   |                    |   | 238     |  

See accompanying notes to condensed consolidated financial statements.



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GREGG APPLIANCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Nature of Organization

Description of Business

Gregg Appliances, Inc. (the Company) is a specialty retailer of consumer electronics, home appliances, bedding and related services operating under the names hhgregg® and Fine Lines®. As of September 30, 2006, the Company had 72 stores located in Alabama, Georgia, Indiana, Kentucky, North Carolina, Ohio, South Carolina and
Tennessee. The Company operates in one reportable segment.

Interim Financial Information

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC). In the opinion of the Companys management, these unaudited condensed consolidated financial statements reflect all necessary adjustments, which are of a normal recurring nature, for a fair
presentation of such data. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to
such rules and regulations. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the fiscal year ended March 31, 2006, included in the
Companys latest annual report on Form 10-K filed with the SEC on June 26, 2006. The condensed consolidated results of operations and financial position for interim periods are not necessarily indicative of those to be expected for a full
year. Further, the Company has made a number of estimates and assumptions relating to the assets and liabilities and the reporting of revenue and expenses to prepare these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Gregg Appliances, Inc. and its wholly-owned subsidiary, HHG Distributing, LLC
(HHG). HHG is inactive and its assets consist of a 5% ownership interest in a distributing company, totaling $100,000, accounted for on the cost method.

Property and Equipment

The Company sold one location in the six months ended September 30, 2006. The Company leased
the location back applying the provisions of Statement of Financial Accounting Standards (SFAS) No. 98, Accounting for Leases. Net proceeds from the transaction were $2.7 million. The Company recognized an immaterial loss on this
transaction. The Company does not have any continuing involvement with the sale and leaseback location. The lease is accounted for as an operating lease.

Stock-based Compensation

On April 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment(SFAS 123R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors under the Companys stock option
plans, based on fair value, using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Companys Statements of Operations. In March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123R, which the Company utilized in its adoption of SFAS 123R.

Prior to April 1, 2006, the Company applied the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees,and related interpretations including Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, to
account for activity under its stock-based employee compensation plans.



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As the Company is considered a nonpublic entity, as defined in SFAS 123R, that used the minimum value
method for pro forma disclosures under SFAS No. 123, Accounting for Stock-Based Compensation, the Company was required to apply the prospective transition method at the date of adoption. As such, the Company applies the statement to any
new awards and to any awards modified, repurchased or cancelled since April 1, 2006. For all awards outstanding on March 31, 2006, the Company continues to apply the intrinsic-value-based method of accounting prescribed by APB Opinion
No. 25. Under the provisions of SFAS No. 123R, the Company will not provide pro forma disclosures for outstanding awards accounted for under the intrinsic value method. Accordingly, the Company did not recognize compensation expense in
connection with employee stock option grants upon adoption because stock options were granted at exercise prices equal to or greater than the fair value of the common stock at the date of grant in accordance with APB Opinion No. 25. Stock-based
compensation expense for employee stock options recognized under SFAS 123R for the three and six months ended September 30, 2006 was approximately $30,000.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the
Companys Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2006 included compensation expense for the share-based payment awards granted subsequent to April 1, 2006 based on the grant
date fair value estimated in accordance with the provisions of SFAS 123R. Compensation expense for all share-based payment awards are recognized using the straight-line single option approach. Stock-based compensation expense recognized in the
Companys Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2006 is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. SFAS 123R requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

With the adoption of SFAS 123R, the Company continued to use the Black-Scholes option-pricing model as its method of valuation for share-based awards. For additional information, refer to Note 4. The Companys determination of fair
value of share-based payment awards on the date of grant using an option-pricing model is affected by the Companys stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but
are not limited to, the Companys expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors.

Reclassifications

Certain amounts shown in the prior-period condensed consolidated financial
statements have been reclassified to conform to the current period condensed consolidated financial statement presentation. These reclassifications had no effect on net income (loss) or stockholders deficit as previously presented.

2. Recent Accounting Pronouncements

In July 2006,
FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes.FIN 48 is effective for fiscal years beginning after December 15, 2006 with earlier adoption permitted at the beginning of a fiscal year if interim financial statements for that year
have not been issued. The Company does not expect the adoption of FIN 48 to have a material impact on its consolidated financial statements.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for fiscal
years ending after November 15, 2006. Early application is encouraged, but not required. We are currently assessing the impact, if any, that the adoption of SAB No. 108 will have on our operating income or net earnings. The cumulative
effect, if any, of applying the provisions of SAB No. 108 will be reported as an adjustment to beginning-of-year retained earnings.



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In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement applies to previous accounting pronouncements that require or
permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. We are currently evaluating the impact, if any, the
adoption of SFAS No. 157 will have on our operating income or net earnings.

3. Properties

Property and equipment consisted of the following at September 30, 2006 and March 31, 2006 (in thousands):



|                                               |  |                    |         |   |                |   |         |  
|---------------------------------------------- |  | ------------------ | ------- | - | -------------- | - | ------- | -
|                                               |  | September 30, 2006 |         |   | March 31, 2006 |  
|Buildings                                      |  | $                  |        |   |                | $ | 2,725   |  
|Machinery and equipment                        |  |                    | 6,907   |   |                |   | 7,097   |  
|Office furniture and equipment                 |  |                    | 42,724  |   |                |   | 37,897  |  
|Vehicles                                       |  |                    | 6,117   |   |                |   | 6,178   |  
|Signs                                          |  |                    | 3,878   |   |                |   | 3,562   |  
|Leasehold Improvements                         |  |                    | 34,038  |   |                |   | 31,964  |  
|Construction in progress                       |  |                    | 4,358   |   |                |   | 2,945   |  
|                                               |  |                    |         |   |                |   |         |  
|                                               |  |                    | 98,022  |   |                |   | 92,368  |  
|Less accumulated depreciation and amortization |  |                    | (46,487 | ) |                |   | (41,382 | )
|                                               |  |                    |         |   |                |   |         |  
|Net property and equipment                     |  | $                  | 51,535  |   |                | $ | 50,986  |  
|                                               |  |                    |         |   |                |   |         |  

