UNITED STATES
                  SECURITIES AND EXCHANGE COMMISSION
                        Washington, D.C. 20549


                              FORM 10-Q


      [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
               OF THE SECURITIES EXCHANGE ACT OF 1934

           For the quarterly period ended October 1, 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 0-24548

                            Movie Gallery, Inc.
           (Exact name of registrant as specified in charter)

                DELAWARE                                63-1120122
    (State or other jurisdiction                   (I.R.S. Employer
    of incorporation or organization)              Identification No.)

  900 West Main Street, Dothan, Alabama                  36301
 (Address of principal executive offices)              (zip code)

                                (334) 677-2108
          (Registrant's telephone number, including area code)

      Securities registered pursuant to Section 12(b) of the Act: Common Stock,
$0.001 par value (including associated rights to purchase shares of Series A
Junior Participating Preferred Stock or Common Stock)
(Title of class)

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

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

Indicate by check mark 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 [X]  Non-accelerated filer [ ]

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

The number of shares outstanding of the registrant's common stock, par value
$0.001 per share as of January 17, 2007 was 31,838,901.


Part I - Financial Information

Forward Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which represent
our expectations or beliefs about future events and financial performance.
Forward-looking statements are identifiable by the fact that they do not relate
strictly to historical information and may include words such as "believe,"
"anticipate," "expect," "intend," "plan," "will," "may," "estimate" or other
similar expressions and variations thereof.  In addition, any statements that
refer to expectations, projections or other characterizations of future events
or circumstances are forward-looking statements.  Our forward-looking
statements are based on management's current intent, belief, expectations,
estimates and projections regarding our company and our industry.  Forward-
looking statements are subject to known and unknown risks and uncertainties,
including those described in our Annual Report on Form 10-K for the fiscal year
ended January 1, 2006.  Forward-looking statements include statements regarding
our ability to comply with the covenants contained in our senior credit
facility, our ability to make projected capital expenditures and our ability to
achieve cost savings in connection with our acquisition of Hollywood
Entertainment Corporation, as well as general market conditions, competition
and pricing.

Our forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially, including, but not limited to,
risks and uncertainties that:

-  revenues are less than projected;

-  we are unable to comply with the revised financial covenants contained in
   our senior credit facility;

-  our real estate subleasing program and other initiatives fail to generate
   anticipated cost reductions;

-  the availability of new movie releases priced for sale negatively impacts
   consumers' desire to rent movies;

-  unforeseen issues arise with the continued integration of the Hollywood
   Entertainment business;

-  our actual expenses or liquidity requirements differ from estimates and
   expectations;

-  consumer demand for movies and games is less than expected;

-  the availability of movies and games is less than expected; or

-  competitive pressures are greater than anticipated.

In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this quarterly report on Form 10-Q might not occur.  In
addition, actual results could differ materially from those suggested by the
forward-looking statements, and therefore you should not place undue reliance
on the forward-looking statements.  We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.  We desire to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, and, in that regard, we caution the readers of this quarterly report on
Form 10-Q that the important factors described under Part II, Item 1A. Risk
Factors in this quarterly report on Form 10-Q and under Item 1A. Risk Factors
in our Annual Report on Form 10-K for the fiscal year ended January 1, 2006,
among others, could affect our actual results of operations and may cause
changes in our strategy with the result that our operations and results may
differ materially from those expressed in any forward-looking statements made
by us, or on our behalf.


Item 1. Financial Statements

                               Movie Gallery, Inc.
                          Consolidated Balance Sheets
                                (In thousands)

                                             -------------------------
                                              January 1,    October 1,
                                                 2006          2006
                                             -----------   -----------
                                                           (Unaudited)
Assets
Current assets:
 Cash and cash equivalents                   $   135,238   $    19,634
 Merchandise inventory, net                      136,450       123,929
 Prepaid expenses                                 41,393        51,226
 Store supplies and other                         24,194        20,564
                                             -----------   -----------
Total current assets                             337,275       215,353

Rental inventory, net                            371,565       340,078
Property, furnishings and equipment, net         332,218       272,341
Goodwill, net                                    118,404       117,626
Other intangibles, net                           184,671       182,803
Deposits and other assets                         40,995        37,726
                                             -----------   -----------
Total assets                                 $ 1,385,128   $ 1,165,927
                                             ===========   ===========
Liabilities and stockholders' deficit
Current liabilities:
 Current maturities of long-term obligations $    78,146   $   781,559
 Current maturities of financing obligations       4,492           982
 Accounts payable                                236,989        78,799
 Accrued liabilities                              88,460        78,511
 Accrued payroll                                  38,624        42,726
 Accrued interest                                  7,220        16,207
 Deferred revenue                                 39,200        33,014
                                             -----------    ----------
Total current liabilities                        493,131     1,031,798

Long-term obligations, less current portion    1,083,083       322,371
Other accrued liabilities                         21,662        32,570
Deferred income taxes                                 70            88

Stockholders' deficit:
Preferred stock, $.10 par value; 2,000
 shares authorized, no shares issued
 or outstanding                                       -             -
Common stock, $.001 par value; 65,000
 shares authorized, 31,686 and 31,840
 shares issued and outstanding, respectively          32            32
Additional paid-in capital                       199,151       197,074
Unearned compensation                             (4,128)            -
Retained deficit                                (417,882)     (428,541)
Accumulated other comprehensive income            10,009        10,535
                                             -----------   -----------
Total stockholders' deficit                     (212,818)     (220,900)
                                             -----------   -----------
Total liabilities and stockholders' deficit  $ 1,385,128   $ 1,165,927
                                             ===========   ===========

The accompanying notes are an integral part of this financial statement.



                               Movie Gallery, Inc.
                      Consolidated Statements of Operations
              (Unaudited, in thousands, except per share amounts)


                                Thirteen Weeks Ended    Thirty-Nine Weeks Ended
                              -----------------------   -----------------------
                               October 2,   October 1,   October 2,  October 1,
                                  2005         2006         2005        2006
                               ---------    ---------   ----------  ----------
Revenue:
  Rentals                      $ 473,086    $ 475,779   $1,109,661  $1,539,754
  Product sales                   99,356      107,210      201,301     338,888
                               ---------    ---------    ---------   ---------
Total revenue                    572,442      582,989    1,310,962   1,878,642

Cost of sales:
  Cost of rental revenue         136,236      141,589      345,159     470,073
  Cost of product sales           70,080       78,160      141,896     249,455
                                --------    ---------     --------   ---------
Gross profit                     366,126      363,240      823,907   1,159,114


Operating costs and expenses:
 Store operating expenses        319,919      322,643      690,592     944,495
 General and administrative       40,020       44,022       93,014     134,853
 Amortization of intangibles       1,163          701        2,718       2,142
                                --------     --------     --------    --------
Operating income (loss)            5,024       (4,126)      37,583      77,624

Interest expense, net            (24,427)     (31,185)     (41,430)    (89,331)
Write-off of bridge financing          -            -       (4,234)         -
Equity in losses of
 unconsolidated entities               -            -         (806)         -
                                 --------    --------     --------    --------
Loss before income taxes          (19,403)    (35,311)      (8,887)    (11,707)
Income taxes (benefit)             (6,934)        800       (2,622)     (1,048)
                                 --------    --------     --------    --------
Net loss                         $(12,469)   $(36,111)    $ (6,265)   $(10,659)
                                 ========    ========     ========    ========

Net loss per share:
   Basic                          $ (0.39)   $  (1.13)    $  (0.20)    $ (0.34)
   Diluted                        $ (0.39)   $  (1.13)    $  (0.20)    $ (0.34)

Weighted average shares outstanding:
   Basic                           31,640      31,840       31,471      31,786
   Diluted                         31,640      31,840       31,471      31,786

Cash dividends per common share   $     -    $      -     $   0.06    $      -


The accompanying notes are an integral part of this financial statement.


                                Movie Gallery, Inc.
                       Consolidated Statements of Cash Flows
                             (Unaudited, in thousands)

                                                  Thirty-Nine Weeks Ended
                                                  -----------------------
                                                  October 2,    October 1,
                                                     2005          2006
                                                  ---------     ---------
Operating activities:
Net loss                                          $  (6,265)    $(10,659)
Adjustments to reconcile net loss to net cash
 provided by (used in)operating activities:
  Rental inventory amortization                     152,018      167,259
  Purchases of rental inventory                    (120,135)    (125,246)
  Purchases of rental inventory-base stock          (16,569)     (10,527)
  Depreciation and intangibles amortization          60,206       79,214
  Accretion on asset retirement obligations               -        3,022
  Loss on disposal of property,
   furnishings and equipment                          1,363        3,675
  Stock-based compensation                            1,098        2,073
  Tax benefit of stock options exercised              3,301           -
  Amortization of debt issuance cost                  2,235        4,952
  Deferred income taxes                             (11,557)          18
Changes in operating assets and liabilities, net of
 business acquisitions:
  Extended viewing fees receivable, net              20,259           -
  Merchandise inventory                               8,516       12,634
  Other current assets                               (3,948)      (7,075)
  Deposits and other assets                          (2,053)       2,567
  Accounts payable                                  (82,258)    (157,454)
  Accrued interest                                   29,193        8,986
  Accrued liabilities and deferred revenue           13,336       (8,508)
                                                  ---------    ---------
Net cash provided by (used in)
 operating activities                                48,740      (35,069)

Investing activities:
Business acquisitions, net of cash acquired      (1,096,265)        (319)
Purchase of property, furnishings and equipment     (48,873)     (19,145)
Proceeds from disposal of property,
 furnishings and equipment                            2,107        1,320
Acquisition of construction phase assets, net         2,154        3,553
                                                  ---------    ---------
Net cash used in investing activities            (1,140,877)     (14,591)

Financing activities:
Repayment of capital lease obligations                 (265)        (412)
Decrease in financing obligations                    (2,412)      (3,510)
Net borrowings on credit facilities                   9,046       13,142
Debt financing fees                                 (32,452)      (5,528)
Proceeds from issuance of long-term debt          1,166,120        1,948
Principal payments on long-term debt                 (8,367)     (72,392)
Proceeds from exercise of stock options               5,318           -
Proceeds from employee stock purchase plan              169           -
Payment of dividends                                 (2,827)          -
                                                  ---------    ---------
Net cash provided by (used in)
 financing activities                             1,134,330      (66,752)

Effect of exchange rate changes on cash
 and cash equivalents                                 1,044          808
                                                  ---------    ---------
Increase (decrease) in cash and
 cash equivalents                                    43,237     (115,604)
Cash and cash equivalents at
 beginning of period                                 25,518      135,238
                                                  ---------    ---------
Cash and cash equivalents
   at end of period                               $  68,755    $  19,634
                                                  =========    =========

The accompanying notes are an integral part of this financial statement.


                                Movie Gallery, Inc.
               Notes to Consolidated Financial Statements (Unaudited)
                                 October 1, 2006


1.  Accounting Policies

Principles of Consolidation

The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of Movie Gallery, Inc. and its
subsidiaries (the "Company").  Investments in unconsolidated subsidiaries where
we have significant influence but do not have control are accounted for using
the equity method of accounting.  We account for investments in entities where
we do not have significant influence using the cost method.  All material
intercompany accounts and transactions have been eliminated.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X.  Accordingly, the unaudited consolidated financial statements
do not include all of the information and footnotes required by generally
accepted accounting principles for complete consolidated financial statements.
The balance sheet at January 1, 2006 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments
(consisting of normal recurring adjustments and accruals) considered necessary
for a fair presentation have been included.  Operating results for the
thirteen-week and thirty-nine week periods ended October 1, 2006 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2006.  For further information, refer to the consolidated
financial statements and footnotes thereto included in our Annual Report on
Form 10-K for the fiscal year ended January 1, 2006.

Reclassifications and Revisions

Certain reclassifications have been made to the prior year financial statements
to conform to the current year presentation.  These reclassifications had no
impact on stockholders' deficit or net loss.

During the fourth quarter of fiscal year 2005, we began to classify purchases
of rental inventory-base stock in operating activities rather than investing
activities.  The accompanying consolidated statements of cash flows for the
thirty-nine weeks ended October 2, 2005 has been revised to reflect all
purchases of rental inventory as operating cash uses.  The statement of cash
flows for the thirty-nine weeks ended October 2, 2005 has also been revised to
reclassify the book cost of previously viewed movie sales from rental inventory
amortization as a reduction of purchases of rental inventory to be consistent
with the presentation in the current year.

On March 29, 2005, the SEC published Staff Accounting Bulletin No. 107 ("SAB
107"), which provides the Staff's views on a variety of matters relating to
stock-based payments upon adoption of Statement of Financial Accounting
Standard 123(R), "Share-Based Payment."  SAB 107 requires that stock-based
compensation be classified in the same expense line items as cash compensation.
Accordingly, stock-based compensation for the thirteen and thirty-nine weeks
ended October 2, 2005 has been reclassified in the statement of operations to
correspond to current year presentation within the same operating expense line
items as cash compensation paid to employees.

Change in Accounting Estimate for Rental Inventory

We regularly review, evaluate and update our rental amortization accounting
estimates. Effective January 2, 2006, we reduced the amount capitalized on DVD
revenue sharing units for the Movie Gallery segment such that the carrying
value of the units, when combined with revenue sharing expense on previously
viewed sales, more closely approximates the carrying value of non-revenue
sharing units. We also began to amortize games on an accelerated method for the
Movie Gallery segment, effective January 2, 2006, in order to remain consistent
with observed changes in rental patterns for games. These changes were
accounted for as a change in accounting estimate, which increased cost of
rental revenue by approximately $0 and $11.3 million for the thirteen and
thirty-nine weeks ended October 1, 2006, respectively.  This reduced net income
by $0 and $12.2 million (net of tax), or $0.00 and $0.38 per diluted share, for
the thirteen and thirty-nine weeks ended October 1, 2006, respectively.

Earnings Per Share

Basic earnings per share are computed based on the weighted average number of
shares of common stock outstanding during the periods presented.  Diluted
earnings per share are computed based on the weighted average number of shares
of common stock outstanding during the periods presented, increased by the
effects of non-vested stock and shares to be issued from the exercise of
dilutive common stock options.  Due to our loss for the thirteen weeks and
thirty-nine weeks ended October 2, 2005, securities consisting of options
convertible into 215,000 and 319,000 shares of common stock and 0 and 8,000
shares of non-vested stock, respectively, were excluded from the calculation of
diluted loss per share, as their inclusion in the diluted loss per share
calculation would have been anti-dilutive. Due to our loss in the thirteen
weeks and thirty-nine weeks ended October 1, 2006, securities consisting of
options convertible into 66,000 and 68,000 shares of common stock were excluded
from the calculation of diluted loss per share, as their inclusion in the
diluted loss per share calculation would have been anti-dilutive.

Stock Based Compensation

In June 2003, our Board of Directors adopted, and our stockholders approved,
the Movie Gallery, Inc. 2003 Stock Plan (the "2003 Plan"), which was
subsequently amended in June 2005 (Second Amendment) to reserve an additional
3,500,000 shares of our common stock for future grants of awards.  The plan
provides for the award of stock options, restricted stock and stock
appreciation rights to employees, directors and consultants.  Prior to adoption
of the 2003 Plan, stock option awards were subject to our 1994 Stock Plan,
which expired in 2004.  As of October 1, 2006, 5,261,168 shares are reserved
for issuance under the plans.  Options granted under the plans have a ten-year
term and generally vest over four years.

Prior to January 1, 2006, we accounted for stock-based compensation in
accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"), and followed the disclosure-only
provisions of Statement of Financial Accounting Standard ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), as amended by SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
Accordingly, compensation expense was not recognized in our consolidated
statement of operations in connection with stock options that were granted
under our stock-based compensation plan, except for the variable options as
described in our Annual Report on Form 10-K for the fiscal year ended January
1, 2006.

Effective with our fiscal year beginning January 2, 2006, we adopted SFAS No.
123(R), "Share-Based Payment" ("SFAS No. 123(R)"), which no longer permits use
of the intrinsic value method under APB No. 25.  We used the modified
prospective method to adopt SFAS No. 123(R), which requires that compensation
expense be recorded for all stock-based compensation granted on or after
January 1, 2006, as well as the unvested portion of previously granted options.
On December 2, 2005, our Board of Directors approved a resolution to vest all
stock options outstanding as of December 2, 2005.  The Board decided to fully
vest these specific out-of-the-money options, as there was no perceived value
in these options to the employee, there were few retention ramifications, and
to minimize the expense to our consolidated financial statements upon adoption
of SFAS No. 123(R).  This acceleration of the original vesting schedules
affected 716,000 unvested stock options.  As a result, there is no compensation
expense associated with stock options granted prior to January 2, 2006 in the
consolidated statements of operations.  No assumptions regarding the underlying
value of these previously granted stock options were changed upon adoption of
SFAS No. 123(R).

Under SFAS No. 123(R), the modified prospective method requires measurement of
compensation cost for all stock awards at fair value on the date of grant and
recognition of compensation over the service period for awards expected to
vest.  The fair value of non-vested share grants is based on the number of
shares granted and the quoted price of our common stock.  No stock options were
granted in fiscal 2006.  However, we expect to use the Black-Scholes valuation
model for future stock option grants in order to determine fair value.  This is
consistent with the valuation techniques that were previously utilized for
options in footnote disclosures required under SFAS No. 123.  The estimation of
stock awards that will ultimately vest requires significant estimates, and to
the extent that actual results or updated estimates differ from current
estimates, such amounts will be recorded as a cumulative adjustment in the
period that estimates are revised.  Actual results and future changes in
estimates may differ substantially from the current estimates.  Because we
implemented SFAS No. 123(R), there are no longer any employee stock awards
subject to variable accounting treatment.

The weighted-average assumptions used and weighted-average grant-date fair
values of options for fiscal year 2004 and 2005 and the thirty-nine weeks ended
October 1, 2006 were as follows:

					                    Thirty-nine
							       Weeks
                                       Fiscal Year Ended       Ended
                                    -----------------------  ----------
                                     January 2,   January 1,  October 1,
                                       2005         2006         2006
                                    ----------   ----------  ----------

Expected volatility                     0.632        0.626          -
Risk-free interest rate                 2.97%        3.05%          -%
Expected life of option in years        3.4          3.0            -
Expected dividend yield                 0.6%         5.7%           -%
Weighted average grant date
  fair value per share              $   8.70    $    7.43   $       -



The adoption of SFAS No. 123(R) did not result in any changes in our
assumptions regarding estimated future forfeitures for grants outstanding as of
January 1, 2006; therefore, no cumulative adjustment from accounting change is
included in our consolidated statement of operations.

