How may I vote for the proposal toto ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2006,January 6, 2008, and how many votes must the proposal receive to pass?

You may:

·       vote FOR the proposal;

·       vote AGAINST the proposal; or

·       ABSTAIN from voting on the proposal.

The ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm requires the affirmative vote of a majority of the shares present, in person or by proxy, at the annual meeting and entitled to vote. If you do not vote in person or by proxy, your shares will not be counted as present at the annual meeting and will have no effect on the proposal unless a quorum is not present. If you return your proxy card, but abstain from voting on the proposal, your abstentionthis will have the same practical effect as a vote against the proposal.

How does the boardBoard recommend that I vote on all of the items of business presented for a vote at the annual meeting?

The boardBoard recommends a vote:

·       FOR the election of Joe T. Malugen, H. Harrison Parrish, William B. Snow, John J. Jump and James C. Lockwood to the boardBoard of directors;Directors;

·       FOR the approval of the Movie Gallery, Inc. Performance Bonus Plan;amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of common stock from 65,000,000 to 250,000,000 and the number of authorized shares of our preferred stock from 2,000,000 to 10,000,000; and

·       FOR the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2006.January 6, 2008.

With respect to any other matters that are properly presented at the annual meeting for consideration, the persons named in the proxy will have the discretion to vote on those matters for you. As of the date of this proxy statement, we do not know of any other matters to be presented for a vote at the annual meeting.

What happens if I sign and return my proxy card but do not provide voting instructions?

If you return a signed proxy card but do not provide voting instructions, your shares will be voted in accordance with our board’sBoard’s recommendations on each of the proposals described in this proxy statement.

Will my shares be voted if I do not sign and return my proxy card?

If you are a stockholder of record and you do not sign and return your proxy card or attend the annual meeting and vote in person, your shares will not be voted and will not count in deciding the matters presented for stockholder consideration in this proxy statement.

If your shares are held in street name through a broker, bank or brokerother nominee or fiduciary and you do not provide voting instructions to your broker, bank or brokerother nominee or fiduciary before the annual meeting, it will be entitled to vote your shares with respect to “routine” matters, but it will not be permitted to vote your shares with respect to “non-routine” matters. In the case of a proposal on a non-routine matter, your shares will be considered “broker non-votes.”  The election of directors and the ratification of the appointment of our independent registered

public accounting firm are routine matters, and your failure to instruct your bank, broker or other nominee or fiduciary will have no impact on the outcome of these proposals. TheBecause the approval of the amendment to the Movie Gallery, Inc. Performance Bonus PlanCertificate of Incorporation is a non-routine matter and requires the affirmative vote of a majority of the outstanding shares entitled to vote thereon, broker non-votes will have no impact on the outcome of thissame practical effect as a vote against the proposal.

Who bears the cost of this proxy solicitation?

We will pay the costs of soliciting proxies. Proxies may be solicited on our behalf by our directors, officers or employees in person or by telephone, mail or other means, for which no compensation will be paid other than their regular salary or usual compensation. We have no present plans to hire special employees or paid solicitors to assist in obtaining proxies, but we reserve the option to do so if it appears that we may not otherwise obtain a quorum at the annual meeting. Arrangements may also be made with banks, brokerage firms and other nominees and fiduciaries to forward proxy materials to the beneficial owners of shares eligible to vote at the annual meeting, and we will, upon request, reimburse them for their reasonable expenses in so doing.doing so.

5

PROPOSAL 1—ELECTION OF DIRECTORS

Currently, our boardBoard consists of five directors. Our boardBoard has determined that three of our directors are independent directors under requirements imposed by the Securities and Exchange Commission, or the SEC, and the Nasdaq Stock Market, or Nasdaq. Our boardBoard may by resolution change the number of directors on the board.Board.

Directors are elected at each annual meeting of stockholders and hold office until their respective successors are elected and qualified. Directors are elected by a plurality of the votes cast at the annual meeting, and shares may not be voted cumulatively.

The nominating committee of the boardBoard has recommended the nomination of, and the Board of Directors has nominated, the individuals named below for election as directors at the annual meeting. Each of the director nominees is currently a member of the boardBoard of directors,Directors, and each director nominee has consented to serve as a director if elected at the annual meeting. There is no family relationship between any of the director nominees and any of our executive officers.