4. Stock-based Compensation

On March 8, 2005, the Companys Board of Directors approved the adoption of the Gregg Appliances, Inc. 2005 Stock Option Plan (Stock Option Plan). The Stock Option Plan provides for the grant of incentive
stock options and nonqualified stock options to the Companys officers, directors, consultants, and key employees. An aggregate of 2,500,000 shares of common stock is reserved for issuance under the Stock Option Plan. If an option expires, is
terminated or canceled without having been exercised or repurchased by the Company, or common stock is used to exercise an option, the terminated portion of the option or the common stock used to exercise the option will become available for future
grants under the Stock Option Plan unless the plan is terminated.

The Board of Directors will determine the exercise price of the options
under the Stock Option Plan, but the exercise price must be at least equal to the fair market value of the Companys common stock on the date of the grant. The term of an incentive stock option and a nonqualified stock option may not exceed
seven years (the Board of Directors may extend the term of the options after the options have been granted), except that with respect to any participant who owns 10% of the voting power of all classes of the Companys outstanding capital stock,
the term must not exceed five years and the exercise price must equal at least 110% of the fair market value of the Companys common stock on the date of the grant.

During the three months ended September 30, 2006, the Company issued options for 203,000 shares of common stock under the Stock Option Plan to certain employees and directors of the Company. The options vest over
a three-year period and expire seven years from the date of the grant. The Company estimated the fair value of stock options using the Black-Scholes valuation model. The fair value of each option grant is estimated on the date of grant and is
amortized on a straight-line basis over the vesting period. The weighted-average estimated value of options granted to employees and directors under the Stock Option Plan was $4.76 during both the three and six months ended September 30, 2006,
respectively, using the Black-Scholes model with the following assumptions as of September 30, 2006:



|                                     |  |      |  
|------------------------------------ |  | ---- | -
|Risk-free interest rate              |  | 4.71 | %
|Dividend yield                       |  |     |  
|Expected volatility                  |  | 40.9 | %
|Expected life of the options (years) |  | 4.5  |  



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Risk-Free Rate: The Company bases the risk-free interest rate on the implied yield currently
available on U.S. Treasury zero-coupon issues with an equivalent remaining term commensurate with the estimated expected life of the stock options.

Expected Dividend: The Black-Scholes valuation model calls for a single expected dividend yield as an input. The Company has not issued any dividends and has no expectation to do so in the foreseeable future.

Expected Volatility: The Company uses an independent valuation advisor to assist us in projecting expected stock price volatility. The Company
considers both the historical volatility of our peer groups stock price as well as implied volatilities from exchange-traded options on our peer groups stock in accordance with SAB 107.

Expected Term: The Companys expected term represents the period that the Companys stock options are expected to be outstanding and was
determined using the simplified method described in SAB 107.

Estimated Pre-vesting Forfeitures: Beginning April 1, 2006, the
Company included an estimate for forfeitures in calculating stock option expense. When estimating forfeitures, the Company considers historical termination behavior as well as any future trends it expects. Prior to 2006, the Company accounted for
forfeitures of employee stock options for pro forma disclosure purposes under FAS 123 on an as-incurred basis.

Activity under the Gregg
Appliances, Inc. 2005 Stock Option Plan is summarized as follows:



|                                  |  |                            |   |  |                                         |        |  
|--------------------------------- |  | -------------------------- | - |  | --------------------------------------- | ------ | -
|Range of Exercise Prices          |  | Number ofSharesOutstanding |   |  | WeightedAverageExercise Price per Share |       
|Outstanding at March 31, 2006     |  | 1,853,000                  |   |  | $                                       | 13.75  |  
|Granted                           |  | 203,000                    |   |  |                                         | 11.70  |  
|Exercised                         |  |                           |   |  |                                         |       |  
|Canceled                          |  | (80,000                    | ) |  |                                         | (13.75 | )
|                                  |  |                            |   |  |                                         |        |  
|Outstanding at September 30, 2006 |  | 1,976,000                  |   |  | $                                       | 13.54  |  
|                                  |  |                            |   |  |                                         |        |  

The following table summarizes the Companys outstanding stock options as of
September 30, 2006:



|                 |  |                            |  |                                               |  |                                        |      
|---------------- |  | -------------------------- |  | --------------------------------------------- |  | -------------------------------------- | -----
|Exercise Prices  |  | Number ofSharesOutstanding |  | WeightedAverageRemainingOption Term(in years) |  | WeightedAverageExercise Priceper Share
|$10.00           |  | 886,500                    |  | 5.84                                          |  | $                                      | 10.00
|$11.70           |  | 203,000                    |  | 6.95                                          |  |                                        | 11.70
|$15.00           |  | 443,250                    |  | 5.84                                          |  |                                        | 15.00
|$20.00           |  | 443,250                    |  | 5.84                                          |  |                                        | 20.00
|                 |  |                            |  |                                               |  |                                        |      
|$10.00 to $20.00 |  | 1,976,000                  |  | 5.96                                          |  | $                                      | 13.54
|                 |  |                            |  |                                               |  |                                        |      

As of September 30, 2006, there was approximately $0.9 million of total unrecognized
compensation cost related to non-vested stock options. These costs are expected to be recognized over the remaining vesting period of three years.