Valuation of awards of service-based non-vested shares was accounted for
similarly under APB No. 25, SFAS No. 123 and SFAS No. 123(R), in that all three
methods required the use of the grant date fair value as the basis for future
expense recognition.  Treatment of performance-based non-vested share awards,
however, differs between APB No. 25 and SFAS No. 123(R).  APB No. 25 required
quarterly revaluation of outstanding shares granted based on the quoted market
price of our stock, thus resulting in quarterly cumulative adjustments to the
extent that prior periods' expense was restated to reflect the new underlying
value of the non-vested shares.  SFAS No. 123(R), however, values performance-
based non-vested shares at the quoted market price of our stock as of the grant
date, with no re-measurement.

Prior to the adoption of SFAS No. 123(R), cash retained as the result of tax
deductions relating to stock-based compensation was presented in operating cash
flows, along with other tax cash flows, in accordance with the provisions of
the Emerging Issues Task Force ("EITF") Issue No. 00-15, "Classification in the
Statement of Cash Flows of the Income Tax Benefit Received by a Company upon
Exercise of a Nonqualified Employee Stock Option."  SFAS No. 123(R) supersedes
EITF 00-15, amends SFAS No. 95, "Statement of Cash Flows," and requires tax
benefits relating to excess stock-based compensation deductions to be
prospectively presented in the statement of cash flows as financing cash
inflows.  There were no significant tax benefits resulting from stock-based
compensation deductions in excess of amounts reported for financial reporting
purposes for the third quarter of fiscal 2006.

Fair Value Disclosures - Prior to SFAS No. 123(R) Adoption

Stock-based compensation for the thirteen and thirty-nine weeks ended October
2, 2005 was determined using the intrinsic value method.  The following table
provides supplemental information for the thirteen and thirty-nine weeks ended
October 2, 2005 as if stock-based compensation had been computed under SFAS No.
123 (in thousands, except per share data):

                                   Thirteen Weeks Ended Thirty-nine Weeks Ended
                                   -------------------- -----------------------
                                       October 2,              October 2,
                                          2005                    2005
                                       ---------              ----------

Net loss, as reported                  $ (12,469)             $  (6,265)
Add: Stock based compensation
 included in reported net loss,
 net of tax                                  442                    774
Deduct: Stock based compensation
 determined under fair value based
 methods for all awards, net of tax       (1,087)                (1,887)
                                       ---------              ---------
Pro forma loss                         $ (13,114)             $  (7,378)
                                       =========              =========
Net loss per share, as reported:
 Basic                                 $   (0.39)             $   (0.20)
 Diluted                               $   (0.39)             $   (0.20)

Pro forma net loss, per share:
 Basic                                 $   (0.41)             $   (0.23)
 Diluted                               $   (0.41)             $   (0.23)


A summary of our stock option activity and related information is as follows:

                                                               Weighted-
                                              Outstanding   Average Exercise
                                                Options     Price Per Share
                                              ------------   ---------------

Outstanding at January 1, 2006                     976,751             14.33
    Granted                                           0.00              0.00
    Exercised                                         0.00              0.00
    Cancelled                                     (100,563)            18.57
                                              ------------
Outstanding at October 1, 2006                     876,188             13.84
					      ============

Exercisable at January 1, 2006                     976,751             14.33
Exercisable at October 1, 2006                     876,188             13.84


The total intrinsic value of options exercised was $8.9 million and $0 for the
fiscal year ended January 1, 2006 and for the thirty-nine weeks ended October
1, 2006, respectively.

Options outstanding as of October 1, 2006 had a weighted-average remaining
contractual life of approximately 5 years and exercise prices ranging from
$1.00 to $22.00 as follows:

                                                Exercise price of
                                -----------------------------------------------
                                   $1.00 to       $6.00 to         $13.00 to
                                   $3.00          $12.00           $22.00
                                -------------- --------------- ----------------

Options outstanding                 181,864        78,750           615,574
Weighted-average exercise price       $1.64         $6.22            $18.42
Weighted-average remaining
    contractual life               3.2 years      0.1 years        6.6 years
Options exercisable                 181,864        78,750           615,574
Weighted-average exercise price
    of exercisable options            $1.64         $6.22            $18.42


Service-based non-vested share awards vest over periods ranging from one to
four years.  Compensation expense, representing the excess of the fair market
value of the shares at the date of issuance over the nominal purchase price, if
any, of the shares, net of assumptions regarding estimated future forfeitures
is charged to earnings over the vesting period.  Compensation expense charged
to operations related to these stock grants was $1.2 million and $1.6 million
for the fiscal year ended January 1, 2006 and for the thirty-nine weeks ended
October 1, 2006, respectively.  The total grant date fair value of service-
based share awards vested during the fiscal year ended January 1, 2006 and the
thirty-nine weeks ended October 1, 2006 was $0 and $1.5 million, respectively.

Following is a summary of our service-based non-vested share activity:

                                                          Weighted-Average
                                                           Grant-Date Fair
                                            Shares               Value
                                          ----------     ------------------
Outstanding at January 2, 2005                     -     $                -
     Granted                                 219,431                  25.85
     Cancelled                               (13,000)                 29.45
                                          ----------
Outstanding at January 1, 2006               206,431                  25.62
     Granted                               1,275,900		       6.82
     Vested 				     (61,990)                 24.55
     Cancelled				     (75,924)		      22.72
					   ---------
Outstanding at October 1, 2006		   1,344,417		       7.99
					  ==========

Performance-based non-vested share awards entitle participants to acquire
shares of stock upon attainment of specified performance goals.  Compensation
expense, representing the excess of the fair market value of the shares at the
date of issuance over the nominal purchase price, if any, net of assumptions
regarding future forfeitures and the likelihood that the performance
requirements  will be attained, is charged to earnings over the vesting period.
Compensation cost of $0.4 million and $0.5 million for performance-based stock
grants was recognized for the fiscal year ended January 1, 2006 and for the
thirty-nine weeks ended October 1, 2006, respectively, using the accelerated
expense attribution method under SFAS Interpretation No. 28 (EITF 00-23).

Following is a summary of our performance-based non-vested share activity:

                                                          Weighted-Average
                                                           Grant-Date Fair
                                            Shares             Value
                                          ----------     ------------------
Outstanding at January 2, 2005                     -     $                -
     Granted                                 113,000                  23.79
     Cancelled                                (6,250)                 12.83
                                          ----------
Outstanding at January 1, 2006               106,750                  24.43
     Granted                                       -		          -
     Vested 				     (50,500)                 28.84
     Cancelled				     (31,250)		      12.83
					  ----------
Outstanding at October 1, 2006		      25,000		      30.03
					  ==========

The total grant date fair value of performance-based share awards vested during
the fiscal year ended January 1, 2006 and the thirty-nine weeks ended October
1, 2006 was $0 and $1.5 million, respectively.

Total compensation cost related to all non-vested awards that is not yet
recognized was $9.2 million at October 1, 2006, and is expected to be
recognized over a weighted-average period of approximately three years.

Recently Issued Accounting Pronouncements

On March 28, 2006, the Financial Accounting Standards Board ("FASB") issued
EITF 06-3, "How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That is, Gross versus
Net Presentation)," or EITF 06-3, which clarifies how a company discloses its
recording of taxes collected that are imposed on revenue producing activities.
EITF 06-3 is effective for the first interim reporting period beginning after
December 31, 2006.  We are in the process of evaluating the effect of EITF 06-3
on our financial statements.

On July 13, 2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109,"
which clarifies the way companies account for uncertainty in income taxes.  FIN
48 is effective for the first fiscal year beginning after December 15, 2006.
FIN 48 will be effective for us for the fiscal year beginning January 1, 2007.
We are in the process of evaluating the effect of FIN 48 on our financial
statements.

In April 2006, the FASB issued FSP FIN 46(R)-6 "Determining the Variability to
be Considered in Applying FASB Interpretation No. 46(R)-6", or FSP FIN 46(R)-6,
which addresses certain major implementation issues related to FASB
Interpretation No. 46(R)6. FSP FIN 46(R)-6 is effective prospectively for all
entities (including newly created entities) with which that enterprise first
becomes involved and to all entities previously required to be analyzed under
FIN 46(R). We are in the process of evaluating the effect of FSP FIN 46(R)-6 on
our financial statements.

In September 2006, the FASB issued FASB Statement No. 157 (SFAS 157), "Fair
Value Measurements", which provides enhanced guidance for using fair value to
measure assets and liabilities. The standard also responds to investors'
requests for expanded information about the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings. The standard
applies whenever other standards require (or permit) assets or liabilities to
be measured at fair value. The standard does not expand the use of fair value
in any new circumstances.  SFAS 157 is effective for us for fiscal years
beginning after November 15, 2007.   We are in the process of evaluating the
effect of SFAS 157 on our financial statements.

In September 2006, the SEC staff released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements" (SAB 108).  SAB 108
provides for a "one-time" special transition provision for correcting certain
prior year misstatements that were uncorrected as of the beginning of the
fiscal year of adoption. SAB 108 permits existing public companies to initially
apply its provisions either by (i) restating prior financial statements as if
the dual approach had always been used or (ii) recording the cumulative effect
of initially applying the dual approach as adjustments recorded to the opening
balance of retained earnings.  SAB 108 is effective for fiscal years ending
after November 15, 2006.  We are in the process of evaluating the effect of SAB
108 on our financial statements.

2.  Business Combinations

Merger of Movie Gallery and Hollywood

On April 27, 2005, Movie Gallery and Hollywood Entertainment Corporation
("Hollywood") completed their previously announced merger pursuant to the
Agreement and Plan of Merger, dated as of January 9, 2005 (the "Merger
Agreement"). Upon the consummation of the merger, Hollywood became a wholly-
owned subsidiary of Movie Gallery.  As of the date of the merger, Hollywood
operated 2,031 specialty home video retail stores and 20 free-standing video
game stores throughout the United States.  The merger was made as a strategic
expansion of our geographic and urban markets.

Under the terms of the Merger Agreement, Hollywood shareholders received $13.25
in cash for each Hollywood share they owned. Approximately $862.1 million in
cash was paid in exchange for (i) all outstanding common stock of Hollywood and
(ii) all outstanding vested and unvested stock options of Hollywood.
Hollywood's outstanding indebtedness was repaid at the time of the merger for a
total of $381.5 million, of which $161.4 million was paid by Hollywood with the
remainder funded by Movie Gallery with proceeds from a new credit facility
("Credit Facility") and the issuance of $325.0 million principal amount of 11%
Senior notes due 2012 ("Senior Notes").  The total consideration paid was
approximately $1.1 billion, including transaction costs of $10.0 million.

The merger has been treated as a purchase business combination for accounting
purposes, and, as such, Hollywood's assets acquired and liabilities assumed
have been recorded at their estimated fair values.  The purchase price for the
acquisition, including transaction costs, was allocated to the assets acquired
and liabilities assumed based on estimated fair values at the date of
acquisition, April 27, 2005.  The purchase price allocation is final for all
items except deferred income taxes, and further adjustments may be required in
2006 as we complete the analysis of the acquired tax basis of certain assets
and carryover tax attributes of Hollywood.

The purchase price allocation has been revised in the periods following the
acquisition in accordance with SFAS No. 141, "Business Combinations," to
reflect revisions in our estimates of the fair values of assets acquired and
liabilities assumed to correct certain accounts in Hollywood's acquisition date
balance sheet. The table below presents a summary of our initial purchase price
allocation, together with subsequent revisions and the resulting revised
allocation reflected in the accompanying consolidated balance sheets (in
thousands):

								       As of
                                              Initial    Subsequent   October
                                             Allocation  Revisions    1, 2006
Current Assets:
    Cash and cash equivalents                $   18,733 $       -  $   18,733
    Extended viewing fees receivable, net        21,369         -      21,369
    Merchandise inventory                       122,468         -     122,468
    Prepaid expenses                             27,632         -      27,632
    Store supplies and other                     18,146    (5,107)     13,039
                                             ---------- ---------  ----------
Total current assets                            208,348    (5,107)    203,241

Rental inventory                                227,800         -     227,800
Property, furnishings and equipment             238,279        49     238,328
Goodwill                                        474,990     3,707     478,697
Other intangibles                               183,894         -     183,894
Deferred income taxes                            64,944   (13,708)     51,236
Deposits and other assets                         1,662         -       1,662
                                             ---------- ---------  ----------
Total assets acquired                         1,399,917   (15,059)  1,384,858

Liabilities
Current Liabilities:
    Current maturities of long-term obligations     557         -         557
    Current maturities of financing obligations  10,385         -      10,385
    Accounts payable                            182,963   (14,728)    168,235
    Accrued liabilities                          65,507     6,984      72,491
    Accrued payroll                              19,691    (1,147)     18,544
    Accrued interest                                 39         -          39
    Deferred revenue                             27,552    (6,168)     21,384
                                             ---------- ---------  ----------
Total current liabilities                       306,694   (15,059)    291,635

Long-term obligations, less current portion         941         -         941
Total liabilities                               307,635   (15,059)    292,576
                                             ---------- ---------  ----------
Net assets acquired                          $1,092,282 $       -  $1,092,282
                                             ========== =========  ==========

The initial allocation shown above was based on the unaudited balance sheet as
of April 27, 2005, and our preliminary estimates of fair value, which were
revised and adjusted throughout fiscal 2005 and the third quarter of fiscal
2006 as we completed the analysis of various balance sheet accounts and refined
the estimates of the fair values of assets acquired and liabilities assumed.
For the thirty-nine weeks ended October 1, 2006, adjustments were made to the
purchase price allocation for accrued liabilities, deferred income taxes,
accounts receivable, and property, furnishings and equipment totaling $0.9
million.  Following is a summary of the nature of the significant revisions and
the facts and circumstances that required the revisions shown in the preceding
table:

- Store supplies and other: We decreased the balance in store supplies by $5.4
million based on the results of subsequent physical inventories and revised
estimates.  We increased legal-related receivables by $0.3 million related to
pre-acquisition legal contingencies and the related insurance coverage.

- Deferred income taxes: We wrote-off Hollywood's pre-acquisition deferred
income tax balances and set-up new deferred income tax balances based on the
differences between the financial reporting basis of assets and liabilities and
their underlying tax basis, including amounts assigned to Hollywood's carryover
tax attributes.  The net impact of these adjustments decreased deferred tax
assets by $13.7 million.

- Accounts payable: During fiscal 2005, we completed an analysis of accounts
payable to our studio vendors based on detailed reconciliations and revised
estimates, the net effect of which decreased accounts payable by $14.7 million
as of April 27, 2005.

- Accrued liabilities: The revisions to the initial allocation included:

   - recorded a $6.6 million liability for employee separation costs for
     Hollywood employees who were terminated shortly before and after the
     merger in accordance with EITF 95-3, "Recognition of Liabilities in
     Connection with a Purchase Business Combination;"

   - adjusted Hollywood's favorable and unfavorable operating leases to net
     fair value of $2.9 million, based on a report received from an independent
     valuation consultant in the third quarter;

   - reduced Hollywood's pre-acquisition legal contingencies $0.6 million to
     the amount we concluded was probable based on management's assessment of
     the individual matters using all available information;

   - reduced accruals for Hollywood's pre-merger expenses by $2.0 million to
     reflect the actual amounts paid;

   - established $3.1 million in reserves for store closures in accordance with
     EITF 95-3 to reflect the cost of remaining lease obligations for closed
     stores and other costs associated with 50 Game Crazy departments that were
     closed shortly after the merger; and

   - recorded a reduction of $3.0 million in income tax and franchise tax
     liabilities based on subsequent analyses of Hollywood's tax accounts,
     after giving consideration to the effects of merger-related transactions.

- Accrued payroll:  We reduced our estimate of Hollywood's accrued bonuses by
$1.1 million to reflect actual amounts subsequently earned (considering the
impact of employee separations and changes to the bonus plans implemented as of
the transaction date by Movie Gallery).

- Deferred revenue: We decreased Hollywood's deferred revenue associated with
stored value (gift) card by $6.2 million to reflect the estimated fair value
associated with redemptions in accordance with EITF 01-3, "Accounting in a
Business Combination for Deferred Revenue of an Acquiree."  This adjustment was
determined, in part, based on an analysis of the fair value completed by the
valuation advisors in the third quarter of fiscal 2005.

We allocated approximately $183.9 million of the purchase price to identifiable
intangible assets, of which approximately $170.9 relates to the indefinite-
lived trade name of Hollywood Video. The remaining intangible assets include
finite-lived trade names and customer lists, which will be amortized over their
estimated useful lives, which are 15 years and 5 years, respectively. The fair
value of these intangible assets was determined by independent valuations
advisors.

After giving consideration to the effect of the revisions described above, we
allocated a total of $478.7 million to goodwill, against which an impairment
charge of $361.2 million was recorded in fiscal 2005.  We paid a substantial
premium to acquire Hollywood for several reasons, including:

- Expanded geographic footprint: The merger created a strong number two
competitor in the specialty home video retail industry that combines
Hollywood's prime urban superstore locations with Movie Gallery's substantial
presence in rural and suburban markets. The two companies possessed minimal
store overlap as a result of Movie Gallery's significant East Coast presence
and focus on rural and suburban locations and Hollywood's significant West
Coast presence and focus on urban locations.

- Cost savings: The combined operations of Movie Gallery and Hollywood are
expected to achieve cost benefits resulting from the reduction of duplicative
general and administrative costs and the realization of scale economies with
respect to products and services purchased from studios and merchandisers.

- Operating efficiencies: The combined operations of Movie Gallery and
Hollywood are expected to improve operational performance due to greater
distribution density, consolidation of duplicative functions and the adoption
of best practices at the 4,675 store locations for the combined company.

In addition, in order to acquire Hollywood, we participated in a competitive
bidding process against Leonard Green & Partners L.P. and Blockbuster, Inc.
Our successful bid was $1.25 per share lower than Blockbuster, Inc.'s bid.
However, Hollywood's stock (NASDAQ: HLYW) was trading at a significant premium
to book value due, in part, to merger and acquisition speculation.