If, at any time prior to the annual meeting, any nominee for director should be unable to serve, or for good cause will not serve, as a director, then the shares represented by properly signed and returned proxy cards will be voted for thea substitute nominee designated by the board.Board. The boardBoard has no reason to believe that any substitute nominee or nominees will be required.

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” PROPOSAL 1, THE ELECTION OF THE NOMINEES FOR DIRECTOR, JOE T. MALUGEN, H. HARRISON PARRISH, JOHN J. JUMP, JAMES C. LOCKWOOD AND WILLIAM B. SNOW, AS OUR DIRECTORS TO SERVE UNTIL THE NEXT ANNUAL MEETING OF STOCKHOLDERS.

Information Relating to Director Nominees

The information below provides the names, ages, positions and information regarding the business experience and occupations of our director nominees as of April 28, 2006.20, 2007.

(1)          Member of the Compensation Committee

(2)          Member of the Audit Committee

(3)          Member of the Nominating Committee

(4)          Lead Independent Director

Mr. Malugenco-founded Movie Gallery in 1985 and has been our Chairman of the Board and Chief Executive Officer since that time. Mr. Malugen was appointed President effective January 4, 2002. Prior to our initial public offering in August 1994, Mr. Malugen had been a practicing attorney in the states of Alabama and Missouri since 1978, but spent a majority of his time managing the operations of Movie Gallery beginning in early 1992. Mr. Malugen received a B.S. degree in Business Administration from the

University of Missouri—Columbia, his J.D. from Cumberland School of Law, Samford University and his LL.M. (in Taxation) from New York University School of Law.

Mr. Parrish co-founded Movie Gallery in 1985 and has served as a director since that time. He was elected Vice Chairman of the Board in June 2002. Mr. Parrish served as President of Movie Gallery from 1985 until his resignation on January 4, 2002, at which time Mr. Parrish assumed the position of Senior Vice President—Concessions. Mr. Parrish received a B.A. degree in Business Administration from The University of Alabama.

Mr. Jumpbecame a director of Movie Gallery in June 2003. He is the President and Owner of Jump Start Promotions,Since July 2006, he has served as a specialty advertising business that he founded in September 2000.  Since August 2004,Manager for Accent Marketing, Inc. Mr. Jump has also served aswas a Managing Partner for Foodservice Equipment Brokers of MO., Inc. From August 2002from July 2004 until July 2004, he2006. He served as Business Manager, Operations for Convergys Corporation.Corporation from August 2002 until July 2004. Mr. Jump served as Chairman of the boardBoard of directorsDirectors of Video Update, Inc. from May 2001 until December 2001, and he served as its interim Chief Executive Officer from November 2001 until December 2001. Mr. Jump served as Executive Vice President, Sales and Marketing of Sight and Sound Distributors, Inc., a home video distribution company, from 1985 to 2000. Mr. Jump received a B.A. degree in Psychology from the University of Missouri at St. Louis.

Mr. Lockwoodbecame a director of Movie Gallery in June 2004. He has served as Vice President, General Counsel and Secretary of Keystone Automotive Industries, Inc., a publicly held distributor of aftermarket collision replacement parts since 1997.from 1997 to February 2007 when he resigned as an officer. From 1985 until 1997, Mr. Lockwood was a member of the law firm of Troy and Gould. Mr. Lockwood was an investment banker with Montgomery Securities from 1984 to 1985. Mr. Lockwood received a B.S. degree in Chemical Engineering from the Georgia Institute of Technology and his J.D. from the University of Michigan.

Mr. Snow became a director of Movie Gallery in July 1994. He served as Vice Chairman of the Board from July 1994 until June 2002, and served as Chief Financial Officer from July 1994 until May 1996. Mr. Snow was the Executive Vice President and Chief Financial Officer and a Director of Consolidated Stores Corporation, a publicly held specialty retailer, from 1985 until he retired in June 1994. Mr. Snow is a Certified Public Accountant, and he received his Masters in Business Administration from the Kellogg Graduate School of Management at Northwestern University and his Masters in Taxation from DePaul University.

The Board of Directors

Meetings of the Board

Our directors are expected to attend all meetings of the boardBoard of directorsDirectors and committees on which they serve. Our boardBoard held 12eighteen meetings during the fiscal year ended January 1,December 31, 2006. All of our directors attended at least 75% of the aggregate number of all applicable boardBoard and committee meetings during fiscal 2005.2006. Our directors are also expected to attend our annual meeting of stockholders, and all of our directors attended the 20052006 annual meeting.