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5. Inventories

Inventories as of September 30, 2006 and March 31, 2006 were comprised as follows (in thousands):



|                      |  |                    |         |                |   |       
|--------------------- |  | ------------------ | ------- | -------------- | - | ------
|                      |  | September 30, 2006 |         | March 31, 2006
|Appliances            |  | $                  | 37,206  |                | $ | 32,867
|Electronics           |  |                    | 73,316  |                |   | 63,405
|Bedding and furniture |  |                    | 3,713   |                |   | 2,535 
|                      |  |                    |         |                |   |       
|                      |  | $                  | 114,235 |                | $ | 98,807
|                      |  |                    |         |                |   |       

6. Debt

Debt outstanding consisted of the following at September 30, 2006 and March 31, 2006 (in thousands):



|                                                                                                                                                                                                                   |  |                    |         |                |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | -------------- | - | -------
|                                                                                                                                                                                                                   |  | September 30, 2006 |         | March 31, 2006
|Revolving credit facility                                                                                                                                                                                          |  | $                  |        |                | $ |       
|9.0% senior notes, interest due in arrears on a semi-annual basis on February 1 and August 1 through February 3,
2013                                                                                              |  |                    | 149,500 |                |   | 160,500
|6.0% junior notes, interest due in arrears on a semi-annual basis on February 1 and August 1 through February 3, 2015, net of
discount of $7,009 and $7,258 at September 30, 2006 and March 31, 2006, respectively |  |                    | 17,991  |                |   | 17,742 
|                                                                                                                                                                                                                   |  |                    |         |                |   |        
|Total debt                                                                                                                                                                                                         |  |                    | 167,491 |                |   | 178,242
|Less current maturities                                                                                                                                                                                            |  |                    |        |                |   |       
|                                                                                                                                                                                                                   |  |                    |         |                |   |        
|Total long-term debt                                                                                                                                                                                               |  | $                  | 167,491 |                | $ | 178,242
|                                                                                                                                                                                                                   |  |                    |         |                |   |        

In connection with the Companys recapitalization on February 3, 2005, the Company
issued $165 million in unsecured 9% senior notes. Interest on the notes is payable in arrears twice a year on February 1 and August 1. The notes will mature on February 3, 2013. On September 1, 2005, the interest on the senior
notes increased to 9.25% per annum pursuant to section 4 of the Registration Rights Agreement dated February 3, 2005 between the Company and the initial purchasers of the notes. The interest rate increase remained in effect until the
Registration Statement covering the exchange offer with respect to the notes was declared effective by the Securities and Exchange Commission (the SEC) and the exchange offer was consummated. On November 4, 2005, the exchange offer was
consummated and the interest rate consequently decreased to 9.0% per annum.

Inception to date through September 30, 2006, the
Company has purchased $15.5 million of its 9% senior notes of which $11.0 million was purchased during the first six months of fiscal 2007 at a weighted-average price of 92.56% of face value. For the three and six months ended September 30,
2006, the Company recorded a gain related to the early extinguishment of debt representing the difference between the purchase price and the carrying value of the 9% senior notes, net of related capitalized debt issuance costs of approximately $0.1
million and $0.3 million, respectively.

On February 3, 2005, the Company issued to certain of its stockholders, $25 million in
unsecured 6% junior subordinated notes, with a fair value of $17.2 million at the time of issue, based on an effective interest rate of 11%. These notes are subordinated to the unsecured senior notes and any payment of principal thereof directly or
indirectly is deferred until the payment in full of all of the senior debt. Unless there is a default or an event of default under any senior debt, interest on the junior subordinated debt is payable in arrears on February 1 and August 1.
The junior notes will mature on February 3, 2015. The original discount on the notes will be accreted to interest expense through the maturity date. Accretion of the discount, which is included in interest expense in the accompanying condensed
consolidated statements of operations, was approximately $0.1 million and $0.2 million for the three and six months ended September 30, 2006, respectively.



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The Company has a revolving credit agreement with a bank group for up to $75 million. The facility
includes a $25 million sub-limit for letters of credit. Borrowings under the revolving credit agreement are subject to a borrowing base calculation based on specified percentages of eligible accounts receivable and inventories. Interest on
borrowings is payable monthly at a fluctuating rate based on the banks prime rate or LIBOR plus an applicable margin. The Company pays an annual commitment fee of 3/8% on the unused portion of the facility.

The interest rate based on the banks prime rate as of September 30, 2006 was 8.50%. As of September 30, 2006, the Company had no
borrowings outstanding under the revolving credit facility and $2.6 million of letters of credit outstanding. As of September 30, 2006, the total borrowing availability under the revolving credit facility was $50.2 million.

The unsecured senior notes and the revolving credit facility are guaranteed by the Companys wholly-owned subsidiary, HHG, which has substantially
no assets or operations. The guarantee is full and unconditional and the Company has no other subsidiaries. In addition, there are no restrictions on HHGs ability to pay dividends under the arrangement.

The debt agreements contain restrictions on mergers, incurring additional debt or liens, making investments, selling assets or making equity repurchases,
and debt prepayments and transactions with affiliates. The revolving credit agreement also contains a financial covenant requiring maintenance of a minimum fixed charge coverage ratio. The debt agreements also restrict payment of dividends unless
the Company achieves a specific fixed charge coverage ratio as defined in the debt agreements. Any such dividends are limited to the lesser of 50% of consolidated net income and 100% of equity contributions since the date of the recapitalization.
The Company was in compliance with the restrictions and covenants in the debt agreements at September 30, 2006.

7. Income Taxes

Prior to February 3, 2005, Gregg Appliances, Inc. was organized as an S corporation. Accordingly, the allocable share of taxable income or loss was
includable in the tax returns of the stockholders and income taxes were not reflected in the Companys consolidated financial statements. Following the recapitalization, Gregg Appliances, Inc. no longer qualified as an S corporation and became
subject to U.S. federal and certain state and local income taxes applicable to C corporations.