The operations of Hollywood Entertainment have been included in our
consolidated results of operations from April 27, 2005 forward.  The following
pro forma financial information is presented for informational purposes only
and is not indicative of the results of operations that would have been
achieved if the merger had taken place as of the beginning of 2005, nor is it
indicative of future results. In addition, the following pro forma information
has not been adjusted to reflect any operating efficiencies that may be
realized as a result of the merger, except for the elimination of certain
redundant executive compensation costs for terminated corporate personnel,
substantially all of which occurred shortly after the merger.  The unaudited
pro forma financial information in the table below summarizes the combined
results of operations of Movie Gallery and Hollywood Entertainment for the
thirty-nine weeks ended October 2, 2005 as though the companies had been
combined as of the beginning of fiscal 2005.

                                      (unaudited)
                         (in thousands, except per share data)

                                Thirty-nine weeks ended
                                   October 2, 2005
                                   ---------------
Total revenue                         $  1,926,705
Operating income                           100,087
Net income                                  14,396
Net income per share:
  Basic                                       0.46
  Diluted                                     0.45

The summary pro forma data includes adjustments to depreciation, amortization
and lease expenses to reflect the allocation of purchase price to record
Hollywood's assets and liabilities at their estimated fair values. In addition,
pro forma net income reflects increases in interest expense related to the
incremental borrowings under our bank credit facilities and Senior Notes as if
such financing had taken place at the beginning of fiscal 2005.

The historical financial data of Hollywood (not separately presented herein)
for periods prior to the merger (included in the pro forma presentation above),
includes $21.1 million (before taxes) of transactions costs and professional
services related to merger activities.

Merger Reserves

We closed 50 Game Crazy departments shortly after the acquisition date for a
total cash cost of $0.3 million.  The costs associated with these department
closures were not charged to current operations, but rather were recognized as
acquired liabilities in purchase accounting, resulting in an increase to
goodwill.

3. Property, Furnishings and Equipment

Property, furnishings and equipment consists of the following (in thousands):

                                              -----------  ----------
                                               January 1,   October 1,
                                                 2006 (1)      2006
                                              -----------  ----------
        Land and buildings                      $  19,372  $   20,211
        Fixtures and equipment                    244,320     246,749
        Leasehold improvements                    284,737     281,482
        Asset retirement obligation                     -       5,924
        Construction phase assets                   4,542         989
        Equipment under capital lease               1,659       1,659
                                              -----------  ----------
                                                  554,630     557,014
        Less accumulated depreciation
         and amortization                        (222,412)   (284,673)
                                              -----------  ----------
                                                $ 332,218  $  272,341
                                              ===========  ==========

(1) Amounts reflect an adjustment of $36.2 million to conform presentation
between Movie Gallery and Hollywood segments from signage (fixtures and
equipment) to leasehold improvements.

Accumulated depreciation and amortization, as presented above, includes
accumulated amortization of assets under capital leases of $0.3 and $0.6
million at January 1, 2006 and October 1, 2006, respectively.  Depreciation
expense related to property, furnishings and equipment was $28.2 million and
$77.0 million for the thirteen and thirty-nine weeks ended October 1, 2006,
respectively, compared to $30.3 million and $57.5 million for the corresponding
periods in 2005.

4. Income Taxes

In the ordinary course of business, there may be many transactions and
calculations where the ultimate tax outcome is uncertain.  The calculation of
tax liabilities involves dealing with uncertainties in the application of
complex tax laws.  No assurance can be given that the final outcome of these
matters will not be different than what is reflected in the current and
historical income tax provisions and accruals.

The effective tax rate was an expense of 2.3% and a benefit of 8.9% for the
thirteen and thirty-nine weeks ended October 1, 2006, respectively, as compared
to a benefit of 35.7% and 29.5% for corresponding prior year periods.  The
projected annual effective tax rate is a benefit of 4.2% which differs from the
expense of 2.3% for the quarter ended October 1, 2006 due to the interaction
between valuation allowances against our deferred tax assets and net operating
losses which have been incurred and changes to contingent liabilities and
equity compensation.  The low annual effective rate is primarily a result of
changes in previously established valuation allowances for our deferred tax
assets.

Because of the existence of the valuation allowance against our deferred tax
assets, we generally expect that our federal income tax provision will be low
until such time as the valuation allowance is depleted through future taxable
income or until we determine it is no longer necessary.  Likewise, we do not
currently expect that we will be able to recognize any significant federal
income tax benefit on future net operating losses because those benefits would
most likely cause us to increase the valuation allowance by a corresponding
amount in the foreseeable future.

5. Goodwill and Other Intangible Assets

The components of goodwill and other intangible assets are as follows (in
thousands):

                                     January 1, 2006         October 1, 2006
                    Weighted-   ------------------------ ---------------------
                    Average      Gross                   Gross
                  Amortization  Carrying  Accumulated   Carrying  Accumulated
                     Period      Amount   Amortization   Amount   Amortization
                  ------------  --------  ------------  --------  ------------
Goodwill
  Segments:
     Movie Gallery      -       $      -  $          -  $    147  $          -
     Hollywood Video    -        118,404             -   117,479             -
                                --------  ------------  --------  ------------
Total goodwill                  $118,404  $          -  $117,626  $          -
                                ========  ============  ========  ============

Other intangible assets:
Non-compete
 agreements          8 years    $ 12,205  $    (10,110) $ 12,293  $   (10,717)
Trademarks:
 Hollywood Video   Indefinite    170,959             -   171,159            -
 Game Crazy         15 years       4,000          (178)    4,000         (378)
Customer lists       5 years       8,994        (1,199)    8,994       (2,548)
                                --------  ------------  --------  ------------
                                $196,158  $    (11,487) $196,446  $   (13,643)
                                ========  ============  ========  ============

Estimated amortization expense for other intangible assets for the remainder of
fiscal 2006 and the five succeeding fiscal years is as follows (in thousands):

                     2006                             696
                     2007                           2,698
                     2008                           2,476
                     2009                           2,289
                     2010                             958
                     2011                             292

The changes in the carrying amounts of goodwill for the fiscal year ended
January 1, 2006 and the thirty-nine weeks ended October 1, 2006, are as follows
(in thousands):

          Net balance as of January 2, 2005           $   143,761
          Goodwill acquired (including revisions)         497,593
          Impairment                                     (522,950)
                                                      -----------
          Net balance as of January 1, 2006               118,404
          Goodwill acquired                                   147
          Change in goodwill                                 (925)
                                                      -----------
          Net balance as of October 1, 2006            $  117,626
                                                      ===========

6. Store Closure, Merger and Restructuring Reserves

Store Closure

In the fourth quarter of fiscal 2005, we decided to close 64 Movie Gallery
stores that overlapped trade areas served by competing Hollywood stores. In
addition to these closures, we continue to evaluate underperforming stores and
stores that have overlap trade areas in our Movie Gallery, Hollywood and Game
Crazy segments.  We anticipate closing approximately 230 underperforming and
overlap stores during fiscal 2006.  For the thirty-nine weeks ended October 1,
2006, we have recognized $9.1 million in store closure expenses, of which $3.7
million is related to the loss on the disposal of fixed assets.

                                       Movie    Hollywood
                                      Gallery     Video       Total
                                    ----------  ---------  ---------
Store closure reserve:
Balance as of January 1, 2006       $   10,112  $   3,613   $ 13,725
Additions and
 adjustments                             5,065       (216)     4,849
Reclassifications (1)                   (1,921)         -     (1,921)
Payments                                (3,808)      (564)    (4,372)
                                    ----------  ---------   --------
Balance as of October 1, 2006       $    9,448  $   2,833   $ 12,281
                                    ==========  =========   ========

(1) In the first quarter of fiscal 2006, $1.9 million of accrued estimated
fixed assets disposals were reclassified from current liabilities into
property, furnishings and equipment, net.

Merger and Restructuring

During the fourth quarter of fiscal 2005 we notified 101 Movie Gallery
associates that their positions would be relocated or eliminated as part of our
integration plan to consolidate Finance, Accounting, Treasury, Product,
Logistics, Human Resources and Payroll functions at our Wilsonville, Oregon
support center. The affected individuals are required to render service for a
range of 10 to 49 weeks in order to receive termination benefits.  We currently
estimate that the total cost of providing severance, retention incentives and
outplacement services to all impacted associates will be approximately
$2.5 million, of which approximately $1.2 million and $1.3 million was
recognized during the fiscal year ended January 1, 2006 and the thirty-nine
weeks ended October 1, 2006, respectively, in accordance with SFAS No. 146,
"Accounting for Costs Associated with Disposal and Exit Activities."
Severance, retention incentives and outplacement services costs are recognized
in store operating expenses and general and administrative expense.  Cash
payments of $1.4 million were charged to the reserve during the thirty-nine
weeks ended October 1, 2006.

The integration plan was amended in the second quarter of fiscal 2006 with
regard to the Human Resource Processing and Benefits functions within the Human
Resources department. We decided to consolidate substantially all of these
functions to the Dothan, Alabama corporate offices, and the affected Hollywood
employees were notified that their positions will be relocated.

We established merger reserves, which were treated as liabilities of the
acquired Hollywood business at the date of acquisition, relating to executives
and other employees that were terminated shortly after the merger, including
some that were terminated as part of our integration efforts, in accordance
with EITF 95-3, "Recognition of Liabilities in Connection with a Purchase
Business Combination."  During the second quarter of fiscal 2005, we notified
92 Hollywood employees of the decision to eliminate their positions in
connection with these integration efforts. We recorded a $6.6 million reserve
for costs associated with severance and benefits for the impacted individuals.
Payments to these individuals will be made over the severance period in
accordance with the severance agreements.  Total payments of $2.5 million and
$1.8 million were made for the fiscal year ended January 1, 2006 and the
thirty-nine weeks ended October 1, 2006, respectively, leaving a $2.3 million
reserve as of October 1, 2006.

                                       Movie    Hollywood
                                      Gallery     Video      Total
Termination benefits:               ----------  ---------   --------
Balance as of January 1, 2006       $    1,190  $   4,116   $  5,306
Additions and
 adjustments                             1,301          -      1,301
Payments                                (1,410)    (1,825)    (3,235)
                                    ----------  ---------   --------
Balance as of October 1, 2006       $    1,081  $   2,291   $  3,372
                                    ==========  =========   ========

Estimated future
 additions and
 adjustments                        $       50  $       -   $     50
Total termination
 benefits cost                      $    2,541  $   6,655   $  9,196


7.  Long-Term Debt

Long term debt consists of the following (in thousands):


                                           January 1,   October 1,
           Instrument                        2006          2006
-----------------------------------       ----------   ----------

Movie Gallery senior notes                $  321,489   $  321,905
Credit Facility:
  Term A Loan                                 85,500       71,447
  Term B Loan                                746,250      689,915
  Revolving credit facility                    6,862       20,004
 Hollywood senior subordinated notes             450          450
 Capital leases                                  678          209
                                          -----------  ----------
 Total                                     1,161,229    1,103,930
 Less current portion                        (78,146)    (781,559)
                                          -----------  ----------
                                          $1,083,083   $  322,371
                                          ===========  ==========

As of October 1, 2006, we were in compliance with our Credit Facility financial
covenants.   We anticipate complying with the financial covenants contained in
the Credit Facility, as amended, at each test date through the remainder of
fiscal 2006.  However, unless we are successful in obtaining an additional
amendment to the financial covenants in our Credit Facility, our projected
operating results indicate that we will fail the more restrictive financial
covenant tests effective as of April 1, 2007.  As a result, in accordance with
EITF 86-30, "Classification of Obligations When a Violation is Waived by a
Creditor," all amounts outstanding under the Credit Facility have been
classified as current liabilities as of October 1, 2006.

To the extent such a breach occurs, one or more events of default, including
cross-defaults between multiple components of our indebtedness, could result.
These events of default could permit our creditors to declare all amounts owing
to be immediately due and payable and to terminate any commitments to make
further extensions of credit.  If we are unable to repay our indebtedness, our
secured creditors could proceed against the collateral securing the
indebtedness owed to them.

If amounts outstanding under the Credit Facility were accelerated by the
lenders due to a covenant violation, amounts under other agreements, such as
the indenture governing our 11% Senior Notes and certain leases, could also
become due and payable immediately.  Should the amounts outstanding under the
Credit Facility be accelerated and become due and payable because of our
failure to comply with applicable debt covenants in the future, we would be
required to search for alternative measures to finance current and ongoing
obligations of our business.  There can be no assurance that such financing
would be available on acceptable terms, if at all.  Our ability to obtain
future financing or to sell assets to provide additional funding could be
adversely affected because we have substantial indebtedness and substantially
all of our assets have been secured as collateral under the Credit Facility.
In addition, our financial results, our substantial indebtedness, and our
reduced credit ratings could adversely affect the availability and terms of
financing for us.  Further, uncertainty surrounding our ability to finance our
obligations has caused some of our trade creditors to impose increasingly less
favorable terms, and continuing uncertainty could result in even more
unfavorable terms from our trade creditors.  Any of these scenarios could
adversely impact our liquidity and results of operations.

We are exploring several alternative strategies to facilitate further
amendments to or a refinancing of our Credit Facility, including, among other
things, raising additional equity, sale/leaseback transactions, and subleasing
and restructuring leases at our stores.  We cannot assure you that any of these
actions will be successful, or that further debt amendments or additional debt
or equity financings can be obtained on acceptable terms, if at all.

Credit Facility

The Credit Facility, which we entered into in connection with our acquisition
of Hollywood Entertainment Corporation ("Hollywood"), provides for aggregate
borrowings of $836.4 million, consisting of a five-year $75.0 million revolving
credit facility due April 27, 2010 (the "Revolver") and two term loans in an
aggregate principal amount of $761.4 million as of October 1, 2006.  Term Loan
A is a $71.5 million loan that matures on April 27, 2010, and Term Loan B is a
$689.9 million loan that matures on April 27, 2011.  At October 1, 2006, we had
$43.8 million drawn under the Revolver, comprised of $23.8 million in letters
of credit and $20.0 million in borrowings.

On March 15, 2006, we executed a second amendment to the Credit Facility,
effective through the fourth quarter of 2006 that relaxed financial covenants,
increased restrictive operating covenants and increased interest rate margins.
The quarterly financial covenants revert to the original covenants commencing
with the first quarter of 2007.

We accounted for the second amendment as a modification pursuant to EITF No.
96-19, "Debtor's Accounting for a Modification or Exchange of Debt
Instruments," and accordingly have continued to defer $19.0 million of
unamortized deferred financing costs associated with the Credit Facility.  We
incurred significant fees related to the second amendment totaling $5.5
million, which have been deferred in accordance with EITF 96-19 and will be
amortized over the remaining term of the Credit Agreement.

Borrowings under the Term Loan A and the Revolver bear interest at LIBOR plus
the following margin based upon a leverage ratio described below:

                         Leverage Ratio       LIBOR Margin
                            > 4.00                5.00%
                          3.25 - 4.00             3.50%
                          2.75 - 3.25             2.75%
                          2.25 - 2.75             2.50%
                          1.75 - 2.25             2.25%
                            < 1.75                2.00%

Borrowings under the Term Loan B bear interest at a rate of LIBOR plus 5.25% if
our leverage ratio exceeds 4.00; otherwise the rate will be LIBOR plus 3.75%.
As of October 1, 2006, the Revolver/Term Loan A and Term Loan B interest rates
are 10.37% and 10.62%, respectively.  When the leverage ratio is greater than
or equal to 4.00, at our discretion, we can elect to defer payment of 0.50% of
the Term Loan A, Term Loan B and Revolver interest as non-cash interest, which
will be capitalized into the loans (with compounding interest).  For the
thirteen and thirty-nine weeks ended October 1, 2006, we have recapitalized
$1.0 million and $2.0 million of interest, respectively.

The Credit Facility is fully and unconditionally guaranteed on a joint and
several basis by our domestic subsidiaries.  The Credit Facility is secured by
first priority security interests in, and liens on, substantially all of our
direct and indirect subsidiaries' tangible and intangible assets (other than
leasehold mortgages on stores) and first priority pledges of all the equity
interests owned by us in our existing and future direct and indirect wholly
owned domestic subsidiaries and 66 2 / 3 % of the equity interests owned by us
in our existing and future wholly owned non-domestic subsidiaries.

The Credit Facility requires us to meet certain financial covenants including a
leverage ratio test, a fixed charge coverage ratio test and an interest
coverage test.  Each of these covenants is calculated on trailing four quarter
results based on specific definitions that are contained in the credit
agreement.  In general terms, the leverage ratio is a measurement of total net
indebtedness relative to operating cash flow.  The fixed charge coverage ratio
is a measurement of operating cash flow plus rent relative to total fixed
charges including rent, scheduled principal payments, and cash interest.  The
interest coverage ratio is a measurement of operating cash flow relative to
interest expense.  The covenant levels under the Credit Facility are as
follows:

                   Leverage        Fixed Charge     Interest Coverage
                     Ratio        Coverage Ratio          Ratio
      2006 Q3         6.75             1.00                1.45
      2006 Q4         6.50             1.00                1.45
      2007 Q1         2.25             1.10                3.00
      2007 Q2         2.25             1.10                3.00

The Credit Facility also imposes certain other restrictions on us, including
restrictions on our ability to: incur debt; grant liens; provide guarantees in
respect of obligations of any other person; pay dividends; make loans and
investments; sell our assets; make redemptions and repurchases of capital
stock; make capital expenditures; prepay, redeem or repurchase debt; engage in
mergers or consolidations; engage in sale/leaseback transactions and affiliate
transactions; change our business; amend certain debt and other material
agreements; issue and sell capital stock of subsidiaries; and make
distributions from subsidiaries.

Term Loan A and Term Loan B require aggregate quarterly prepayments of
principal in the amounts of 5.0% and 0.25%, respectively, of the outstanding
balances through the first quarter of fiscal 2010, after which the mandatory
Term Loan B prepayments escalate.  In addition to these prepayments, the Credit
Facility also requires us to make prepayments in an amount equal to 100% of any
excess cash flow, which generally represents the amount of cash generated by
the Company but not used towards operations, debt service, or investments.
Based upon our operating results for the thirty-nine weeks ended October 1,
2006 and projected operating results for the remainder of fiscal 2006, we do
not believe that we that we will be required to make an excess cash flow
prepayment for fiscal 2006.