Committees of the Board

Our boardBoard of directorsDirectors has three standing committees—the Compensation Committee, the Audit Committee and the Nominating Committee. The Compensation Committee, Audit Committee and Auditthe Nominating Committee were established prior to fiscal 2005, and our board established the Nominating Committee on September 22, 2005.2006. Membership and principal responsibilities of the boardBoard committees are described below.

Compensation Committee.During the fiscal year ended January 1,December 31, 2006, our Compensation Committee met 10nine times and was comprised of the following members:

Each of the members of our Compensation Committee meets the definition of independence established by Nasdaq. We have adopted a Compensation Committee Charter, a copy of which is posted on our website at www.moviegallery.com. OurA description of the Compensation Committee’s responsibilities areprocesses and procedures for the consideration and determination of executive compensation is set forth in the below “Joint Report of the Board of Directorsunder “Executive Compensation—Compensation Discussion and Compensation Committee on Executive Compensation.Analysis.”

Audit Committee.During the fiscal year ended January 1,December 31, 2006, our Audit Committee met 12thirteen times and was comprised of the following members:

Our boardBoard has affirmatively determined that each member of our Audit Committee is financially literate and that Mr. Snow qualifies as an “audit committee financial expert” within the meaning of SEC rules and regulations. As of the date of this proxy statement, all three members of our Audit Committee are, and effective immediately following our annual meeting we expect that each member will be, independent directors as defined by Rule 10A-3(b)(1) of the Securities Exchange Act of 1934 and by Rule 4200(a)(15) of the National Association of Securities Dealers, or NASD Marketplace Rules.

Our boardBoard of directorsDirectors has adopted an Audit Committee Charter, a copy of which is included as Appendix A to this proxy statement and is posted on our website at www.moviegallery.com. The Audit Committee’s responsibilities are set forth in the below under “Report of the Audit Committee.”

Nominating Committee.   Because our board did not create the Nominating Committee until September 22, 2005, our Nominating Committee did not meet duringDuring the fiscal year ended January 1, 2006. TheDecember 31, 2006, our Nominating Committee met once and was comprised of the following members:

As of the date of this proxy statement, each member of our Nominating Committee is, and effective immediately following our annual meeting we expect that each member will be, independent as defined by the NASD Marketplace Rules.

On September 22, 2005, our boardOur Board of Directors has adopted a Nominating Committee Charter, a copy of which is posted on our website at www.moviegallery.com. Our Nominating Committee Charter defines the committee’s principal duties and responsibilities, which include, among other things:

·       periodically reviewing and making recommendations to our boardBoard of directorsDirectors regarding the appropriate size and composition of the boardBoard of directorsDirectors and committees;

·       identifying individuals qualified to serve on our boardBoard of directors;Directors;

·       establishing and recommending to our boardBoard of directorsDirectors a policy and procedures for receiving recommendations from stockholders for director candidates;

·       considering suggestions for membership on the boardBoard of directorsDirectors submitted by stockholders;

·       recommending a slate of director nominees for consideration by our boardBoard of directorsDirectors and recommending director candidates to fill vacancies; and

·       assessing annually the adequacy of the Nominating Committee charter.Charter.

Director Nominations

Our boardBoard of directorsDirectors believes that directors should have the highest professional and personal ethics and values, consistent with our longstanding values and standards. They should have broad experience at the policy-making level in business, government, education, technology or public interest. They should be committed to enhancing stockholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on other boardsBoards of public companies should be limited to a number that permits them, given their individual circumstances, to perform responsibly all director duties. Each director must represent the interests of all of our stockholders.

For our 20062007 Annual Meeting, the Nominating Committee has nominatedrecommended the nomination of the current members of our boardBoard of directorsDirectors to draw on their experience with the Company. Our Nominating Committee utilizes a variety of methods for identifying and evaluating nominees for director. In the future, theThe Nominating Committee will periodically assessassesses the appropriate size of the boardBoard and whether any vacancies on the boardBoard are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Nominating Committee will consider various potential candidates for director. Candidates may come to the attention of the Nominating Committee through current boardBoard members, professional search firms, stockholders or other persons. These candidates will be evaluated at meetings of the Nominating Committee, and may be considered at any point during the year. As described below, the Nominating Committee will consider stockholder nominations for candidates for the board.Board. If any materials are provided by a stockholder in connection with the nomination of a director candidate, the materials will be forwarded to the entire Nominating Committee. The Nominating Committee will also review materials provided by professional search firms or other parties in connection with a nominee who is not proposed by a stockholder.