Subsequent to the recapitalization and
change to C corporation status, the Company began recognizing deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards. Following the recapitalization, Gregg Investment Corporation, LLC and the former stockholders of the Company made an election under Section 338(h)(10) of the Internal
Revenue Code of 1986, as amended, to treat the recapitalization as an asset purchase for tax purposes. In accordance with Emerging Issues Task Force (EITF) 94-10, Accounting by a Company for the Income Tax Effects of Transactions among or with
Its Shareholders under FASB Statement No. 109, the tax benefit of this election was recorded as an equity transaction. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

For the six months ended September 30, 2006 and 2005, the income tax expense differs from the amount of income tax determined by applying the U.S.
federal income tax rate of 35% to income before income taxes due to the following (in thousands):



|                                                                 |  |                    |       |   |                    |   |        |  
|---------------------------------------------------------------- |  | ------------------ | ----- | - | ------------------ | - | ------ | -
|                                                                 |  | Six Months Ended   |      
|                                                                 |  | September 30, 2006 |       |   | September 30, 2005 |  
|Computed expected tax expense (benefit)                        |  | $                  | 1,249 |   |                    | $ | (1,106 | )
|State income tax expense (benefit), net of federal income effect |  |                    | 189   |   |                    |   | (158   | )
|Change in state income tax rates and apportionment               |  |                    |      |   |                    |   | 2,057  |  
|Non-deductible permanent differences                             |  |                    | 28    |   |                    |   | 166    |  
|Other, net                                                       |  |                    | (47   | ) |                    |   | (2     | )
|                                                                 |  |                    |       |   |                    |   |        |  
|                                                                 |  | $                  | 1,419 |   |                    | $ | 957    |  
|                                                                 |  |                    |       |   |                    |   |        |  



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In assessing the realizability of deferred tax assets, management considers whether it is more likely
than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for
future taxable income over the periods in which temporary differences are expected to reverse, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.



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Forward-Looking Statements

Some of the statements in this document and any documents incorporated by reference constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our businesses or our industries actual results, levels of activity,
performance or achievements to be materially different from those expressed or implied by any forward-looking statements. Such statements include, in particular, statements about our plans, strategies, prospects, changes, outlook and trends in our
business and the markets in which we operate under the heading Managements Discussion and Analysis of Financial Condition and Results of Operations. In some cases, you can identify forward-looking statements by terminology such as
may, will, could, would, should, expect, plan, anticipate, intend, tends, believe, estimate,
predict, potential or continue or the negative of those terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially because of market conditions in
our industries or other factors. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Managements Discussion and Analysis of Financial Condition and Results of Operations
herein and Managements Discussion and Analysis of Financial Condition and Results of Operations in our latest annual report on Form 10-K filed with the SEC on June 26, 2006 and any documents incorporated by reference that
describe risks and factors that could cause results to differ materially from those projected in these forward-looking statements. The forward-looking statements are made as of the date of this document or the date of the documents incorporated by
reference in this document, as the case may be, and we assume no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.



|ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial
statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. We believe it is helpful to read our MD&A in
conjunction with the Consolidated Financial Statements for the fiscal year ended March 31, 2006, included in the Companys latest annual report on Form 10-K, as filed with the SEC on June 26, 2006, as well as the unaudited interim
condensed consolidated financial statements included herein.

Overview

We are a specialty retailer of consumer electronics, home appliances, bedding and related services operating under the names hhgregg® and Fine Lines®. As of September 30, 2006, our stores averaged approximately 30,000 square feet and generated annualized net sales per store of approximately
$13.8 million, or annualized sales per square foot of approximately $408, for stores open at least 14 months. As of September 30, 2006, we operated 72 retail stores located in major urban and suburban areas in Alabama, Georgia, Indiana,
Kentucky, North Carolina, Ohio, South Carolina and Tennessee.

Over the past several years, we have added stores in existing markets where
we believe we can gain market share from our competitors and leverage our distribution network and advertising costs. We have also expanded into new markets where we believe there is significant underlying demand for our product mix and customer
services as well as an attractive demographic profile. We plan to continue to add stores in existing markets and expand into high-growth contiguous regions. We target markets that meet our demographic and competitive criteria, including areas that
demonstrate above-average economic growth, strong new housing starts and remodeling activity and a favorable percentage of our target consumers. Our markets typically include most or all of our major competitors. Consistent with our expansion in the
past, we plan to continue to follow our approach of building store density in each major market and distribution area, which in the past has helped us improve our strong market share and realize operating efficiencies.

For each new market, we develop a plan that establishes annual revenue and market share targets for the entire market and includes a store roll-out plan
aimed at achieving those targets. As we build out a market, our most recently opened stores may reduce the comparable store sales performance of other stores.



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This potential impact on comparable store performance is acceptable to us as long as our total share of a market and our total market sales increase
meaningfully over the prior period. After we have completed building out a market and our stores have reached targeted performance levels, which generally takes between 18 to 30 months, we change our focus to driving comparable store sales growth
for that market.

Both the consumer electronics and home appliance industries have grown over the past several years, driven by product
innovations and introductions particularly in the premium segment that we target. In general, average selling prices for major appliances have increased for the last three fiscal years attributable to innovation in high efficiency laundry and French
door refrigeration. This aspect has added stability to our sales performance relative to our consumer electronics-focused competitors. In contrast, the consumer electronics industry depends on new products to drive sales and profitability.
Innovative, heavily-featured digital flat panel products are typically introduced at relatively high price points, which are then gradually reduced to drive consumption. As prices for these products fall below $3,000, more of our customers purchase
them, with the result that the average selling price of the televisions we carry and the quantity we sell have risen in each of the last three fiscal years.