11% Senior Notes due 2012

Also in connection with the Hollywood acquisition, we issued $325.0 million in
an aggregate principal amount of 11% senior notes due 2012 (the "Senior
Notes").  The indenture governing the Senior Notes imposes certain restrictions
on us, including restrictions on our ability to: incur debt; grant liens;
provide guarantees in respect of obligations of any other person; pay
dividends; make loans and investments; sell our assets; make redemptions and
repurchases of capital stock; make capital expenditures; prepay, redeem or
repurchase debt; engage in mergers or consolidations; engage in sale/leaseback
transactions and affiliate transactions; change our business; amend certain
debt and other material agreements; issue and sell capital stock of
subsidiaries; and make distributions from subsidiaries.

The indenture governing the Senior Notes also contains a covenant requiring us
to file on a timely basis the periodic reports required by the Exchange Act.
Accordingly, prior to filing this Quarterly Report on Form 10-Q, the Company
was in violation of this covenant.  We believe that with this filing the
violation was cured.  In addition, the senior notes may be accelerated if an
event of default occurs under our Credit Facility. Because no events of default
have occurred under the Credit Facility as of October 1, 2006 and through the
date of our filing of the Form 10-Q no events of acceleration have occurred.
Therefore, we believe that the Senior Notes continue to be appropriately
classified as long-term as of October 1, 2006.

Interest Rate Hedge

Our Credit Facility requires that for a period of two years subsequent to
entering into the Credit Facility, a portion of our floating rate debt is to be
converted to fixed rate debt.  In fiscal 2005, we entered into two, two-year
floating-to-fixed interest rate swaps for a total amount of $280.0 million.
Under the terms of both of the swap agreements, we paid fixed interest on the
$280.0 million at a rate of 4.06% and received floating interest based on
three-month LIBOR.  The scheduled termination date for both of these swaps was
June 29, 2007.

Subsequent to the thirty-nine weeks ended October 1, 2006, on October 20, 2006,
we settled both of these interest rate swaps (prior to their scheduled
termination dates) and received $2.5 million in cash.

On October 20, 2006, we entered into a new floating-to-fixed interest rate swap
for an amount of $140.0 million.  Under the terms of the new swap agreement, we
will pay fixed interest on the $140.0 million at a rate of 5.41% and receive
floating interest based on three-month LIBOR.  The termination date for the new
swap agreement is April 30, 2007.

Also on October 20, 2006, we entered into a new 5.50% interest rate cap
agreement for an amount of $140.0 million.  Under the terms of the new cap
agreement we will pay floating rate interest up to a maximum of 5.50% and
receive floating rate interest based on three-month LIBOR.  The termination
date for the new 5.50% cap agreement is April 27, 2007.


8.  Comprehensive Income

Comprehensive income is as follows (in thousands):

                                Thirteen Weeks Ended   Thirty-nine Weeks Ended
                               ----------------------   ----------------------
                               October 2,   October 1,  October 2,   October 1,
                                  2005         2006        2005         2006
                               ---------    ---------   ---------    ---------
Net loss                       $ (12,469)   $ (36,111)  $  (6,265)    $(10,659)
Foreign currency translation
 adjustment                        2,398         (523)      1,044          808
Change in value of interest
 rate swap                             -         (135)          -         (282)
                               ---------    ---------   ---------    ---------
Comprehensive loss             $ (10,071)   $ (36,769)  $  (5,221)   $ (10,133)
                               =========    =========   =========    =========

9.  Commitments and Contingencies

Hollywood and the members of its former board of directors (including
Hollywood's former chairman, Mark Wattles) were named as defendants in several
lawsuits in the Circuit Court in Clackamas County, Oregon. The lawsuits, filed
between March 31, 2004 and April 14, 2004, asserted breaches of duties
associated with the merger agreement executed by Hollywood with a subsidiary of
Leonard Green & Partners, L.P., or LGP. The Clackamas County actions were later
consolidated and the plaintiffs filed an Amended Consolidated Complaint
alleging four claims for relief against Hollywood's former board members
arising out of the merger of Hollywood with Movie Gallery. The purported four
claims for relief are breach of fiduciary duty, misappropriation of
confidential information, failure to disclose material information in the proxy
statement in support of the Movie Gallery merger, and a claim for attorneys'
fees and costs. The Amended Consolidated Complaint also names UBS Warburg and
LGP as defendants. Following the merger with Movie Gallery, the plaintiffs
filed a Second Amended Consolidated Complaint.  The plaintiffs restated their
causes of action and generally allege that the defendants adversely impacted
the value of Hollywood through the negotiations and dealings with LGP.
Hollywood and the former members of its board have also been named as
defendants in a separate lawsuit entitled JDL Partners, L.P. v. Mark J. Wattles
et al. filed in Clackamas County, Oregon, Circuit Court on December 22, 2004.
This lawsuit, filed before Hollywood's announcement of the merger agreement
with Movie Gallery, alleges breaches of fiduciary duties related to a bid by
Blockbuster Inc. to acquire Hollywood, as well as breaches related to a loan to
Mr. Wattles that Hollywood forgave in December 2000. On April 25, 2005, the JDL
Partners action was consolidated with the other Clackamas County lawsuits.  The
plaintiffs seek damages and attorneys' fees and costs.  Hollywood denies these
allegations and is vigorously defending this lawsuit.

Hollywood was named as a defendant in a sexual harassment lawsuit filed in the
Supreme Court of the State of New York, Bronx County on April 17, 2003.  The
action, filed by eleven former female employees, alleges that an employee, in
the course of his employment as a store director for Hollywood, sexually
harassed and assaulted certain of the plaintiffs, and that Hollywood and its
members of management failed to prevent or respond adequately to the employee's
alleged wrongdoing.  The plaintiffs seek unspecified damages, pre-judgment
interest and attorneys' fees and costs.  Hollywood denies these allegations and
is vigorously defending this lawsuit.

In addition, we have been named to various other claims, disputes, legal
actions and other proceedings involving contracts, employment and various other
matters.  A negative outcome in certain of the ongoing litigation could harm
our business, financial condition, liquidity or results of operations.  In
addition, prolonged litigation, regardless of which party prevails, could be
costly, divert management attention or result in increased costs of doing
business. We believe we have provided adequate reserves for contingencies and
that the outcome of these matters should not have a material adverse effect on
our consolidated results of operation, financial condition or liquidity.

At October 1, 2006, the legal contingencies reserve, net of expected recoveries
from insurance carriers, was $1.6 million, of which $1.1 million relates to
pre-acquisition contingencies.  Adjustments related to pre-acquisition
contingencies made after the anniversary date of the acquisition will be
recognized in the income statement in the period when such revisions are made.
All other adjustments related to matters existing as of the date of acquisition
of Hollywood will be recognized in the income statement in the period when such
revisions are made.

Boards, Inc.

By letter dated August 29, 2005, Boards, Inc. ("Boards"), an entity controlled
by Mark Wattles, the founder and former Chief Executive Officer of Hollywood,
exercised a contractual right to require Hollywood to purchase all of the 20
Hollywood Video stores including 17 Game Crazy stores owned and operated by
Boards pursuant to a "put" option contained in the license agreement for these
stores.  In accordance with the terms of the license agreement, Hollywood and
Boards have agreed to the retention of a valuation expert and are proceeding
with the valuation of the stores.  As of October 1, 2006 the purchase price has
not yet been determined.  We anticipate that the transaction could close in
2007.

10.  Segment Reporting

With the acquisition of Hollywood as of April 27, 2005, management began
evaluating the operating results of the Company based on three segments, Movie
Gallery, Hollywood Video, and Game Crazy.  The segments are based on store
branding.  Movie Gallery represents 2,609 video stores serving mainly rural
markets in the United States, Canada, and Mexico, Hollywood Video represents
2,049 video stores serving predominantly urban markets, and Game Crazy
represents 643 in-store departments and 17 free-standing stores serving the
game market in urban locations.  We measure segment profit as operating income
(loss), which is defined as income (loss) before interest, and other financing
costs, equity in losses of unconsolidated entities and income taxes.
Information on our reportable operating segments is as follows (in thousands):


                                    Thirteen Weeks Ended
                                      October 2, 2005 (1)
                        -------------------------------------------
                          Movie     Hollywood   Game
                         Gallery      Video     Crazy      Total
                        ----------  ---------  --------  ----------
Revenues                $  197,185 $  316,115  $ 59,142  $  572,442
Depreciation and
 amortization                9,448     19,701     2,278      31,427
Rental amortization         25,803     34,687         -      60,490
Operating income(loss)        (652)    10,508    (4,832)      5,024
Goodwill, net              162,142    463,743         -     625,885
Total assets               523,108  1,230,589   116,391   1,870,088
Purchases of property,
 furnishings and
 equipment                  11,672      4,351       400      16,423

(1) Rental amortization includes $10.1 million of VHS residual value
adjustment

                                    Thirteen Weeks Ended
                                       October 1, 2006
                        -------------------------------------------
                          Movie     Hollywood   Game
                         Gallery      Video     Crazy      Total
                        ----------  ---------  --------  ----------
Revenues                $  202,577 $  312,270  $ 68,142  $  582,989
Depreciation and
 amortization               10,545     15,320     2,280      28,145
Rental amortization         21,854     25,655         -      47,509
Operating income(loss)     (14,799)    10,990      (317)     (4,126)
Goodwill, net                  147    117,479         -     117,626
Total assets               353,110    717,262    95,555   1,165,927
Purchases of property,
 furnishings and
 equipment                   1,455      2,545        54       4,054


                                    Thirty-nine Weeks Ended
                                        October 2, 2005 (2)
                        -------------------------------------------
                          Movie     Hollywood   Game
                         Gallery(3)   Video     Crazy      Total
                        ----------  ---------  --------  ----------
Revenues                 $ 630,038  $ 572,650 $ 108,274 $ 1,310,962
Depreciation and
 amortization               27,342     27,463     5,401      60,206
Rental amortization         84,867     67,151         -     152,018
Operating income(loss)      18,462     25,873    (6,752)     37,583
Goodwill, net              162,142    463,743         -     625,885
Total assets               523,108  1,230,589   116,391   1,870,088
Purchases of property,
 furnishings and
 equipment                  40,403      7,874       596      48,873

(2) Hollywood Video and Game Crazy from April 27, 2005 through October 2,
2005.

(3) Rental amortization includes $10.1 million of VHS residual value
adjustment.

                                   Thirty-nine Weeks Ended
                                       October 1, 2006
                        -------------------------------------------
                          Movie     Hollywood   Game
                         Gallery      Video     Crazy      Total
                        ----------  ---------  --------  ----------
Revenues                $  656,205 $1,016,881  $205,556  $1,878,642
Depreciation and
 amortization               28,930     42,855     7,429      79,214
Rental amortization         74,524     92,735         -     167,259
Operating income(loss)      (1,256)    82,097    (3,217)     77,624
Goodwill, net                  147    117,479         -     117,626
Total assets               353,110    717,262    95,555   1,165,927
Purchases of property,
 furnishings and
 equipment                  12,164      6,834       147      19,145


11.  Asset Retirement Obligation

We record certain obligations associated with the requirement to restore leased
premises to their original condition for the removal of certain long-lived
assets under the guidance in FASB Statement No. 143, "Accounting for Asset
Retirement Obligations."  Under this standard, we recognize the fair value of a
liability for an asset retirement obligation in the period in which the
obligation is incurred if we can make a reasonable estimate of the liability's
fair value. The associated asset retirement cost is capitalized as part of the
carrying amount of the long-lived asset and depreciated over the remaining life
of the underlying asset, and the associated liability is accreted to the
estimated fair value of the obligation at the settlement date through periodic
accretion charges to the consolidated statement of operations.  When the
obligation is settled, any difference between the final cost and the recorded
amount is recognized as income or loss on settlement.

During the preparation and review of our Quarterly Report on Form 10-Q for the
thirteen and thirty-nine week periods ended October 1, 2006, we realized that
we had not properly applied the guidance as set out above.  As a result of this
review, certain errors were identified and were corrected in the third quarter
of 2006.  We increased our property and equipment by $1.4 million, other long-
term liabilities by $8.7 million, and operating expenses by $7.3 million.  The
impact of these corrections on our financial position, results of operations,
and cash flows for the fiscal years ended January 4, 2004, January 2, 2005, and
January 1, 2006, were not material.  Although the correction of the errors is
material to the third quarter of 2006 it is not material to fiscal 2006 taken
as a whole.

The following is an analysis of our asset retirement obligation if we would
have properly implemented FASB Statement No. 143 as of January 4, 2003 for the
fiscal years ended 2003, 2004, 2005, and the quarters ended April 2, 2006, July
2, 2006, and October 1, 2006 (in thousands):


                                                                   Amount
                                                                   -------
Asset retirement obligation as of January 4, 2003                  $2,462
Liability accrued upon lease commencement                             554
Liability settled                                                     (73)
Accretion of discount                                                 104
                                                                   -------
Asset retirement obligation as of January 4, 2004                   3,047
Liability accrued upon lease commencement                             529
Liability settled                                                    (125)
Accretion of discount                                                 126
                                                                   -------
Asset retirement obligation as of January 2, 2005                   3,577
Liability accrued upon lease commencement/acquisition               5,219
Liability settled                                                    (322)
Accretion of discount                                                 276
                                                                   -------
Asset retirement obligation as of January 1, 2006                   8,750
Liability accrued upon lease commencement                              61
Liability settled                                                     (96)
Accretion of discount                                                  87
                                                                   -------
Asset retirement obligation as of April 2 2006                      8,802
Liability accrued upon lease commencement                              25
Liability settled                                                    (106)
Accretion of discount                                                  86
                                                                   -------
Asset retirement obligation as of July 2, 2006                      8,807
Liability accrued upon lease commencement                              17
Liability settled                                                    (203)
Accretion of discount                                                  85
                                                                   -------
Asset retirement obligation as of October 1, 2006                  $8,706


The following table illustrates the effect on net income or loss and related
per share amounts as if we had properly applied the guidance of FASB Statement
No. 143 on January 4, 2003 on each of the fiscal years ended 2003, 2004, and
2005 and the first and second quarters of 2006:


                                                 Fiscal Year
                                 --------------------------------------------
                               (Amounts in thousands, except per share amounts)
                                      2003           2004           2005
                                 -------------- -------------- --------------
Net income (loss) as reported          $49,436        $49,488      $(552,740)
Pro forma net income                   $48,453        $49,209      $(557,649)

Basic earnings per share:
Net income (loss) per share as reported  $1.53          $1.54        $(17.53)
Pro forma net income per share           $1.50          $1.53        $(17.69)

Diluted earnings per share:
Net income per share as reported         $1.48          $1.52        $(17.53)
Pro forma net income per share           $1.45          $1.51        $(17.69)

                                                        Quarter Ended
                                                 ----------------------------
(Amounts in thousands, except per share amounts)     April 2,      July 2,
                                                       2006          2006
                                                 -------------- -------------
Net income (loss) as reported                          $40,347      $(14,898)
Pro forma net income                                   $40,198      $(15,045)

Basic earnings per share:
Net income (loss) per share as reported                  $1.27        $(0.47)
Pro forma net income per share                           $1.27        $(0.47)

Diluted earnings per share:
Net income per share as reported                         $1.27        $(0.47)
Pro forma net income per share                           $1.27        $(0.47)


12. Consolidating Financial Statements

The following tables present condensed consolidating financial information for:
(a) Movie Gallery, Inc. (the "Parent") on a stand-alone basis; (b) on a
combined basis, the guarantors of the 11% Senior Notes ("Subsidiary
Guarantors"), which include Movie Gallery US, LLC; Hollywood Entertainment
Corporation; M.G.A. Realty I, LLC; M.G. Digital, LLC; and (c) on a combined
basis, the Non-Guarantor Subsidiaries, which include Movie Gallery Canada,
Inc., Movie Gallery Mexico, Inc., S. de R.L. de C.V., and MG Automation, Inc.
Each of the Subsidiary Guarantors is wholly-owned by Movie Gallery, Inc. The
guarantees issued by each of the Subsidiary Guarantors are full, unconditional,
joint and several. Accordingly, separate financial statements of the wholly-
owned Subsidiary Guarantors are not presented because the Subsidiary Guarantors
are jointly, severally and unconditionally liable under the guarantees, and we
believe separate financial statements and other disclosures regarding the
Subsidiary Guarantors are not material to investors. Furthermore, there are no
significant legal restrictions on the Parent's ability to obtain funds from its
subsidiaries by dividend or loan.

The Parent is a Delaware holding company and has no independent operations
other than investments in subsidiaries and affiliates.