Subject to the advance notice, information and other requirements set forth in our Bylaws, the Nominating Committee will consider stockholder nominations for candidates for membership on the boardBoard of directors.Directors. In evaluating such nominations, the Nominating Committee seeks to achieve a balance of knowledge, experience and capability on the board.Board. Any stockholder nominations proposed for consideration by the Nominating Committee should include the proposed nominee’s name, age, address,business and residence addresses, principal occupation or employment during the past ten years, number and class of shares of our stock held beneficially or of record by the proposed nominee, and the proposed nominee’s qualifications for boardBoard membership. In addition, the stockholder submitting the nomination must provide his or her name and address number and classnumber of shares of our stock held beneficially or of record by the stockholder, a description of any arrangements or understandings between the stockholder and the proposed nominee or other persons pursuant to which the nomination is made, and a statement that the stockholder intends to appear in person or by proxy at the meeting to nominate the proposed nominee. Stockholder nominations should be addressed to:

We must receive any stockholder nominations for director at our principal executive offices no later than 120 calendar days prior to the anniversary of the date we mailed proxy statements to our stockholders in connection with ourthe previous year’s annual meeting.

Director Compensation

Non-employee directors receive an annual fee of $48,000, a fee of $2,000 for each boardBoard meeting the director attends in person and a $1,000 fee for each boardBoard meeting in which the director participates telephonically. Audit Committee members receive a fee for each meeting of $2,500 for the chairman of the committee and $1,500 for each other committee member. Fees for each other committee meeting are $2,000 for the chairman of the committee and $1,000 for each other committee member. Each member of our board of directors, other than Mr. Malugen, also received a $10,000 cash bonusIn addition, in connection with and in recognition of the extraordinary effort required by our merger with Hollywood Entertainment Corporation. We have also2006 we granted vested options to purchase10,000 shares of our common stock to each of our non-employee directors, in each case at the fair market value of the common stock on the date of grant.  In addition, we have granted restricted stock with a one-year vesting period to each of our non-employee directors.

The following table summarizes the cash and equity compensation paid to our directors for fiscal 2006.

(1)          Joe T. Malugen, the Company’s Chairman of the Board, President and Chief Executive Officer is not included in this table as he is a Named Executive Officer of the Company and receives no compensation for his services as a director. The compensation received by Mr. Malugen as an employee of the Company is shown in the Summary Compensation Table on page 20.

(2)          Reflects the proportionate amount of the total fair value of stock awards recognized by the Company as an expense in 2006 for financial accounting purposes, disregarding for this purpose the estimate of forfeitures related to service-based vesting conditions. The fair values of these awards and the amounts expensed in 2006 were determined in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment (which we refer to as FAS 123R). The assumptions used in determining the grant date fair values of these awards are set forth in Note 9, “Stock Based Compensation,” in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2006.

The following table shows: (i) the grant date fair value of restricted shares received by Messrs. Jump, Lockwood and Snow as determined in accordance with FAS 123R, (ii) the total number of restricted shares held as of December 31, 2006 and (iii) the total number of stock options held as of December 31, 2006:

(3)          H. Harrison Parrish, the Company’s Vice Chairman of the Board and Senior Vice President—Concessions, is an employee of the Company and did not receive any compensation for his services as a director. Mr. Parrish received total compensation of $326,130 as an employee of the Company in 2006. The compensation received in 2006 by Mr. Parrish as an employee of the Company includes the following: $125,000 of salary compensation, $71,100 of non-equity incentive plan compensation, $120,986 of stock awards, (based on the amount of expense recognized in 2006 by the Company under FAS 123R with respect to restricted stock granted to Mr. Parrish) and $9,044 of other compensation.

Director Independence

NASD Marketplace rules require that our boardBoard shall have at all times a majority of independent directors, as such term is defined by the NASD Marketplace Rules. Our boardBoard has affirmatively determined that Messrs. Jump, Lockwood and Snow, encompassing three of our five directors, are independent. As of the date of this proxy statement, our Compensation Committee, Audit Committee and Nominating Committee are comprised solely of independent directors.