The innovation in certain consumer electronic product categories, such as DVD players, camcorders and audio products, has not been sufficient to maintain stability in average selling prices. These mature products have
become commoditized and experienced price declines and reduced margins. As certain of our products become commodities, we focus on the next generation of products, such as plasma and LCD televisions, while carefully managing the selection of
commoditized products that we offer. We must continue to shift our sales mix to newer, higher-margin items or increase our unit sales at a rate greater than the decline in product prices. Our past experience is that we have been able to shift our
product mix to newer, higher-margin products.

Digital products, such as home theater systems, have become increasingly complex and require
sophisticated instruction and, in many cases, home installation. Consequently, our strategy of employing knowledgeable sales personnel and providing superior post-sale support is well-suited to meet customer demand for these products. Additionally,
most major appliances and bedding require home delivery and installation, further leveraging our delivery and installation expertise. The majority of our large screen television, major appliance and bedding customers purchase our delivery or
installation service.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amount of
assets and liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on other assumptions that we believe to be relevant under the circumstances and these
estimates form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions and/or conditions. We
continually evaluate the information used to make these estimates as our business and the economic environment changes. We use estimates throughout our financial statements, but the accounting policies and estimates we consider most critical, are
described below:

Vendor Allowances. We receive funds from our vendors for volume rebates, marketing support, training and other
discount and promotional programs, which we record on an accrual basis as a reduction of either the related expense or the related product cost. The majority of our vendors support us with cooperative advertising. The programs are typically
negotiated at least annually and are generally based on product purchase volume.

We accrue allowances based on the satisfaction of terms
of the program and sales of qualifying products even though we may not receive the allowances until the end of a quarter or year. When we record vendor allowances we must determine the period in which they should be recognized in the consolidated
statements of operations and whether they should be reflected as adjustments to cost of goods sold or the related expense, as provided in EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Cash Consideration Received
from a Vendor. If the programs provide reimbursement for specific, incremental and identifiable costs incurred to promote a vendors products, the allowances, credits, or payments are recorded as a reduction of the related expense in the
period in which the cost is incurred.



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We also deduct amounts for cooperative advertising from our payments to manufacturers for inventory purchases based on individual agreements with our
manufacturers. For all other vendor programs, the allowances, credits or payments are recorded as a reduction to the related inventory cost (rather than as a reduction to advertising expense) and recognized in cost of goods sold when the product is
sold.

Self-Insured Liabilities.We are self-insured for certain losses related to workers compensation, general liability,
motor vehicle and health insurance. We obtain third-party insurance coverage to limit our exposure to certain of these claims. When estimating our self-insurance liabilities, we consider a number of factors, including historical claims experience,
loss estimates and information provided by third-party administrators. We periodically review our assumptions, estimates and the information provided by third-party administrators to determine the adequacy of our reserves for our self-insured
liabilities. Our reserves for self-insurance were $4.6 million and $4.1 million as of September 30, 2006 and March 31, 2006, respectively.

Key Operating Measures

We use the following key measures to evaluate and assess our business.

Comparable Store Sales. Our comparable store sales base includes net sales for all store locations including remodeled and relocated stores, as
well as our e-commerce site, that have been in operation for at least 14 full months. As of September 30, 2006, we included 61 stores in our comparable store base. We monitor comparable store sales daily, weekly, monthly and annually by product
category, region, store and sales associate. Our analysis of comparable store sales provides us with the information to make strategic merchandising and marketing decisions.

Gross Profit. Gross profit measures the profitability of our sales, and is defined by us as net sales less cost of goods sold. We analyze gross
profit at every level of our business, from the company as a whole to individual sales personnel and specific products and categories. We use gross profit measurements to focus our advertising and to manage our product offerings.

Description of Certain Line Items

Following is a
description of additional components of certain line items from our condensed consolidated financial statements.

Net Sales. Net
sales consists of gross revenues from sales of products, delivery and installation and other services, net of promotions, rebates and discounts. Net sales also include revenues from sales of our extended service plans (ESPs). When we are the obligor
on the ESP, we recognize revenue from the sale of the ESP ratably over the life of the contract. For the majority of our ESPs where the obligor on the ESP is a third party, we recognize commission revenue from the sale of the ESP at the time of
sale, net of the portion paid to the third-party obligor.

Cost of Goods Sold. Cost of goods sold is defined as the cost of gross
inventory sold, including any handling charges, in-bound freight expenses and physical inventory losses, less the amortized portion of certain vendor allowances. Because we do not include costs related to our distribution facilities in cost of goods
sold, our gross profit may not be comparable to that of other retailers that include these costs in cost of goods sold and in the calculation of gross profit.

Selling, General & Administrative Expenses (SG&A). SG&A represents the majority of our costs (other than cost of goods sold, net advertising expense, restructuring and asset impairment charges
and interest) including wages, rent, depreciation and amortization, taxes (other than income taxes), insurance, utilities, delivery costs, distribution costs, service expense, repairs and maintenance of stores and equipment, and other general
administrative expenses.

Net Advertising Expense.Net advertising expense consists of advertising costs as incurred reduced by
payments received from vendors under cooperative advertising.

Restructuring and Asset Impairment Charges.Restructuring and asset
impairment charges consist of charges associated with our decision to outsource our product service and repair offerings. These charges reflect fair market adjustments to the carrying value of long-lived assets, primarily comprised of vehicles and
equipment, and severance related charges in relation to certain eliminated positions.



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Other Expense (Income). Other expense (income) includes interest expense, interest income, and
gain related to the early extinguishment of debt.