Consolidating Statement of Operations
Thirteen weeks ended October 2, 2005
(unaudited, in thousands)


                             --------------------------------------------------
                                                     Non-
                                       Guarantor  Guarantor
                                         Subsid-   Subsid-    Elimin-   Consol-
                               Parent    iaries    iaries     ations    idated
                             --------- ---------  --------- --------- --------
Revenue:
  Rentals                   $       - $ 452,502  $  20,584 $       - $ 473,086
  Product sales                     -    96,679      2,677         -    99,356
                            --------- ---------  --------- --------- ---------
Total revenue                       -   549,181     23,261         -   572,442

Cost of sales:
  Cost of rental revenue            -   131,161      5,075         -   136,236
  Cost of product sales             -    68,465      1,615         -    70,080
                            --------- ---------  --------- --------- ---------
Gross profit                        -   349,555     16,571         -   366,126


Operating costs and expenses:
 Store operating expenses           -   307,766     12,153         -   319,919
 General and administrative       171    38,561      1,288         -    40,020
 Amortization of intangibles        -     1,070         93         -     1,163
                             --------  --------   --------  -------- ---------
Operating income(loss)           (171)    2,158      3,037         -     5,024

Interest expense, net         (24,052)     (241)      (134)        -   (24,427)
Equity in earnings (loss)
 of subsidiaries                3,194     1,745         -     (4,939)        -
                             --------  --------   --------  -------- ---------
Income (loss) before
 income taxes                 (21,029)    3,662      2,903    (4,939)  (19,403)
Income taxes (benefit)         (8,560)      468      1,158         -    (6,934)
                             --------  --------   --------  -------- ---------
Net income (loss)            $(12,469) $  3,194   $  1,745  $ (4,939)$ (12,469)
                             ========  ========   ========  ======== =========


Consolidating Statement of Operations
Thirteen weeks ended October 1, 2006
(unaudited, in thousands)


                            --------------------------------------------------
                                                     Non-
                                       Guarantor  Guarantor
                                         Subsid-   Subsid-   Elimin-   Consol-
                               Parent    iaries    iaries    ations    idated
                            --------- ---------  --------- --------- ---------
Revenue:
  Rentals                   $       - $ 454,002  $  21,777 $      - $ 475,779
  Product sales                     -   104,858      2,352        -   107,210
                            --------- ---------  --------- --------- ---------
Total revenue                       -   558,860     24,129        -   582,989

Cost of sales:
  Cost of rental revenue            -   133,701      7,888        -   141,589
  Cost of product sales             -    76,347      1,813        -    78,160
                            --------- ---------  --------- --------- ---------
Gross profit                        -   348,812     14,428        -   363,240


Operating costs and expenses:
 Store operating expenses           -   309,103     13,540        -   322,643
 General and administrative     3,167    39,133      1,722        -    44,022
 Amortization of intangibles        -       665         36        -       701
                             --------  --------   --------  -------- ---------
Operating income(loss)         (3,167)      (89)      (870)       -    (4,126)
Interest expense, net         (21,063)  (10,014)      (108)       -   (31,185)
Equity in earnings (loss)
 of subsidiaries              (11,022)     (361)         -   11,383         -
                             --------  --------   --------  -------- ---------
Income (loss) before
 income taxes                 (35,252)  (10,464)      (978)  11,383   (35,311)
Income taxes (benefit)            859       558       (617)       -       800
                             --------  --------   --------  -------- ---------
Net income (loss)            $(36,111) $(11,022)   $  (361) $11,383  $(36,111)
                             ========  ========   ========  ======== =========


Consolidating Statement of Operations
Thirty-nine weeks ended October 2, 2005
(unaudited, in thousands)


                           --------------------------------------------------
                                                     Non-
                                       Guarantor  Guarantor
                                         Subsid-   Subsid-   Elimin-   Consol-
                               Parent    iaries    iaries    ations    idated
                           --------- ----------  --------- --------- ---------
Revenue:
  Rentals                  $       - $1,056,278  $  53,383 $      - $1,109,661
  Product sales                    -    195,300      6,001        -    201,301
                           --------- ----------  --------- --------- ---------
Total revenue                      -  1,251,578     59,384        -  1,310,962

Cost of sales:
  Cost of rental revenue           -    328,867     16,292        -    345,159
  Cost of product sales            -    137,981      3,915        -    141,896
                           --------- ----------  --------- --------- ---------
Gross profit                       -    784,730     39,177        -    823,907


Operating costs and expenses:
 Store operating expenses          -    659,461     31,131        -    690,592
 General and administrative      372     89,125      3,517        -     93,014
 Amortization of intangibles       -      2,544        174        -      2,718
                            --------  ---------   --------  -------- ---------
Operating income(loss)          (372)    33,600      4,355        -     37,583

Interest expense, net        (40,606)      (669)      (155)       -    (41,430)
Write-off bridge financing    (4,234)         -          -        -     (4,234)
Equity in losses of
 unconsolidated entities        (806)         -          -        -       (806)
Equity in earnings (loss)
 of subsidiaries              23,118      2,543          -   (25,661)       -
                            --------  ---------   --------  -------- ---------
Income (loss) before
 income  taxes               (22,900)    35,474      4,200   (25,661)   (8,887)
Income taxes (benefit)       (16,635)    12,356      1,657         -    (2,622)
                            --------  ---------   --------  -------- ---------
Net income (loss)           $ (6,265) $  23,118   $  2,543  $(25,661) $ (6,265)
                            ========  =========   ========  ======== =========


Consolidating Statement of Operations
Thirty-nine weeks ended October 1, 2006
(unaudited, in thousands)


                           ---------------------------------------------------
                                                    Non-
                                       Guarantor Guarantor
                                         Subsid-  Subsid-   Elimin-    Consol-
                              Parent     iaries   iaries    ations     idated
                           --------- ---------- --------- --------- ----------
Revenue:
  Rentals                  $       - $1,475,068 $  64,686  $      - $1,539,754
  Product sales                    -    331,422     7,466         -    338,888
                           --------- ---------- --------- ---------  ---------
Total revenue                      -  1,806,490    72,152         -  1,878,642

Cost of sales:
  Cost of rental revenue           -    444,442    25,631         -    470,073
  Cost of product sales            -    243,097     6,358         -    249,455
                           --------- ---------- --------- ---------  ---------
Gross profit                       -  1,118,951    40,163        -   1,159,114


Operating costs and expenses:
 Store operating expenses          -    903,956    40,539         -    944,495
 General and administrative    6,065    124,762     4,026         -    134,853
 Amortization of intangibles       -      2,034       108         -      2,142
                            --------  ---------  --------  --------  ---------
Operating income(loss)        (6,065)    88,199    (4,510)        -     77,624

Interest expense, net        (61,209)   (27,898)     (224)        -    (89,331)
Equity in earnings (loss)
 of subsidiaries              57,109     (2,956)        -   (54,153)        -
                            --------  ---------  --------  --------  ---------
Income (loss) before
 income taxes                (10,165)    57,345    (4,734)  (54,153)  (11,707)
Income taxes (benefit)           494        236    (1,778)        -    (1,048)
                            --------  ---------  --------  --------  ---------
Net income (loss)           $(10,659) $  57,109  $ (2,956) $(54,153) $(10,659)
                            ========  =========  ========  ========  =========


Condensed Consolidating Balance Sheet
January 1, 2006
(in thousands)

                             --------------------------------------------------
                                                   Non-
                                       Guarantor Guarantor
                                         Subsid-  Subsid-   Elimin-    Consol-
                               Parent    iaries   iaries    ations     idated
                             --------- --------- --------  ---------  ---------
Assets
Current assets:
 Cash and cash equivalents  $        - $ 133,901 $  1,337 $        -  $ 135,238
 Merchandise inventory, net          -   132,757    3,693          -    136,450
 Prepaid expenses                   19    39,495    1,879          -     41,393
 Store supplies and other            -    22,177    2,017          -     24,194
                             --------- --------- --------  ---------  ---------
Total current assets                19   328,330    8,926          -    337,275

Rental inventory, net                -   354,091   17,474          -    371,565
Property, furnishings and
 equipment, net                      -   315,604   16,614          -    332,218
Goodwill, net                        -   118,404        -          -    118,404
Other intangibles, net               -   184,271      400          -    184,671
Deposits and other assets       32,292     8,127      576          -     40,995
Investments in subsidiaries    902,135    19,790        -   (921,925)         -
                             --------- --------- --------  ---------  ---------
Total assets                 $ 934,446$1,328,617 $ 43,990  $(921,925)$1,385,128
                             ========= ========= ========  =========  =========

Liabilities and stockholders' equity (deficit):
Current liabilities:
 Current maturities of
   long-term obligations    $   77,557 $     533 $     56  $       - $  78,146
 Current maturities of
   financing obligations             -     4,492        -          -     4,492
 Accounts payable                    -   230,436    6,553          -   236,989
 Accrued liabilities           (13,378)   99,608    2,230          -    88,460
 Accrued payroll                   386    37,164    1,074          -    38,624
 Accrued interest                7,130        58       32          -     7,220
 Deferred revenue                    -    38,709      491          -    39,200
                             --------- --------- --------  --------- ---------
Total current liabilities       71,695   411,000   10,436          -   493,131

Long-term obligations,
  less current portion       1,075,682       538    6,863          - 1,083,083
Other accrued liabilities            -    20,209    1,453          -    21,662
Deferred income taxes                -      (345)     415          -        70
Intercompany promissory note
  (receivable)                (384,200)  384,200        -          -         -
Payable to (receivable from)
  affiliate                    384,087  (389,120)   5,033          -         -
Stockholders' equity
  (deficit)                   (212,818)  902,135   19,790   (921,925) (212,818)
                             --------- --------- --------  --------- ---------
Total liabilities and
 stockholders' equity
 (deficit)                   $ 934,446$1,328,617 $ 43,990  $(921,925)$1,385,128
                             ========= ========= ========  =========  =========


Condensed Consolidating Balance Sheet
October 1, 2006
(unaudited, in thousands)

                             --------------------------------------------------
                                                   Non-
                                       Guarantor Guarantor
                                         Subsid-  Subsid-   Elimin-    Consol-
                               Parent    iaries   iaries    ations     idated
                             --------- --------- --------  ---------  ---------
Assets
Current assets:
 Cash and cash equivalents $       -   $  19,450 $    184  $      -   $  19,634
 Merchandise inventory, net        -     120,457    3,472         -     123,929
 Prepaid expenses                  -      49,342    1,884         -      51,226
 Store supplies and other          -      19,304    1,260         -      20,564
 Deferred income taxes, net        -           -        -         -           -
                            ---------   --------- --------  -------   ---------
Total current assets               -     208,553    6,800         -     215,353

Rental inventory, net              -     325,815   14,263         -     340,078
Property, furnishings and
 equipment, net                    -     257,425   14,916         -     272,341
Goodwill, net                      -     117,613       13         -     117,626
Other intangibles, net             -     182,490      313         -     182,803
Deposits and other assets     33,004       4,174      548         -      37,726
Investments in
 subsidiaries                871,487      18,110        -  (889,597)          -
                           ---------   --------- --------  --------- ----------
Total assets              $  904,491  $1,114,180 $ 36,853 $(889,597) $1,165,927
                           =========   =========  =======  ========  ==========

Liabilities and stockholders' equity (deficit):
Current liabilities:
 Current maturities of
  long-term obligations   $  781,366   $     193  $     -  $      -  $  781,559
Current maturities of
  financing obligations            -         982        -         -         982
 Accounts payable                  -      73,816    4,983         -      78,799
 Accrued liabilities         (10,704)     88,260      955         -      78,511
 Accrued payroll                 413      41,260    1,053                42,726
 Accrued interest             16,146           9       52         -      16,207
 Deferred revenue                  -      32,588      426         -      33,014
                          ----------   --------- --------  --------   ---------
Total current liabilities    787,221     237,108    7,469         -   1,031,798

Long-term obligations, less
 current portion             321,905         466        -         -     322,371
Other accrued liabilities          -      30,480    2,090         -      32,570
Deferred income taxes              -        (345)     433         -          88
Intercompany promissory note
 (receivable)               (384,200)    384,200       -          -          -
Payable to(receivable from)
 affiliate                   400,465    (409,216)   8,751         -          -
Stockholders' equity
 (deficit)                  (220,900)    871,487   18,110  (889,597)  (220,900)
                           ---------   --------- --------  --------   ---------
Total liabilities and
 stockholders' equity
 (deficit)                 $ 904,491  $1,114,180  $36,853 $(889,597) $1,165,927
                           =========  ========== ======== ========== ==========


Consolidating Condensed Statement of Cash Flow
Thirty-nine weeks ended October 2, 2005
(unaudited, in thousands)

                             -------------------------------------------------
                                                   Non-
                                      Guarantor  Guarantor
                                       Subsid-    Subsid-   Elimin-   Consol-
                               Parent  iaries     iaries    ations    idated
                             -------- ---------  --------  --------  ---------
Operating Activities:
Net income (loss)            $ (6,265) $ 23,118  $  2,543 $ (25,661) $  (6,265)
Equity earnings in
 subsidiaries                 (23,118)   (2,543)        -    25,661          -
Adjustments to reconcile
 net income to cash
 provided by (used in)
 operating activities:
Rental inventory
 amortization                       -   142,815     9,203         -    152,018
Purchases of rental
 inventory                          -  (111,656)   (8,479)        -   (120,135)
Purchase of rental
 inventory-base stock               -   (15,136)   (1,433)        -    (16,569)
Depreciation and
 intangibles amortization           -    57,927     2,279         -     60,206
(Gain) loss on disposal of
 property, furnishings, and
 equipment                          -       706       657         -      1,363
Stock based compensation          705       393         -         -      1,098
Tax benefit of stock
 options exercised              3,301         -         -         -      3,301
Amortization of debt
 issuance cost                  2,235         -         -         -      2,235
Deferred income taxes         (18,398)    5,313     1,528         -    (11,557)
Changes in operating
 assets and liabilities, net
 of business acquisitions:
  Extended viewing fees
   receivable, net                  -    20,259         -         -     20,259
  Merchandise inventory             -     8,658      (142)        -      8,516
  Other current assets            (10)   (3,098)     (840)        -     (3,948)
  Deposits and other assets       493    (2,418)     (128)        -     (2,053)
  Accounts payable                  -   (77,603)   (4,655)        -    (82,258)
  Accrued interest             29,168        (2)       27         -     29,193
  Accrued liabilities and
   deferred revenue             2,013     9,498     1,825         -     13,336
                             -------- ---------  --------  --------  ---------
Net cash (used in)
 provided by operating
 activities                    (9,876)   56,231     2,385         -     48,740

Investing Activities:
Business acquisitions,
 net of cash acquired      (1,092,282)   12,142   (16,125)        - (1,096,265)
Purchase of property,
 furnishings and equipment          -   (44,156)   (4,717)        -    (48,873)
Proceeds from disposal of
 Property, furnishings and
 Equipment                          -     2,107         -         -      2,107
Acquisition of construction
 phase assets, net                  -     2,154         -         -      2,154
Investment in subsidiaries       (354)   (8,149)        -     8,503          -
                             -------- ---------  --------  --------  ---------
Net cash used in investing
 activities                (1,092,636)  (35,902)  (20,842)    8,503 (1,140,877)

Financing Activities:
Repayment of capital
 lease obligations                  -      (265)        -         -       (265)
Intercompany payable/
 receivable                   (31,165)   36,550    (5,385)        -          -
Decrease in financing
 obligations                        -    (2,412)        -         -     (2,412)
Net borrowings on credit
 facilities                         -         -     9,046         -      9,046
Debt financing fees           (32,452)        -         -         -    (32,452)
Proceeds from issuance of
 debt                       1,166,120         -         -         -  1,166,120
Principal payments on
 debt                          (6,625)        -    (1,742)        -     (8,367)
Proceeds from exercise
 of stock options               5,318         -         -         -      5,318
Proceeds from employee
 stock purchase plan              169         -         -         -        169
Capital contribution
 from parent                        -       354     8,149    (8,503)         -
Dividend to parent              3,973    (3,973)        -         -          -
Payment of dividends           (2,827)        -         -         -     (2,827)
                             -------- ---------  --------  --------  ---------
Net cash provided
 by (used in) financing
 activities                 1,102,511    30,254    10,068    (8,503) 1,134,330

Effect of exchange rate
 changes on cash and
 cash equivalents                   -     1,044         -         -      1,044
                             -------- ---------  --------  --------  ---------
Increase (decrease) in
 cash and cash equivalents         (1)   51,627    (8,389)        -     43,237

Cash and cash equivalents at
 beginning of period                1    15,711     9,806         -     25,518
                             -------- ---------  --------  --------  ---------
Cash and cash equivalents
 at end of period            $      - $  67,338  $  1,417  $      -  $  68,755
                             ======== =========  ========  ========  =========


Consolidating Condensed Statement of Cash Flow
Thirty-nine weeks ended October 1, 2006
(unaudited, in thousands)

                             -------------------------------------------------
                                                   Non-
                                      Guarantor  Guarantor
                                       Subsid-    Subsid-   Elimin-   Consol-
                               Parent  iaries     iaries    ations    idated
                             -------- ---------  --------  --------  ---------
Operating Activities:
Net income (loss)            $(10,659) $ 57,109  $ (2,956) $(54,153) $ (10,659)
Equity earnings in
 subsidiaries                 (57,109)    2,956         -    54,153          -
Adjustments to reconcile
 net income to cash
 provided by (used in)
 operating activities:
Rental inventory
 amortization                       -   155,113    12,146         -    167,259
Purchases of rental
 inventory                          -  (116,585)   (8,661)        -   (125,246)
Purchase of rental
 inventory-base stock               -   (10,252)     (275)        -    (10,527)
Depreciation and
 intangibles amortization           -    76,245     2,969         -     79,214
Accretion on asset retirement
 obligations                        -     3,022         -         -      3,022
Gain on disposal of property,
 furnishings, and equipment         -     3,196       479         -      3,675
Stock based compensation        1,977        96         -         -      2,073
Amortization of debt
 issuance cost                  4,952         -         -         -      4,952
Deferred income taxes              (4)        4        18         -         18
Changes in operating
 assets and liabilities, net
 of business acquisitions:
  Merchandise inventory             -    12,413       221         -     12,634
  Other current assets             19    (7,846)      752         -     (7,075)
  Deposits and other assets         -     2,540        27         -      2,567
  Accounts payable                  -  (155,884)   (1,570)        -   (157,454)
  Accrued interest              9,015       (49)       20         -      8,986
  Accrued liabilities and
   deferred revenue             2,577   (10,349)     (736)        -     (8,508)
                             -------- ---------  --------  --------  ---------
Net cash provided
 by (used in) operating
 activities                   (49,232)   11,729     2,434         -    (35,069)

Investing Activities:
Business acquisitions,
 net of cash acquired               -      (300)      (19)        -       (319)
Purchase of property,
 furnishings and equipment          -   (17,502)   (1,643)        -    (19,145)
Proceeds from disposal of
 property, furnishings and
 equipment                          -     1,320         -         -      1,320
Acquisition of construction
 phase assets, net                  -     3,553         -         -      3,553
Investment in subsidiaries     88,576    (1,276)        -   (87,300)         -
                             -------- ---------  --------  --------  ---------
Net cash provided by
 (used in) investing
  activities                   88,576   (14,205)   (1,662)  (87,300)   (14,591)

Financing Activities:
Repayment of capital
 lease obligations                  -      (412)       -          -       (412)
Intercompany payable/
 receivable                    16,567   (20,285)    3,718         -          -
Decrease in financing
 obligations                        -    (3,510)        -         -     (3,510)
Net borrowings (repayments)
 on credit facilities          20,004         -    (6,862)        -     13,142
Debt financing fees            (5,528)        -         -         -     (5,528)
Proceeds from issuance
 of long-term debt              1,948         -         -         -      1,948
Principal payments on
 debt                         (72,335)        -       (57)        -    (72,392)
Capital contribution
 from parent                        -   (88,576)    1,276    87,300          -
                             -------- ---------  --------  --------  ---------
Net cash provided by
 (used in) financing
  activities                  (39,344) (112,783)   (1,925)   87,300    (66,752)

Effect of exchange rate
 changes on cash and
 cash equivalents                   -       808         -         -        808
                             -------- ---------  --------  --------  ---------
Decrease in cash and
 cash equivalents                   -  (114,451)   (1,153)       -    (115,604)

Cash and cash equivalents at
 beginning of period                -   133,901     1,337         -    135,238
                             -------- ---------  --------  --------  ---------
Cash and cash equivalents
 at end of period            $      - $  19,450  $    184  $      -  $  19,634
                             ======== =========  ========  ========  =========



Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

Overview

On April 27, 2005, we completed our acquisition of Hollywood Entertainment
Corporation, or Hollywood.  This acquisition increased our store count to over
4,700 stores and substantially increased our urban market presence.  We believe
that the Company's eastern-focused rural and secondary market presence under
the Movie Gallery brand and its western-focused, prime urban and suburban
superstore locations under the Hollywood brand combine to form a strong
nationwide geographical store footprint.