Results of Operations

Certain Operating Information

The following table reflects our operating results for the periods
indicated as a percentage of net sales.



|                                             |  |                                  |   |  |                                |   |  |       |   |  |       |  
|-------------------------------------------- |  | -------------------------------- | - |  | ------------------------------ | - |  | ----- | - |  | ----- | -
|                                             |  | Three Months Ended September 30, |   |  | Six Months Ended September 30, |  
|                                             |  | 2006                             |   |  | 2005                           |   |  | 2006  |   |  | 2005  |  
|Net sales                                    |  | 100.0                            | % |  | 100.0                          | % |  | 100.0 | % |  | 100.0 | %
|Cost of goods sold                           |  | 68.1                             |   |  | 69.3                           |   |  | 68.6  |   |  | 67.7  |  
|                                             |  |                                  |   |  |                                |   |  |       |   |  |       |  
|Gross profit                                 |  | 31.9                             |   |  | 30.7                           |   |  | 31.4  |   |  | 32.3  |  
|Selling, general and administrative expenses |  | 23.4                             |   |  | 25.1                           |   |  | 24.0  |   |  | 25.8  |  
|Net advertising expense                      |  | 4.2                              |   |  | 4.3                            |   |  | 4.5   |   |  | 4.6   |  
|Restructuring and asset impairment charges   |  |                                 |   |  | 0.6                            |   |  |      |   |  | 0.3   |  
|                                             |  |                                  |   |  |                                |   |  |       |   |  |       |  
|Income from operations                       |  | 4.3                              |   |  | 0.7                            |   |  | 2.8   |   |  | 1.6   |  
|Other expense                                |  | 1.8                              |   |  | 2.2                            |   |  | 2.0   |   |  | 2.4   |  
|Income tax expense                           |  | 1.0                              |   |  | 0.4                            |   |  | 0.3   |   |  | 0.2   |  
|                                             |  |                                  |   |  |                                |   |  |       |   |  |       |  
|Net income (loss)                            |  | 1.5                              |   |  | (2.0                           | ) |  | 0.5   |   |  | (1.0  | )
|                                             |  |                                  |   |  |                                |   |  |       |   |  |       |  

Certain percentage amounts do not sum to total due to rounding.

Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005

Net Sales.Net sales for the three months ended September 30, 2006 increased 11.7% to $237.7 million from $212.9 million for the three months
ended September 30, 2005. This increase in sales was primarily attributable to the addition of ten stores during the past twelve months and a 1.2% increase in comparable stores sales during the second quarter of fiscal 2007. The comparable
store sales performance was driven by gains in major appliances, bedding and video, with flat panel television sales growth outpacing the sales decline in projection and tube televisions.

Gross Profit.As a percentage of sales, our gross profit margin increased by 1.2% to 31.9% for the three months ended September 30, 2006 from
30.7% for the three months ended September 30, 2005. The increase in gross profit, as a percentage of sales, was primarily attributable to an increase in core product margins offset by our decision to outsource our product service and repair
work to third-party providers as well as to sell third-party ESPs along with the related change in ESP revenue recognition associated with these changes.

Selling, General and Administrative Expenses (SG&A). SG&A expenses decreased by 1.7%, as a percentage of sales, from 25.1% for the three months ended September 30, 2005 to 23.4% for the three
months ended September 30, 2006. The decrease in SG&A expense as a percentage of sales for the three months ended September 30, 2006 was primarily attributable to the outsourcing of our product service and repair work to third-party
providers and our decision to sell third-party ESPs, partially offset by increases in financing fees on our private label credit card, rent expense and depreciation expense.

Net Advertising Expense.As a percentage of sales, net advertising expense decreased 0.1% to 4.2% for the three months ended September 30,
2006 from 4.3% for the three months ended September 30, 2005. The decrease was primarily attributable to more efficient gross advertising spending as a percentage of sales during the current year period.

Restructuring and Asset Impairment Charges.In connection with our transition to outsource our product service and repair services, we recorded
restructuring and asset impairment charges of $1.3 million during the three months ended September 30, 2005 in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities and SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.These charges represented asset impairments of certain long-lived assets and severance and benefits costs. The severance and benefits costs resulted in a cash outlay while the
asset impairments were recognized as a non-cash charge to write-off certain assets.



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Other Expense. Other expense declined to $4.4 million for the three months ended
September 30, 2006 from $4.7 million for the three months ended September 30, 2005. This decrease in other expense was due to a decrease of approximately $0.2 million in net interest expense and a $0.1 million gain related to early
extinguishment of debt representing the difference between the purchase price and the carrying value of the repurchased senior notes during the three months ended September 30, 2006, along with the associated write-off of debt issuance costs.

Income Tax Expense. The difference between income tax expense during the second quarter of fiscal 2007 and fiscal 2006 was
primarily the result of the increase in income before income taxes in the current year compared to a loss before income taxes in the prior year.

Six
Months Ended September 30, 2006 Compared to Six Months Ended September 30, 2005

Net Sales.Net sales for the six
months ended September 30, 2006 increased 10.8% to $441.0 million from $397.9 million for the six months ended September 30, 2005. This increase in sales was primarily attributable to the addition of ten stores during the past twelve
months and a 1.1% increase in comparable stores sales during the first half of fiscal 2007. The comparable store sales performance was driven by gains in major appliances, bedding and video, with flat panel television sales growth outpacing the
sales decline in projection and tube televisions.

Gross Profit.As a percentage of sales, our gross profit margin decreased by 0.9%
to 31.4% for the six months ended September 30, 2006 from 32.3% for the six months ended September 30, 2005. The decrease in gross profit, as a percentage of sales, was primarily attributable to our decision to outsource our product
service and repair work to third-party providers as well as to sell third-party ESPs along with the related change in ESP revenue recognition associated with these changes. In addition, gross profit, as a percentage of sales, also declined due to
the non-comparable year over year timing of the collection and recognition of vendor support monies designated to support our growth. These reductions in gross profit were partially offset with increases in core product margins.