We currently plan to open approximately 120 new Movie Gallery and Hollywood
Video stores for the full fiscal year 2006 period, subject to market and
industry conditions.  We continue to evaluate underperforming stores and stores
that have overlapping trade areas in order to close the smaller cash flow
stores in those markets at an accelerated pace.  We anticipate closing
approximately 230 underperforming and overlapping stores during fiscal 2006.
We believe we can transfer a sufficient percentage of the customer base to our
Movie Gallery and Hollywood Video stores in these markets to improve our market
level profitability.

We believe the most significant dynamic in our industry is the relationship our
industry maintains with the movie studios.  The studios have historically
maintained an exclusive window for home video distribution (DVDs and video
cassettes available for rental and sale), which provides the home video
industry with an approximate 45 day period during which they can rent and sell
new releases before they are made available on pay-per-view or other
distribution channels.  According to Kagan Research, the domestic home video
industry accounted for approximately 51% of domestic studio movie revenue in
2005.  For this reason, we believe movie studios have a significant interest in
maintaining a viable home video industry.

Our strategies have been designed to maximize store revenues and profitability
in a mature industry.  We strive to minimize the operating and overhead costs
associated with our business in both the Movie Gallery and Hollywood brands.

In addition to the relationship between our industry and the movie studios, our
operating results are driven by revenue, inventory, rent and payroll.  Given
those key factors, we believe that by monitoring the five operating performance
indicators described below, we can continue to be successful in executing our
operating plans and our strategy.

- Revenues.  Our business is primarily a cash business with initial rental fees
paid upfront by the customer.  Our management team continuously reviews
inventory levels, marketing and sales promotions, real estate strategies, and
staffing requirements in order to maximize revenues at each location.
Additionally, our team monitors revenue performance on a daily basis to quickly
identify trends or issues in our store base or in the industry as a whole.  Our
management closely monitors same-store revenues, which we define as revenues at
stores that we have operated for at least twelve full months, to assess the
performance of our business.

- Product purchasing economics.  In order to maintain the desired profit margin
in our business, purchases of inventory for both rental and sale must be
carefully managed.  Our purchasing models are designed to analyze the impact of
the economic factors inherent in the various pricing strategies employed by the
studios.  We believe that we are able to achieve purchasing levels tailored for
the customer demographics of each of our markets and to maximize the return on
investment of our inventory purchase dollars.

- Store level cost control.  The most significant store expenses are payroll
and rent, followed by facilities-related and supply expenditures.  We attempt
to control these expenses primarily through budgeting systems and
centralization of purchases in our corporate support centers. This enables us
to measure performance against expectations and to leverage our purchasing
power.  We are also able to adjust store hours and staffing levels to specific
market conditions as well as leverage best practices from both Movie Gallery
and Hollywood to reduce expense and increase operating efficiency.

- Leverage of overhead expenses.  We apply the same principles of budgeting,
accountability and conservatism in our overhead spending that we employ in
managing our store operating costs.  Our general and administrative expenses
include the costs to maintain our corporate support centers as well as the
overhead costs of our field management teams.  Our integration strategy is
focused on eliminating duplication, leveraging best practices and reaping the
financial benefits of economies of scale to reduce costs.

- Operating cash flows.  There is a distinct seasonal pattern to the home video
and game retail business.  Compared to other months during the year, we
typically experience peak revenues during the months of November, December,
January and February due to the holidays at year end as well as inclement
weather conditions during the winter months.  September is typically the lowest
revenue period with schools back in session and the premiere of "new" fall
broadcast television programs.  Seasonal patterns for our Game Crazy operating
segment are similar to traditional retail revenue peaks, which are
significantly weighted towards holiday periods and when schools are out of
session.

Hollywood Acquisition

On April 27, 2005, we completed our cash acquisition of Hollywood, refinanced
substantially all of the existing indebtedness of Hollywood, and replaced our
existing unsecured revolving credit facility.  We paid $862.1 million to
purchase all of Hollywood's outstanding common stock and $384.7 million to
refinance Hollywood's debt.  As part of the refinancing of Hollywood's debt,
Hollywood executed a tender offer for its $225.0 million principal amount
9.625% senior subordinated notes due 2011, pursuant to which $224.6 million
were tendered.  The Hollywood acquisition was financed using Hollywood's cash
on-hand of approximately $180.0 million, a senior secured credit facility
guaranteed by all of our domestic subsidiaries in an aggregate principal amount
of $870.0 million, and an issuance of $325.0 million of 11% senior unsecured
notes.

The acquisition substantially increased our presence on the West Coast and in
urban areas.  Hollywood's predominantly West Coast urban superstore locations
present little overlap with Movie Gallery's rural and suburban store locations
concentrated in the eastern half of the United States.  In the fourth quarter
of fiscal 2005, we closed 64 Movie Gallery stores with trade areas that
overlapped with acquired Hollywood Video stores.  In the thirty-nine weeks
ended October 1, 2006, we have closed an additional 189 overlapping or
underperforming stores, predominantly from our Movie Gallery segment.  We will
continue to evaluate the closure of stores with overlapping trade areas as
market conditions warrant.

We maintain our Hollywood store format and brand separately from our Movie
Gallery business because of Hollywood's distinct operational model and to
ensure customer continuity.  There has been a conscious effort not to interrupt
the field management organizations at Movie Gallery and Hollywood to ensure
they remain focused on revenue and customer service.  Integration efforts to
date have primarily focused on consolidating the leadership functions in the
brands.  This effort is complete with the exception of the Operations and
Marketing functions, which we currently do not intend to consolidate.  The
respective leaders of our support organizations continue to evaluate
opportunities to leverage both Movie Gallery's and Hollywood's best practices
and generate general and administrative cost savings.  To date, we have
identified cost savings opportunities in both Movie Gallery's and Hollywood's
cost structures, and we anticipate that we will identify additional
opportunities in the future.  The combined companies also are evaluating
opportunities to reap the benefits of increased purchasing leverage to reduce
costs.  However, we can make no assurances that we will successfully integrate
Hollywood's business or that we will achieve any further cost savings.

During the fourth quarter of fiscal 2005, we notified 101 Movie Gallery
associates that their positions would be relocated or eliminated as part of our
integration plan through the consolidation of Finance, Accounting, Treasury,
Product, Logistics, Human Resources and Payroll functions at our Wilsonville,
Oregon support center.  The affected individuals are required to render service
for a range of 10 to 49 weeks in order to receive termination benefits.  We
currently estimate that the total cost of providing severance, retention
incentives and outplacement services to the impacted associates will be
approximately $2.5 million, of which approximately $1.2 million and $1.3
million were recognized during the fiscal year ended January 1, 2006 and the
thirty-nine weeks ended October 1, 2006, respectively, in accordance with SFAS
No. 146, "Accounting for Costs Associated with Disposal and Exit Activities."
There were cash payments charged to the reserve of $1.4 million during the
thirty-nine weeks ended October 1, 2006.

Our integration plan was amended in the second quarter of fiscal 2006 with
regard to the Human Resource Processing and Benefits functions within the Human
Resources department.  We decided to consolidate substantially all of these
functions to the Dothan, Alabama corporate offices, and the affected Hollywood
employees were notified that their positions will be relocated.

We estimate the integration-related efficiencies and savings achieved during
fiscal 2005 to be in excess of $20 million.  These savings were driven
principally by improvements in the supply chain for Movie Gallery branded
stores, consolidation of our Real Estate and Architecture functions, inventory
utilization, and elimination of duplicative executive management.  We continue
to identify and implement additional savings opportunities.  We expect that
total savings, including new projects in 2006 combined with the full year
fiscal 2006 impact of the savings already achieved in 2005 will be in excess of
$50 million.

Real Estate Initiatives

We have entered into an agreement with Excess Space Retail Services, Inc. to
explore opportunities for us to sublease retail space at more than 2,200
existing Movie Gallery and Hollywood Video stores.  In addition, on April 17,
2006, we entered into an agreement with Hilco Real Estate, LLC under which we
and Hilco will initiate a program to restructure lease terms at more than 1,000
existing Movie Gallery and Hollywood Video stores.

Pending Acquisition

By letter dated August 29, 2005, Boards Inc., or Boards, an entity controlled
by Mark Wattles, the founder and former Chief Executive Officer of Hollywood,
exercised a contractual right to require Hollywood to purchase all of the 20
Hollywood Video stores, including 17 Game Crazy stores owned and operated by
Boards, pursuant to a put option.  The put option, and a related call option,
were contained in the license agreement between Hollywood and Boards that was
effective January 25, 2001.  On a change of control (as defined in the license
agreement), Hollywood had an option to purchase the stores within six months.
Likewise, on a change of control, Boards had the option to require Hollywood to
purchase the stores within six months.  In both cases, the process by which the
price would be determined was detailed in the license agreement and was at fair
value as determined by an appraisal process.  In accordance with the terms of
the license agreement, Hollywood and Boards have agreed to the retention of a
valuation expert and are proceeding with the valuation of the stores.  As of
October 1, 2006, the purchase price has not yet been determined.  It is
anticipated that the transaction will close in fiscal 2007.

Developments in the Fiscal Year

On April 7, 2006, Timothy R. Price, Movie Gallery's Executive Vice President
and Chief Financial Officer, resigned for personal reasons and Mark D.
Moreland, Senior Vice President and Treasurer, was appointed Interim Chief
Financial Officer.  Additionally, Bart Walker, Senior Vice President and
Controller, resigned effective April 28, 2006.  On June 1, 2006, we announced
that Thomas D. Johnson, Jr., Senior Vice President, Corporate Finance and
Business Development, was appointed Interim Chief Financial Officer in addition
to his current responsibilities following the resignation of Mark D. Moreland.
We have retained Alvarez & Marsal, LLC, a global professional services firm,
specializing in providing turnaround management, restructuring and corporate
advisory services, to immediately fill several leadership vacancies in our
accounting and finance functions, shorten the lead-time for implementing
specific turnaround initiatives, and to assist us with remediation of our
previously identified material weaknesses and deficiencies in internal control
over financial reporting.

Results of Operations

The following discussion of our results of operations, liquidity and capital
resources is intended to provide further insight into our performance for the
thirteen and thirty-nine weeks ended October 2, 2005 and October 1, 2006.

The financial information provided in the Selected Financial Statement and
Operational Data is not comparable on a year-over-year basis for the thirty-
nine week period due to the acquisition of Hollywood, which occurred April 27,
2005.  The results of operations for the thirty-nine weeks ended October 2,
2005 only includes Hollywood results starting from the April 27, 2005 merger
date, while the thirty-nine weeks ended October 1, 2006 includes Hollywood
results for the full thirty-nine weeks.

Selected Financial Statement and Operational Data:

                             Thirteen Weeks Ended   Thirty-nine Weeks Ended
                             ---------------------   -----------------------
                             October 2,  October 1,   October 2,  October 1,
                                2005        2006         2005       2006
                             ---------    ---------   ---------   ---------
                           ($ in thousands, except per share and store data)

Rental revenue               $ 473,086    $ 475,779  $1,109,661   $1,539,754
Product sales                   99,356      107,210     201,301      338,888
                             ---------    ---------   ---------   ----------
  Total revenue                572,442      582,989   1,310,962    1,878,642

Cost of rental revenue         136,236      141,589     345,159      470,073
Cost of product sales           70,080       78,160     141,896      249,455
                             ---------    ---------  ----------   ----------
Total gross profit           $ 366,126    $ 363,240  $  823,907   $1,159,114
                             =========    =========  ==========   ==========
Store operating expenses     $ 319,919    $ 322,643  $  690,592   $  944,495
General and administrative
 expenses                    $  40,020    $  44,022  $   93,014   $  134,853
Operating income             $   5,024    $  (4,126) $   37,583   $   77,624
Interest expense, net        $  24,427    $  31,185  $   41,430   $   89,331
Net loss                     $ (12,469)   $ (36,111) $   (6,265)  $  (10,659)
Net loss per diluted share   $   (0.39)   $   (1.13) $    (0.20)  $    (0.34)

Cash dividends per
 common share                $       -    $       -  $     0.06   $        -

Rental margin                    71.2%        70.2%       68.9%        69.5%
Product sales margin             29.5%        27.1%       29.5%        26.4%
Total gross margin               64.0%        62.3%       62.8%        61.7%

Percent of total revenue:
Rental revenue                   82.6%        81.6%       84.6%	       82.0%
Product sales                    17.4%        18.4%       15.4%        18.0%
Store operating expenses         55.9%        55.3%       52.7%        50.3%
General and administrative
 expenses                         7.0%         7.6%        7.1%         7.2%
Operating income                  0.9%        (0.7%)       2.9%         4.1%
Interest expense, net             4.3%         5.3%        3.2%         4.8%
Net loss                         (2.2%)       (6.2%)      (0.5%)       (0.6%)

Total same-store revenues        (9.0%)       (0.4%)      (3.1%)       (4.0%)
Movie Gallery same-store
 revenues                        (9.8%)        3.0%       (5.3%)        0.0%
Hollywood same-store revenues(1) (8.6%)       (1.9%)      (2.2%)       (5.9%)

Total same-store rental revenues(10.3%)       (1.9%)      (5.2%)       (5.2%)
Movie Gallery same-store
 revenues                       (10.8%)        3.1%       (5.5%)       (0.8%)
Hollywood same-store revenues(1)(10.1%)       (4.6%)      (5.1%)       (7.5%)

Total same-store product sales   (2.2%)        6.5%        7.8%         1.1%
Movie Gallery same-store sales    2.5%         1.0%       (3.1%)        8.8%
Hollywood same-store sales(1)    (3.0%)        7.5%       10.0%        (0.2%)

Store count:
   Beginning of period           4,730        4,763       2,482        4,749
   New store builds                 80           13         234          115
   Stores acquired                   -            -       2,138            -
   Stores closed                   (25)        (101)        (69)        (189)
                             ---------    ---------  ----------    ---------
   End of period                 4,785        4,675       4,785        4,675
                             =========    =========  ==========    =========

(1) The information above reflects the historical store operating statistics
previously reported by Hollywood Entertainment.  Hollywood's store operating
statistics for periods prior to April 27, 2005 are not otherwise included in
the consolidated statements of operations.  Hollywood same-store revenues are
presented on a pro forma basis as if the merger had been completed at the
beginning of fiscal 2005 and are inclusive of the Game Crazy operating segment.

Revenue.  For the thirteen weeks and thirty-nine weeks ended October 1, 2006,
consolidated total revenues increased 1.8% and 43.3%, respectively, from the
comparable periods in 2005. The large increase for the thirty-nine week period
was primarily due to the acquisition of Hollywood. Same-store total revenues
were negative 0.4% for the third quarter of fiscal 2006, which consisted of a
1.9% decline in same-store rental revenue and a 6.5% increase in same-store
product revenue.

With the acquisition of Hollywood for the thirty-nine weeks ended October 1,
2006, our revenue has shifted more to product revenue and away from rental
revenues versus the comparable period in fiscal 2005. The Game Crazy operating
segment is the primary driver of this shift in revenue mix.

For the thirteen weeks and thirty-nine weeks ended October 1, 2006, the Movie
Gallery operating segment total revenues increased 2.7% and 4.2%, respectively,
from the comparable periods in fiscal 2005. The increase for the thirteen week
period was primarily due to a 3.0% increase in same-store sales, which
consisted of a 3.1% increase in same-store rental revenue and a 1.0% increase
in same-store product revenue. The same-store rental revenue increases were a
result of increased movie rental revenue, including previously viewed revenue,
offset by a decline in game rental revenues. Same-store product revenue gains
were achieved in the sale of new movies and concession sales. The revenue
increase for the thirty-nine week period was primarily due to an increase of
approximately 2.7% in the average number of stores operated during the current
year period versus the comparable period of fiscal 2005.

The addition of Hollywood operating segment revenue for the thirty-nine weeks
ended October 1, 2006 accounted for 95.4% of the total revenue increase.
Hollywood total same-store revenues were negative 1.9% for the third quarter of
fiscal 2006, which consisted of a 4.6% decline in same-store rental revenue
partially offset by a 7.5% increase in same-store product sales revenue. Movie
rental revenue, including previously viewed sales, declined and was adversely
impacted by the soft home video release schedule, the maturation of the DVD
life cycle, and the overabundance of DVD titles available in the marketplace
and through alternative delivery channels. In addition, game rental revenue
declined, reflecting the weakness of the new game titles currently being
released and the industry softness that occurs in anticipation of the
introduction of new game platforms currently scheduled for release later in
2006.

Cost of Sales. The cost of rental revenue includes the amortization of rental
inventory, revenue sharing expenses and the cost of previously viewed rental
inventory sold. The gross margin on rental revenue for the thirteen weeks and
thirty-nine weeks ended October 1, 2006 was 70.2% and 69.5%, respectively,
compared to 71.2% and 68.9% for the comparable periods of fiscal 2005. The
decrease in gross margin for the thirteen week period was primarily due to an
increase in promotionally discounted sales of previously viewed movies. Charges
totaling $11.3 million were recorded against rental margins in the thirty-nine
weeks ended October 1, 2006 to reflect changes in rental amortization
estimates. In addition, a charge of $10.1 million was recorded against rental
margins in the thirty-nine weeks ended October 2, 2005 to reflect a change in
the estimate of the residual value of VHS movies from $2.00 to $1.00 for the
Movie Gallery segment. Factors contributing to the gross margin improvement in
the thirty-nine weeks ended October 1, 2006 include the increase in the
percentage of DVD movies acquired under revenue sharing arrangements and
efficiencies in rental product distribution and processing.

Cost of product sales includes the costs of new and used video game merchandise
taken in on trade for the Game Crazy operating segment, new movies, concessions
and other goods sold.  New movies and new game merchandise typically have a much
lower margin than used game merchandise and concessions.  The gross margin on
product sales is subject to fluctuations in the relative mix of the products
that are sold.  The gross margin on product sales for the thirteen weeks and
thirty-nine weeks ended October 1, 2006 was 27.1% and 26.4%, respectively,
compared to29.5% and 29.5% for the comparable periods of fiscal 2005.  The
decrease in product sales margin was primarily caused by higher new game
merchandise sales.

Operating Costs and Expenses.  Store operating expenses include store-level
expenses, such as lease payments, in-store payroll and start-up costs
associated with new store openings.  Store operating expenses as a percentage
of total revenue were 55.3% and 50.3% for the thirteen weeks and thirty-nine
weeks ended October 1, 2006, respectively, compared to 55.9% and 52.7% for the
comparable periods of fiscal 2005. For the thirteen and thirty-nine weeks ended
October 1, 2006, we recorded a charge of $7.3 million to recognize asset
retirement obligations in accordance with SFAS 143 (see note 11).

The decrease in the thirteen-week period was driven by reductions in
depreciation expense, store labor expense, and rent and related expenses. These
savings were partially offset by increases in store closure expenses of
approximately $6.6 million and a charge of $7.3 million for the set up of asset
retirement obligations (see note 11). The decrease in the thirty-nine week
period was primarily due to the acquisition of Hollywood and its lower
operating costs and expenses as a percentage of revenue.

General and Administrative Expenses. General and administrative expenses as a
percentage of revenue were 7.6% and 7.2% for the thirteen and thirty-nine weeks
ended October 1, 2006, respectively, compared to 7.0% and 7.1% for the
comparable periods of fiscal 2005.  The increase in the thirteen-week period
was primarily due to increased professional fees, additional bonus expense, and
increased stock compensation expense.

The increase in general and administrative expenses as a percentage of revenue
for the thirty-nine week period was primarily due to professional fees incurred
during the thirteen weeks ended October 1, 2006, accrued severance fees of $2.8
million and additional compensation expense. The additional expenses were
partially offset by the acquisition of Hollywood and its lower general and
administrative costs as a percentage of revenue.

Effective with our fiscal year beginning January 2, 2006, to account for stock-
based compensation, we adopted SFAS No. 123(R), "Share-Based Payment," or SFAS
No. 123(R), which no longer permits use of the intrinsic value method under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."

Compensation expense charged to general and administrative expenses related to
stock-based compensation was $1.2 million and $1.6 million for the fiscal year
ended January 1, 2006 and for the thirty-nine weeks ended October 1, 2006,
respectively.  Total compensation cost related to all non-vested awards that is
not yet recognized was $9.2 million at October 1, 2006, and is expected to be
recognized over a weighted-average period of approximately three years.

Interest Expense, net. Interest expense, net increased $6.8 million from $24.4
million for the thirteen weeks ended October 2, 2005 to $31.2 million for the
thirteen weeks ended October 1, 2006.  The increase is primarily attributed to
increased borrowings on the credit facility and higher average interest rates.
Interest expense, net increased $47.9 million from $41.4 million for the
thirty-nine weeks ended October 2, 2005 to $89.3 million for the thirty-nine
weeks ended October 1, 2006.  The increase is primarily attributed to increased
borrowings and higher average interest rates.  Additionally, borrowings related
to the Hollywood acquisition were outstanding for approximately twenty-three
weeks during the period ended October 1, 2005 compared to thirty-nine weeks for
the period ended October 1, 2006.

Equity in Losses of Unconsolidated Entities. During the last half of fiscal
2003, we began to make investments in various alternative delivery vehicles
(both retail and digital) for movie content.  We do not anticipate that any of
these alternatives will replace our base video rental business.  As of January
1, 2006, we have completely written off our investments in these unconsolidated
entities, either through recognizing our proportionate share of the investee
losses under the equity method, by disposing of the related interests, or
through write-offs for investments we deemed to be worthless.  Although we have
no present intentions to do so, in the future we may make, subject to covenant
limitations, similar investments that we will be required to account for as
equity investments similar to the investments we have made in the past.  The
remaining balances in these investments were written off during fiscal 2005.

Income Taxes. The effective tax rate was an expense of 2.3% and a benefit of
8.9% for the thirteen and thirty-nine weeks ended October 1, 2006,
respectively, as compared to a benefit of 35.7% and 29.5% for corresponding
periods in fiscal 2005.  The projected annual effective tax rate is a benefit
of 4.2%, which differs from the expense of 2.3% for the quarter ended October
1, 2006 due to the interaction between valuation allowances against our
deferred tax assets and net operating losses that have been incurred and
changes to contingent liabilities and equity compensation.  The low annual
effective rate is primarily a result of changes in previously established
valuation allowances for our deferred tax assets.

Liquidity and Capital Resources

Summary

Our primary capital needs are for seasonal working capital, debt service, new
store investment, and remodeling and relocating existing stores.  We fund our
capital needs primarily by cash flow from operations and, as necessary,
borrowings under the revolver portion of our $836.4 million senior secured
credit facility (the "Credit Facility").  For the 39-weeks ended October 1,
2006, net cash from operating activities resulted in a use of cash of $35.1
million, resulting in an increased use of borrowings under our credit facility
to fund our capital needs.

At October 1, 2006, we had cash and cash equivalents of $19.6 million and $31.2
million in available borrowings under the Credit Facility.  We believe that
cash flow available from operations and borrowings under the Credit Facility
will be sufficient to operate our business, satisfy our working capital and
capital expenditure requirements, and meet our foreseeable liquidity
requirements, including debt service for the remainder of fiscal 2006.
However, the financial covenants contained in the Credit Facility will become
significantly more restrictive beginning with the measurement following the
first quarter of fiscal 2007.  Unless we are successful in obtaining an
additional amendment to the financial covenants in the Credit Facility, our
projected operating results indicate that we will fail the more restrictive
financial covenant tests effective as of April 1, 2007.

To the extent such a breach occurs, one or more events of default, including
cross-defaults between multiple components of our indebtedness, could result.
These events of default could permit our creditors to declare all amounts owing
to be immediately due and payable and to terminate any commitments to make
further extensions of credit.  If we are unable to repay our indebtedness, our
secured creditors could proceed against the collateral securing the
indebtedness owed to them.  Because of the likelihood that we will violate the
financial covenants contained in our Credit Facility, in accordance with EITF
86-30, "Classification of Obligations When a Violation is Waived by a
Creditor," or EITF 86-30, all amounts outstanding under the Credit Facility
have been classified as current liabilities as of October 1, 2006.

If amounts outstanding under the Credit Facility were called by the lenders due
to a covenant violation, amounts under other agreements, such as the indenture
governing our 11% Senior Notes and certain leases, could also become due and
payable immediately.  Should the amounts outstanding under the Credit Facility
be accelerated and become due and payable because of our failure to comply with
applicable debt covenants in the future, we would be required to search for
alternative measures to finance current and ongoing obligations of our
business.  There can be no assurance that such financing would be available on
acceptable terms, if at all.  Our ability to obtain future financing or to sell
assets to provide additional funding could be adversely affected because we
have substantial indebtedness and substantially all of our assets have been
secured as collateral under the Credit Facility.  In addition, our financial
results, our substantial indebtedness, and our reduced credit ratings could
adversely affect the availability and terms of financing for us.  Further,
uncertainty surrounding our ability to finance our obligations has caused some
of our trade creditors to impose increasingly less favorable terms, and
continuing uncertainty could result in even more unfavorable terms from our
trade creditors.  Any of these scenarios could adversely impact our liquidity
and results of operations.

We are exploring several alternative strategies to facilitate further
amendments to or a refinancing of our Credit Facility, including, among other
things, raising additional equity, sale/leaseback transactions, and subleasing
and restructuring leases at our stores.  We cannot assure you that any of these
actions will be successful, or that further debt amendments or additional debt
or equity financings can be obtained on acceptable terms, if at all.

Credit Facility

The Credit Facility, which we entered into in connection with our acquisition
of Hollywood Entertainment Corporation ("Hollywood"), provides for aggregate
borrowings of $836.4 million, consisting of a five-year $75.0 million revolving
credit facility due April 27, 2010 (the "Revolver") and two term loans in an
aggregate principal amount of $761.4 million as of October 1, 2006.  Term Loan
A is a $71.5 million loan that matures on April 27, 2010, and Term Loan B is a
$689.9 million loan that matures on April 27, 2011.  At October 1, 2006, we had
$43.8 million drawn under the Revolver, comprised of $23.8 million in letters
of credit and $20.0 million in borrowings.

On March 15, 2006, we executed a second amendment to the Credit Facility,
effective through the fourth quarter of 2006 that relaxed financial covenants,
increased restrictive operating covenants and increased interest rate margins.
The quarterly financial covenants revert to the original covenants commencing
with the first quarter of 2007.

We accounted for the second amendment as a modification pursuant to EITF No.
96-19, "Debtor's Accounting for a Modification or Exchange of Debt
Instruments," and accordingly have continued to defer $19.0 million of
unamortized deferred financing costs associated with the Credit Facility.  We
incurred significant fees related to the second amendment totaling $5.5
million, which have been deferred in accordance with EITF 96-19 and will be
amortized over the remaining term of the Credit Agreement.

Borrowings under the Term Loan A and the Revolver bear interest at LIBOR plus
the following margin based upon a leverage ratio described below:

                         Leverage Ratio       LIBOR Margin
                            > 4.00                5.00%
                          3.25 - 4.00             3.50%
                          2.75 - 3.25             2.75%
                          2.25 - 2.75             2.50%
                          1.75 - 2.25             2.25%
                            < 1.75                2.00%

Borrowings under the Term Loan B bear interest at a rate of LIBOR plus 5.25% if
our leverage ratio exceeds 4.00; otherwise the rate will be LIBOR plus 3.75%.
As of October 1, 2006, the Revolver/Term Loan A and Term Loan B interest rates
are 10.37% and 10.62%, respectively.  When the leverage ratio is greater than
or equal to 4.00, at our discretion, we can elect to defer payment of 0.50% of
the Term Loan A, Term Loan B and Revolver interest as non-cash interest, which
will be capitalized into the loans (with compounding interest).  For the
thirteen and thirty-nine weeks ended October 1, 2006, we have recapitalized
$1.0 million and $2.0 million of interest, respectively.

The Credit Facility requires us to meet certain financial covenants including a
leverage ratio test, a fixed charge coverage ratio test and an interest
coverage test.  Each of these covenants is calculated on trailing four quarter
results based on specific definitions that are contained in the credit
agreement.  In general terms, the leverage ratio is a measurement of total net
indebtedness relative to operating cash flow.  The fixed charge coverage ratio
is a measurement of operating cash flow plus rent relative to total fixed
charges including rent, scheduled principal payments, and cash interest.  The
interest coverage ratio is a measurement of operating cash flow relative to
interest expense.  The covenant levels under the Credit Facility are as
follows:

                   Leverage        Fixed Charge     Interest Coverage
                     Ratio        Coverage Ratio          Ratio
      2006 Q3         6.75             1.00                1.45
      2006 Q4         6.50             1.00                1.45
      2007 Q1         2.25             1.10                3.00
      2007 Q2         2.25             1.10                3.00

The Credit Facility also imposes certain other restrictions on us, including
restrictions on our ability to: incur debt; grant liens; provide guarantees in
respect of obligations of any other person; pay dividends; make loans and
investments; sell our assets; make redemptions and repurchases of capital
stock; make capital expenditures; prepay, redeem or repurchase debt; engage in
mergers or consolidations; engage in sale/leaseback transactions and affiliate
transactions; change our business; amend certain debt and other material
agreements; issue and sell capital stock of subsidiaries; and make
distributions from subsidiaries.

Term Loan A and Term Loan B require aggregate quarterly prepayments of
principal in the amounts of 5.0% and 0.25%, respectively, of the outstanding
balances through the first quarter of fiscal 2010, after which the mandatory
Term Loan B prepayments escalate.  In addition to these prepayments, the Credit
Facility also requires us to make prepayments in an amount equal to 100% of any
excess cash flow, which generally represents the amount of cash generated by
the Company but not used towards operations, debt service, or investments.
Based upon our operating results for the thirty-nine weeks ended October 1,
2006 and projected operating results for the remainder of fiscal 2006, we do
not believe that we that we will be required to make an excess cash flow
prepayment for fiscal 2006.

The Credit Facility is fully and unconditionally guaranteed on a joint and
several basis by our domestic subsidiaries.  The Credit Facility is secured by
first priority security interests in, and liens on, substantially all of our
direct and indirect subsidiaries' tangible and intangible assets (other than
leasehold mortgages on stores) and first priority pledges of all the equity
interests owned by us in our existing and future direct and indirect wholly
owned domestic subsidiaries and 66 2 / 3 % of the equity interests owned by us
in our existing and future wholly owned non-domestic subsidiaries.

11% Senior Notes due 2012

Also in connection with the Hollywood acquisition, we issued $325.0 aggregate
principal amount of 11% senior notes due 2012 (the "Senior Notes").  The
indenture governing the Senior Notes imposes certain restrictions on us,
including restrictions on our ability to: incur debt; grant liens; provide
guarantees in respect of obligations of any other person; pay dividends; make
loans and investments; sell our assets; make redemptions and repurchases of
capital stock; make capital expenditures; prepay, redeem or repurchase debt;
engage in mergers or consolidations; engage in sale/leaseback transactions and
affiliate transactions; change our business; amend certain debt and other
material agreements; issue and sell capital stock of subsidiaries; and make
distributions from subsidiaries.

The indenture governing the Senior Notes also contains a covenant requiring us
to file on a timely basis the periodic reports required by the Exchange Act.
Accordingly, prior to filing this Quarterly Report on Form 10-Q, the Company
was in violation of this covenant.  We believe that with this filing the
violation was cured.  In addition, the senior notes may be accelerated if an
event of default occurs under our Credit Facility. Because no events of default
have occurred under the Credit Facility as of October 1, 2006 and through the
date of our filing of the Form 10-Q no events of acceleration have occurred.
Therefore, we believe that the Senior Notes continue to be appropriately
classified as long-term as of October 1, 2006.

Interest Rate Hedge

Our Credit Facility requires that for a period of two years subsequent to
entering into the Credit Facility, a portion of our floating rate debt is to be
converted to fixed rate debt.  In fiscal 2005, we entered into two, two-year
floating-to-fixed interest rate swaps for a total amount of $280.0 million.
Under the terms of both of the swap agreements, we paid fixed interest on the
$280.0 million at a rate of 4.06% and received floating interest based on
three-month LIBOR.  The scheduled termination date for both of these swaps was
June 29, 2007.

Subsequent to the thirty-nine weeks ended October 1, 2006, on October 20, 2006,
we settled both of these interest rate swaps (prior to their scheduled
termination dates) and received $2.5 million in cash.

On October 20, 2006, we entered into a new floating-to-fixed interest rate swap
for an amount of $140.0 million.  Under the terms of the new swap agreement, we
will pay fixed interest on the $140.0 million at a rate of 5.41% and receive
floating interest based on three-month LIBOR.  The termination date for the new
swap agreement is April 30, 2007.

Also on October 20, 2006, we entered into a new 5.50% interest rate cap
agreement for an amount of $140.0 million.  Under the terms of the new cap
agreement we will pay floating rate interest up to a maximum of 5.50% and
receive floating rate interest based on three-month LIBOR.  The termination
date for the new 5.50% cap agreement is April 27, 2007.

Contractual Obligations

The following table discloses our contractual obligations and commercial
commitments as of October 1, 2006.  The operating lease information presented
is as of January 1, 2006; however, these amounts approximate the obligations as
of October 1, 2006 (in thousands):

Contractual                                  2-3         4-5     More than
Obligations           Total      1 Year     Years       Years     5 Years
---------------    ----------  ----------  --------    --------   ----------
Principal Payments
  Credit Facility
   Term Loan A (1) $   71,447  $   71,447  $      -    $      -   $        -
   Term Loan B (1)    689,915     689,915         -           -            -
   Revolver            20,004      20,004         -           -            -
  Senior Notes        325,450           -         -           -      325,450
  Capital leases          209         193        16           -            -
Interest
  Term Loan A (2)       3,581       3,581         -           -            -
  Term Loan B (2)      36,585      36,585         -           -            -
  Hedge agreement          28          28        -           -            -
  Senior Notes        199,844      35,793    71,586      71,586       20,879
  Capital leases            3           3         -           -            -
Operating leases    1,612,492     367,033   578,443     356,577      310,439
                   ----------  ----------  --------   ---------   ----------
Total              $2,959,558  $1,224,582  $650,045   $ 428,163   $  656,768
                   ----------  ----------  --------   ---------   ----------

(1) In accordance with EITF 86-30, all amounts outstanding under the Credit
Facility as of October 1, 2006 have been classified as current liabilities.
See "Liquidity and Capital Resources-Summary".  Future prepayments of
indebtedness under the amended Credit Facility will be required in an amount
equal to our Excess Cash Flow, as defined in the Credit Facility.  Based upon
our operating results for the thirty-nine weeks ended October 1, 2006 and
projected operating results for the remainder of fiscal 2006, we do not believe
that we that we will be required to make an excess cash flow prepayment for
fiscal 2006.

(2) Interest rates are based on current LIBOR rates plus margin.  As of October
1, 2006, the Term Loan A and Term Loan B rates are 10.37% and 10.62%,
respectively.  We have assumed these interest rates will stay the same for the
remaining terms of the loans for purposes of presenting future interest
payments.  Actual amounts will differ from these estimates, and the difference
based on interest rate changes and our leverage coverage ratio may be material.

Statements of Cash Flow Data:

                                                  Thirty-nine Weeks Ended
                                                 -------------------------
                                                   October 2,   October 1,
                                                     2005          2006
                                                 -----------    ----------
                                                       ($ in thousands)
Net cash provided by (used in) operating
 activities                                      $    48,740    $  (35,069)
Net cash (used in) investing activities           (1,140,877)      (14,591)
Net cash provided by (used in)
 financing activities                              1,134,330       (66,752)


Operating Activities

The decrease in net cash provided by operating activities was primarily
attributable to an increased use of cash for accounts payable, changes in
accrued liabilities and the change in accounting for extended viewing fees,
offset by increases in non-cash expenses including rental inventory
amortization, property and equipment depreciation and intangible amortization
for the first three quarters of fiscal 2006 versus the comparable period in
fiscal 2005. During the thirty-nine weeks ended October 1, 2006, we used $157.5
million of cash toward payment of our accounts payable balances. This was
driven by the seasonal pay down of accounts payable and credit restrictions on
the part of certain vendors.