Selling, General and Administrative Expenses (SG&A). SG&A expenses decreased by 1.8%, as a percentage of sales, from 25.8% for the six
months ended September 30, 2005 to 24.0% for the six months ended September 30, 2006. The decrease in SG&A expense as a percentage of sales for the six months ended September 30, 2006 was primarily attributable to the outsourcing
of our product service and repair work to third-party providers and our decision to sell third-party ESPs, partially offset by increases in financing fees on our private label credit card, rent expense and depreciation expense.

Net Advertising Expense.As a percentage of sales, net advertising expense decreased 0.1% to 4.5% for the six months ended September 30, 2006
from 4.6% for the six months ended September 30, 2005. The decrease was primarily attributable to more efficient gross advertising spending as a percentage of sales during the current year period.

Restructuring and Asset Impairment Charges.In connection with our transition to outsource our product service and repair services, we recorded
restructuring and asset impairment charges of $1.3 million during the first six months ended September 30, 2005 in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities and SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. These charges represented asset impairments of certain long-lived assets and severance and benefits costs. The severance and benefits costs resulted in a cash outlay while the
asset impairments were recognized as a non-cash charge to write-off certain assets.

Other Expense. Other expense declined
to $8.8 million for the six months ended September 30, 2006 from $9.4 million for the six months ended September 30, 2005. This decrease in other expense was due to a decrease in net interest expense of $0.2 million and a $0.3 million gain
related to early extinguishment of debt representing the difference between the purchase price and the carrying value of the repurchased senior notes during the six months ended September 30, 2006, along with the associated write-off of debt
issuance costs.



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Income Tax Expense. The difference between income tax expense during the six months ended
September 30, 2006 and the six months ended September 30, 2005 was primarily the result of income before income taxes in the current year compared to a loss before income taxes in the prior year.

Liquidity and Capital Resources

The following table
presents a summary of our net cash provided by (used in) operating, investing and financing activities (in thousands):



|                                                    |  |                                |        |   |      |   |        |  
|--------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                    |  | Six Months Ended September 30, |       
|                                                    |  | 2006                           |        |   | 2005 |  
|Net cash provided by operating activities           |  | $                              | 15,511 |   |      | $ | 11,750 |  
|Net cash used in investing activities               |  |                                | (5,446 | ) |      |   | (8,632 | )
|Net cash provided by (used in) financing activities |  |                                | (4,936 | ) |      |   | 1,895  |  

Our liquidity requirements arise primarily from our need to fund working capital requirements and
capital expenditures.

Capital Expenditures. We make capital expenditures principally to fund our expansion strategy, which
includes, among other things, investments in new stores, remodeling and relocating existing stores, as well as information technology and other infrastructure-related projects that support our expansion. Capital expenditures of $9.4 million for the
six months ended September 30, 2006 decreased $0.4 million compared to prior year. Capital expenditures for the six months ended September 30, 2006 were primarily comprised of expenditures for new stores. Capital expenditures for the six
months ended September 30, 2005 were primarily to new management information systems as well as expenditures for new stores. Collectively, our gross capital outlay for fiscal 2007 is expected to be in the range between $18 million to $20
million.

Cash Provided by Operating Activities. Cash provided by operating activities primarily consists of net income as adjusted
for increases or decreases in working capital and non-cash depreciation and amortization. Cash provided by operating activities was $15.5 million and $11.8 million for the six months ended September 30, 2006 and 2005, respectively. The increase
in cash flows, for the six months ended September 30, 2006 as compared to the six months ended September 30, 2005 was primarily the result of net income of $1.8 million for 2007 and an increase in other long-term liabilities.

Cash Used in Investing Activities. Cash used in investing activities was $5.4 million and $8.6 million for the six months ended
September 30, 2006 and 2005, respectively. The decrease for cash used in investing activities for the six months ended September 30, 2006 as compared to the six months ended September 30, 2005 was principally due to the receipt of
$2.7 million related to a pre-arranged sale and leaseback transaction for a store opened in fiscal 2006 and a deposit of $1.1 million for a future sale and leaseback transaction on a store to be opened in the third quarter of fiscal 2007.

Cash Provided by (Used in) Financing Activities. Cash provided by (used in) financing activities was ($4.9) million and $1.9
million for the six months ended September 30, 2006 and 2005, respectively. The change from the current year period compared to the prior year period is due to an increase in our book overdrafts of $5.3 million offset by a $10.2 million early
extinguishment of debt.

Senior Notes.In connection with our recapitalization on February 3, 2005, we issued $165 million in
unsecured 9% senior notes. Interest on the notes is payable in arrears twice a year on February 1 and August 1. The notes will mature on February 3, 2013. On September 1, 2005, the interest on the senior notes increased to
9.25% per annum pursuant to section 4 of the Registration Rights Agreement dated February 3, 2005 between us and the initial purchasers of the notes. The interest rate increase remained in effect until the Registration Statement covering
the exchange offer with respect to the notes was declared effective by the Securities and Exchange Commission (the SEC) and the exchange offer was consummated. On November 4, 2005, the exchange offer was consummated and the interest rate
consequently decreased to 9.0% per annum.



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Inception to date through September 30, 2006, we had purchased $15.5 million of its 9% senior notes
of which $11.0 million was purchased during the first six months of fiscal 2007 at a weighted-average price of 92.56% of face value. For the three and six months ended September 30, 2006, we recorded a gain related to the early extinguishment
of debt representing the difference between the purchase price and the carrying value of the 9% senior notes, net of related capitalized debt issuance costs of approximately $0.1 million and $0.3 million, respectively.