Investing Activities

Net cash used in investing activities includes the cost of business
acquisitions, new store builds and other capital expenditures. In the thirty-
nine weeks ended October 1, 2006, our net cash used in investing activities was
$14.6 million, which included 115 new store builds. For the same period in
fiscal 2005, our net cash used in investing activities was $1.1 billion, which
included the purchases of Hollywood, VHQ Entertainment and 234 new store
builds. Capital requirements to fund our projected new store growth of 120
stores for fiscal 2006 and other on-going capital expenditure requirements for
the existing store base are estimated at $34 million. This estimate does not
include capital required to fund our acquisition of the Boards stores pursuant
to a contractual put provision. The Boards stores acquisition is expected to
occur in fiscal 2007; however, no purchase price has been negotiated to date
related to this pending acquisition.

Financing Activities

Net cash flow related to financing activities for the thirty-nine weeks ended
October 1, 2006 was a use of cash of $66.8 million, which included an excess
cash flow payment of $56.9 million made in the first quarter of fiscal 2006.
Additionally, on March 15, 2006, we paid lender fees of $5.5 million to
complete the second amendment to the Credit Facility. Net cash flow related to
financing activities for the thirty-nine weeks ended October 2, 2005 was a
source of cash of $1.1 billion, which included borrowings under the Credit
Facility and the proceeds from the sale of the Senior Notes used to fund the
Hollywood acquisition.

At October 1, 2006, we had a working capital deficit of $816.4 million.  Apart
from the reclassification of all amounts outstanding under the Credit Facility
as current liabilities, this is primarily due to the accounting treatment of
rental inventory.  Rental inventory is treated as a non-current asset under
accounting principles generally accepted in the United States, because it is a
depreciable asset and a portion of this asset is not reasonably expected to be
completely realized in cash or sold in the normal business cycle.  Although the
rental of this inventory generates the major portion of our revenue, the
classification of this asset as non-current results in its exclusion from
working capital.  The aggregate amount payable for this inventory, however, is
reported as a current liability until paid and, accordingly, is reflected as a
reduction in working capital.  Consequently, we believe that working capital is
not an appropriate measure of our liquidity, and we anticipate that we will
continue to operate with a working capital deficit.

Critical Accounting Policies and Estimates

Our critical accounting policies are described in our Annual Report on Form 10-
K for the fiscal year ended January 1, 2006. Except as noted below, no changes
have occurred to our critical accounting policies during the thirty-nine weeks
ended October 1, 2006.

Rental Inventory

We regularly review, evaluate and update our rental amortization accounting
estimates. Effective January 2, 2006, we reduced the amount capitalized on DVD
revenue sharing units for the Movie Gallery segment such that the carrying
value of the units, when combined with revenue sharing expense on previously
viewed sales, more closely approximates the carrying value of non-revenue
sharing units. We also began to amortize games on an accelerated method for the
Movie Gallery segment, effective January 2, 2006, in order to remain consistent
with observed changes in rental patterns for games. These changes were
accounted for as a change in accounting estimate, which increased cost of
rental revenue by approximately $0 and $11.3 million for the thirteen and
thirty-nine weeks ended October 1, 2006, respectively.  This reduced net income
by $0 and $12.2 million (net of tax), or $0.00 and $0.38 per diluted share, for
the thirteen and thirty-nine weeks ended October 1, 2006, respectively.

Recently Issued Accounting Pronouncements

On March 28, 2006, the Financial Accounting Standards Board ("FASB") issued
EITF 06-3, "How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That is, Gross versus
Net Presentation)" (EITF 06-3) which clarifies how a company discloses its
recording of taxes collected that are imposed on revenue producing activities.
EITF 06-3 is effective for the first interim reporting period beginning after
December 31, 2006.  We are in the process of evaluating the effect of EITF 06-
03 on our financial statements.

On July 13, 2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109,"
which clarifies the way companies account for uncertainty in income taxes.  FIN
48 is effective for the first fiscal year beginning after December 15, 2006.
FIN 48 will be effective for us for the fiscal year beginning January 1, 2007.
We are in the process of evaluating the effect of FIN 48 on our financial
statements.

In April 2006, the FASB issued FSP FIN 46(R)-6, "Determining the Variability to
be Considered in Applying FASB Interpretation No. 46(R)-6," (FSP FIN 46(R)-6)
which addresses certain major implementation issues related to FASB
Interpretation No. 46(R)-6. FSP FIN 46(R)-6 is effective prospectively for to
all entities (including newly created entities) with which that enterprise
first becomes involved and to all entities previously required to be analyzed
under FIN 46(R). We are in the process of evaluating the effect of FSP FIN
46(R)-6 on our financial statements.

In September 2006, the FASB issued FASB Statement No. 157 (SFAS 157), "Fair
Value Measurements", which provides enhanced guidance for using fair value to
measure assets and liabilities. The standard also responds to investors'
requests for expanded information about the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings. The standard
applies whenever other standards require (or permit) assets or liabilities to
be measured at fair value. The standard does not expand the use of fair value
in any new circumstances.  SFAS 157 is effective for us for fiscal years
beginning after November 15, 2007.  We are in the process of evaluating the
effect of SFAS 157 on our financial statements.

In September 2006, the SEC staff released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements" (SAB 108).  SAB 108
provides for a "one-time" special transition provision for correcting certain
prior year misstatements that were uncorrected as of the beginning of the
fiscal year of adoption. SAB 108 permits existing public companies to initially
apply its provisions either by (i) restating prior financial statements as if
the dual approach had always been used or (ii) recording the cumulative effect
of initially applying the dual approach as adjustments recorded to the opening
balance of retained earnings.  SAB 108 is effective for fiscal years ending
after November 15, 2006.  We are in the process of evaluating the effect of
SAB 108 on our financial statements.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our financial position,
operating results, or cash flows due to adverse changes in financial and
commodity market prices and rates. We have entered into certain market-risk-
sensitive financial instruments for other than trading purposes, principally to
hedge against fluctuation in variable interest rates on our short-term and
long-term debt.

The interest payable on the Credit Facility is based on variable interest rates
equal to a specified Eurodollar rate or base rate and is therefore affected by
changes in market interest rates.  However, as required by the Credit Facility,
we have entered into hedge agreements to convert a portion of our variable rate
debt to a fixed rate of interest.  If variable base rates were to increase 1%,
our interest expense on an annual basis would increase by approximately $5.9
million on the non-hedged principal, based on both the outstanding balance on
the Credit Facility as of October 1, 2006 and the Credit Facility's mandatory
principal payment schedule.

Item 4.  Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports that the
Company files or submits under the Securities and Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures.  In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Securities and
Exchange Act Rule 13a-15.  Based upon this evaluation as of October 1, 2006,
management concluded that the Company's disclosure controls and procedures were
not effective for the reasons more fully described below, related to the
unremediated material weaknesses in the Company's internal control over
financial reporting identified during the Company's evaluation pursuant to
Section 404 of the Sarbanes-Oxley Act of 2002 as of the fiscal year ended
January 1, 2006.  To address these control weaknesses, the Company performed
additional analysis and performed other procedures in order to prepare this
Quarterly Report on Form 10-Q, including the unaudited quarterly consolidated
financial statements in accordance with generally accepted accounting
principles in the United States.  Accordingly, management believes that the
condensed consolidated financial statements included in this Quarterly Report
on Form 10-Q fairly present, in all material respects, our financial condition,
results of operations and cash flows for the periods presented.

Management's assessment identified material weaknesses in the Company's
internal control over financial reporting as of January 1, 2006 that are in the
process of being remediated as of October 1, 2006, as described further below.
This section of Item 4, "Controls and Procedures," should be read in
conjunction with Item 9A, "Controls and Procedures," included in the Company's
Annual Report on Form 10-K for the year ended January 1, 2006 for additional
information on Management's Report on Internal Controls Over Financial
Reporting.

As of October 1, 2006, the unremediated material weaknesses were:

Ineffective management review of account analyses and reconciliations.
Management's ineffective review of significant account analyses and
reconciliations prepared as part of the financial reporting process, arising
from a shortage of, and turnover in, qualified personnel, did not function to
reduce to remote the likelihood that material misstatement of certain accrued
liability accounts in the financial statements would not be prevented or
detected in a timely manner.  This material weakness resulted in adjustments to
several accrued liability accounts and related expenses and could affect
substantially all of our significant accounts.

Ineffective communication of accounting policy for capitalizing costs and lack
of effective review process.  Controls related to capitalization of property,
furnishings and equipment, including invoice approval, coding and review
processes, did not function to reduce to remote the likelihood that material
misstatements of property, furnishings and equipment and store operating
expenses would not be prevented or detected in a timely manner.  This material
weakness resulted in adjustments to property, furnishings and equipment,
depreciation expense, accumulated depreciation, and store operating expenses.

Inaccurate or lack of timely updating of accounting inputs for key estimates
and assumptions.  Controls that reasonably assure the accurate and timely
updating of accounting data used in making estimates for financial reporting
purposes did not function to reduce to remote the likelihood that errors in
accounts affected by estimation processes could result in material
misstatements that would not be prevented or detected in a timely manner.  This
deficiency is due, in part, to a lack of, and turnover in, qualified people
with sufficient skills and experience, and in part to ineffective or incomplete
policies and procedures surrounding periodic review and updating of key
estimates and assumptions.  This material weakness resulted in adjustments to
rental inventory amortization, store supplies, merchandise inventory, accrued
liabilities, and asset retirement obligations.

Remediation

The Company has taken the following actions to address these material
weaknesses:

Capitalizing costs - Management issued a Capital Expenditures policy on June
30, 2006 that includes guidance and thresholds in accounting for fixed asset
additions and developed a monitoring control to regularly review the details of
fixed asset additions in accordance with the policy.

Management has taken the action described above, which it believes addresses
the material weakness related to properly capitalizing costs.  Tests for
effectiveness of these controls will likely be completed in the fourth quarter
of fiscal 2006.  As a result, management will not be able to determine whether
or not the remediation was successful until that time.  Remediation efforts
surrounding ineffective management review of account analyses and
reconciliations, and inaccurate or lack of timely updating of accounting inputs
for key estimates and assumptions will likely occur in the fourth quarter of
fiscal 2006 in conjunction with integrating the majority of the Company's
accounting functions into its Wilsonville, Oregon location.

Other Changes in Internal Control over Financial Reporting

Pursuant to ongoing merger and process integration efforts arising out of the
Hollywood acquisition, there continues to be a transition of certain financial
reporting functions from the Company's headquarters in Dothan, Alabama to the
Wilsonville, Oregon location.  There have been no other changes in the
Company's internal control over financial reporting, other than those
previously noted, during the most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

Part II - Other Information

Item 1.  Legal Proceedings

Hollywood and the members of its former board of directors (including
Hollywood's former chairman, Mark Wattles) were named as defendants in several
lawsuits in the Circuit Court in Clackamas County, Oregon.  The lawsuits, filed
between March 31, 2004 and April 14, 2004, asserted breaches of duties
associated with the merger agreement executed by Hollywood with a subsidiary of
Leonard Green & Partners, L.P., or LGP.  The Clackamas County actions were
later consolidated and the plaintiffs filed an Amended Consolidated Complaint
alleging four claims for relief against Hollywood's former board members
arising out of the merger of Hollywood with Movie Gallery. The purported four
claims for relief are breach of fiduciary duty, misappropriation of
confidential information, failure to disclose material information in the proxy
statement in support of the Movie Gallery merger, and a claim for attorneys'
fees and costs. The Amended Consolidated Complaint also names UBS Warburg and
LGP as defendants. Following the merger with Movie Gallery, the plaintiffs
filed a Second Amended Consolidated Complaint.  The plaintiffs restated their
causes of action and generally allege that the defendants adversely impacted
the value of Hollywood through the negotiations and dealings with LGP.
Hollywood and the former members of its board have also been named as
defendants in a separate lawsuit entitled JDL Partners, L.P. v. Mark J. Wattles
et al. filed in Clackamas County, Oregon, Circuit Court on December 22, 2004.
This lawsuit, filed before Hollywood's announcement of the merger agreement
with Movie Gallery, alleges breaches of fiduciary duties related to a bid by
Blockbuster Inc. to acquire Hollywood, as well as breaches related to a loan to
Mr. Wattles that Hollywood forgave in December 2000. On April 25, 2005, the JDL
Partners action was consolidated with the other Clackamas County lawsuits.  The
plaintiffs seek damages and attorneys' fees and costs.  Hollywood denies these
allegations and is vigorously defending this lawsuit.

Hollywood was named as a defendant in a sexual harassment lawsuit filed in the
Supreme Court of the State of New York, Bronx County on April 17, 2003.  The
action, filed by eleven former female employees, alleges that an employee, in
the course of his employment as a store director for Hollywood, sexually
harassed and assaulted certain of the plaintiffs, and that Hollywood and its
members of management failed to prevent or respond adequately to the employee's
alleged wrongdoing.  The plaintiffs seek unspecified damages, pre-judgment
interest and attorneys' fees and costs.  Hollywood denies these allegations and
is vigorously defending this lawsuit.

In addition, we have been named to various other claims, disputes, legal
actions and other proceedings involving contracts, employment and various other
matters.  A negative outcome in certain of the ongoing litigation could harm
our business, financial condition, liquidity or results of operations.  In
addition, prolonged litigation, regardless of which party prevails, could be
costly, divert management attention or result in increased costs of doing
business. We believe we have provided adequate reserves for contingencies and
that the outcome of these matters should not have a material adverse effect on
our consolidated results of operation, financial condition or liquidity.

At October 1, 2006, the legal contingencies reserve, net of expected recoveries
from insurance carriers, was $1.6 million, of which $1.1 million relates to
pre-acquisition contingencies.  Adjustments related to pre-acquisition
contingencies made after the anniversary date of the acquisition will be
recognized in the income statement in the period when such revisions are made.
All other adjustments related to matters existing as of the date of acquisition
of Hollywood will be recognized in the income statement in the period when such
revisions are made.

Item 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended January 1, 2006 includes a
detailed discussion of our risk factors.  The information presented below
amends, updates and should be read in conjunction with the risk factors and
information disclosed in our Annual Report on Form 10-K for the fiscal year
ended January 1, 2006.

Our projected inability to maintain the financial ratios in our Credit Facility
may require us to seek alternative sources of financing.

Our Credit Facility requires us to maintain certain financial ratios.  The
financial covenants contained in the Credit Facility will become significantly
more restrictive beginning with the measurement following the first quarter of
2007.  Unless we are successful in obtaining an additional amendment to the
financial covenants in the Credit Facility, our projected operating results
indicate that we will fail the more restrictive financial covenant tests
effective as of April 1, 2007.  We cannot assure you that such amendments or
additional debt or equity financings can be obtained on acceptable terms, if at
all.  Our financial condition, in particular our significant indebtedness, may
make it difficult for us to obtain such an amendment.  In order to obtain such
an amendment, we may be forced to incur significant expenses or agree to other
restrictive covenants that limit our operating flexibility.

Any failure to comply with the financial or other covenants contained in our
Credit Facility may allow our creditors to accelerate the related debt and may
result in the acceleration of any other debt to which cross-acceleration or
cross-default provisions apply.  In addition, these creditors may be able to
terminate any commitments they had made to provide us with further funds.  See
Management's Discussion and Analysis of Financial Condition and Results of
Operations, "Liquidity and Capital Resources," for more information on our
restrictive and financial covenants.

Uncertainty surrounding our ability to meet our financial obligations has
adversely impacted and could continue to adversely impact our ability to obtain
sufficient product on favorable terms.

Since our acquisition of Hollywood in April 2005, we have entered into two
amendments of the Credit Facility pursuant to which certain covenants in our
Credit Facility were amended or waived.  This, coupled with the continued
declines and uncertainty in the rental industry, has caused negative publicity
surrounding our business.  As a result, our flexibility with our suppliers has
been affected, and this risk may be exacerbated by the reclassification of
borrowings under our Credit Facility as current liabilities on our balance
sheet.  We cannot assure you that our trade creditors will not further change
their terms for payment on goods and services provided to us or that we will
continue to be able to receive products and services on acceptable terms.  To
the extent our trade creditors change their terms in a manner that is adverse
to us, this will increase the amount of cash that we need to operate our
business, which may not be available on acceptable terms from lenders, or at
all.

Our business could be adversely impacted if movie studios negatively altered
revenue sharing programs.

Prior to studio revenue sharing programs and the advent of DVD, we would
typically pay between $35 and $65 per videocassette for major theatrical
releases not priced as sell-through titles.  Under studio revenue-sharing
programs, we are able to pay a minimal up-front cost per unit and thereafter
pay a percentage of each revenue dollar earned for a specified period of time
to the studios.  We currently utilize these types of programs for a significant
number of movie releases.  These programs have enabled us to significantly
increase the number of copies carried for each title, thereby enabling us to
better meet consumer demand.  After a specified period of time, we offer the
copies for sale to our customers as "previously viewed movies" at lower prices
than new copies of the movie.  We could be adversely affected if these programs
are changed to give the movie studios a greater percentage of each revenue
dollar or if such programs are discontinued.  Additionally, studio revenue-
sharing programs permit the studios, in the ordinary course of business, to
audit our records to determine whether we have complied with the terms of these
programs.  There can be no assurance that we will not be required to pay
additional amounts, which may be material, as a result of these audits.
Further, some of our agreements may be terminated on short notice.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Submission of Matters to a Vote of Security Holders

None.

Item 5.  Other Information

None.

Item 6.  Exhibits

a)  Exhibits

31.1  Certification of Chief Executive Officer pursuant to Rule 13a-
      14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934.

31.2  Certification of Chief Financial Officer pursuant to Rule 13a-
      14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934.

32.1  Certification of Chief Executive Officer pursuant to Rule 13a-
      14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18
      U.S.C Section 1350.

32.2  Certification of Chief Financial Officer pursuant to Rule 13a-
      14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18
      U.S.C Section 1350.


                                 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.

                                 Movie Gallery, Inc.
                                 -------------------
                                 (Registrant)


Date:  January 19, 2007          /s/ Thomas D. Johnson, Jr.
                                 -------------------------------
                                 Thomas D. Johnson, Jr.,
                                 Senior Vice President and Chief
                                 Financial Officer