Junior Subordinated Notes. On February 3, 2005 we issued to certain of its stockholders, $25 million in unsecured 6% junior subordinated
notes, with a fair value of $17.2 million at the time of issue, based on an effective interest rate of 11%. These notes are subordinated to the unsecured senior notes and any payment of principal thereof directly or indirectly is deferred until the
payment in full of all of the senior debt. Unless there is a default or an event of default under any senior debt, interest on the junior subordinated debt is payable in arrears on February 1 and August 1. The junior notes will mature on
February 3, 2015. The original discount on the notes will be accreted to interest expense through the maturity date. Accretion of the discount, which is included in interest expense in the accompanying condensed consolidated statements of
operations, was approximately $0.1 million and $0.2 million for the three and six months ended September 30, 2006, respectively.

Revolving Credit Facility. We have a revolving credit agreement with a bank group for up to $75 million. The facility includes a $25 million sub-limit for letters of credit. Borrowings under the revolving credit agreement are subject
to a borrowing base calculation based on specified percentages of eligible accounts receivable and inventories. Interest on borrowings is payable monthly at a fluctuating rate based on the banks prime rate or LIBOR plus an applicable margin.
We pay an annual commitment fee of 3/8% on the unused portion of the facility.

The interest rate based on the banks prime rate as of
September 30, 2006 was 8.50%. As of September 30, 2006, we had no borrowings outstanding under the revolving credit facility and $2.6 million of letters of credit outstanding. As of September 30, 2006, the total borrowing availability
under the revolving credit facility was $50.2 million

The unsecured senior notes and the revolving credit are guaranteed by our
wholly-owned subsidiary, HHG Distributing, LLC (HHG), which has substantially no assets or operations. The guarantee is full and unconditional and we have no other subsidiaries. In addition, there are no restrictions on HHGs ability to pay
dividends under the arrangement.

The debt agreements contain restrictions on mergers, incurring additional debt or liens, making
investments, selling assets or making equity repurchases, debt prepayments and transactions with affiliates. The revolving credit agreement also contains a financial covenant requiring maintenance of a minimum fixed charge coverage ratio. The debt
agreements also restrict payment of dividends unless we achieve a specific fixed charge coverage ratio as defined in the debt agreements. Any such dividends are limited to the lesser of 50% of consolidated net income and 100% of equity contributions
since the date of the recapitalization. We were in compliance with the restrictions and covenants in the debt agreements at September 30, 2006.

Long Term Liquidity. Anticipated cash flows from operations and funds available from our revolving credit facility, together with cash on hand, should provide sufficient funds to finance our operations for at
least the next 12 months. As a normal part of our business, we consider opportunities to refinance our existing indebtedness, based on market conditions. Although we may refinance all or part of our existing indebtedness in the future, there can be
no assurances that we will do so. Changes in our operating plans, lower than anticipated sales, increased expenses, acquisitions or other events may require us to seek additional debt or equity financing. There can be no guarantee that financing
will be available on acceptable terms or at all. Additional debt financing, if available, could impose additional cash payment obligations and additional covenants and operating restrictions. We also have the remaining capacity to repurchase up to
$4.5 million of our outstanding Senior Notes at our discretion under the terms of our loan and security agreement.



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Seasonality

Our business is seasonal, with a higher portion of net sales and operating profit realized during the quarter that ends December 31 due to the overall demand for digital electronics and is generally the highest in the third quarter of
each fiscal year due to the holiday shopping season. Appliance revenue is impacted by seasonal weather patterns but is less seasonal than our electronics business and helps to offset the seasonality of our overall business. For example, we
experience stronger sales of compressor appliances (air conditioners, refrigerators and freezers) during hotter summers because higher temperatures tend to wear out the compressors in these products and cause consumers to replace them.

Outlook

We expect to open two new stores during
the third quarter ending December 31, 2006. We anticipate that our comparable store sales will be flat to slightly positive during the third quarter of fiscal 2007.

Our outlook for the third quarter of fiscal 2007 is based on information presently available and contains certain assumptions regarding macroeconomic conditions. We cannot be certain what effects rising energy prices,
reduced consumer confidence and increasing interest rates may have on consumer spending. Differences in actual economic conditions compared with our assumptions could have a material impact on our third quarter of fiscal 2007 results.



|ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

We are exposed to market risk from changes in floating rate interest on outstanding debt under our revolving credit facility. However, as of September 30, 2006, we had no outstanding cash borrowings under our revolver. We are not
currently exposed to market risk from currency fluctuations as all our purchases are dollar-denominated. We do not hedge interest rate exposure. We may consider entering into interest rate swap agreements at such time as we deem appropriate.



|ITEM 4. | Controls and Procedures
|------- | -----------------------

Disclosure Controls and
Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and regulations, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosures based solely on the definition of Disclosure Controls and Procedures in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.

As of September 30, 2006, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, we concluded that our disclosure controls and procedures were effective.

Changes in Internal Control. During the three months ended September 30, 2006, there were no significant changes in our
internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only
reasonable assurance that our controls will succeed in achieving the stated goals under all potential future conditions.



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Part II - Other Information



|ITEM 1. | Legal Proceedings
|------- | -----------------

We are party to various legal
actions in the ordinary course of business. We believe these actions are routine and incidental to the business. While the outcome of these actions cannot be predicted with certainty, we believe that the ultimate resolution of these matters will not
have a material adverse effect on our business, financial condition or operations.



|ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

During the three months ended September 30, 2006, the Company granted options to purchase an aggregate of 203,000 shares of its common stock to certain employees and directors at an exercise price of $11.70 per share. The grant of
options were made under the Companys 2005 Stock Option Plan and were exempt from registration under Rule 701 of the Securities Act as exempt offers and sales under a written compensatory benefit plan.



|ITEM 6. | Exhibits
|------- | --------



|     |  |                                                                                                                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|     | 
|31.2 |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|     | 
|32.1 |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                
|     | 
|32.2 |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                



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Signatures

Pursuant to the requirements 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.



GREGG APPLIANCES, INC.By:

/s/ Donald J.B. Van der WielDonald J.B. Van der WielChief Financial Officer


Dated: November 14, 2006



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