Executive Sessions of Non-Management Directors

Our non-management directors meet without management present, which we refer to as meetings in “executive session,” at certain regularly scheduled boardBoard meetings, as well as periodically by telephone. Mr. Jump, who is our lead independent director, presides over executive sessions of the non-management directors.

Stockholder Communications with the Board

Any stockholder who wishes to communicate directly with all directors or specified directors may do so by writing to:

All communications will be compiled by our corporate secretary and forwarded to the entire boardBoard of directorsDirectors or the directors specified by the stockholder.

11

Code of Ethics

Our boardBoard has adopted a Code of Business Conduct and Ethics applicable to the Company’s Chief Executive Officer, Chief Financial Officer and all other directors, officers and employees of the Company. Our Code of Business Conduct and Ethics embodies our commitment to conduct business in accordance with the highest ethical standards and all applicable laws, rules and regulations. Our Code of Business Conduct and Ethics is available to any stockholder who makes a written request to the Corporate Secretary at the address listed above and on our website at www.moviegallery.com.

10Compensation Discussion and Analysis

This Compensation Discussion and Analysis (“CD&A”) provides an overview and analysis of the Company’s executive compensation programs, including how compensation decisions with respect to our top executive officers were made in 2006. This proxy statement also includes specific information about the compensation earned or paid in 2006 to the following individuals, whom we refer to as our Named Executive Officers:

·       Joe T. Malugen, President and Chief Executive Officer;

·       Thomas D. Johnson, Jr., Executive Vice President and Chief Financial Officer;

·       Mark D. Moreland, Former Interim Chief Financial Officer;

·       Timothy R. Price, Former Chief Financial Officer;

·       S. Page Todd, Executive Vice President, Secretary, General Counsel and Chief Compliance Officer;

·       Jeffrey S. Stubbs, Executive Vice President and Chief Operating Officer; and

·       Keith A. Cousins, Executive Vice President and Chief Development Officer.

The Compensation Committee of the Board of Directors is responsible for executing the Board’s responsibilities with regard to compensation of the executive officers of the Company. These duties include the following:

·       Determining the compensation of the Chief Executive Officer based on its evaluation of the performance of the Chief Executive Officer with respect to goals and objectives established by the Committee at the beginning of each year;

·       Reviewing and approving all compensation of executive officers other than the Chief Executive Officer, based on the Chief Executive Officer’s recommendation to the Committee;

·       Reviewing and approving all executive employment agreements and severance arrangements;

·       Establishing and reviewing policies regarding perquisites granted to executive officers; and

·       Approving and recommending to the Board for approval all grants made under the Company’s incentive compensation and equity-based plans, including establishing performance targets where applicable and certifying achievement against said targets.

The Committee engages a consultant, Semler Brossy Consulting Group, LLC, to assist in the review and planning of executive compensation. Semler Brossy reports directly to the Compensation Committee and does not have any current or prior consulting engagements with the Company or with any firm acquired by the Company. In fulfilling the duties assigned by the Committee, Semler Brossy meets with management to discuss compensation recommendations that management makes to the Committee. Semler Brossy provides its opinion separately to the Compensation Committee on all recommendations provided by management, and also advises the Committee in its deliberations on the Chief Executive Officer’s compensation and on trends in executive compensation matters across retail and general industry firms. The Committee retains its authority over all decisions.

Elements of Executive Compensation Program

The Company’s executive compensation program has five components—base salary, annual cash incentives, equity awards, other benefits and perquisites, and severance and change in control benefits. The Committee believes that this approach to total compensation, with a minimal number of programs, is preferable to one with many plans and arrangements because it makes actual compensation opportunities and incentives more clear. The elements of the program and their objectives are outlined below.

Compensation Positioning

The overall goal of the Company’s compensation program is to attract and retain qualified executive officers by providing compensation that is competitive with peer companies in similar industries and that

also reflects each executive’s unique talents, experience and responsibilities. The Committee also considers comparisons of compensation among Company executives in its decision-making.

Peer Group

The Committee uses a peer group that includes the major companies in the home entertainment industry plus retail companies and restaurants with comparable business characteristics as a reference point in assessing the overall competitiveness of compensation levels, opportunities and practices. The Committee uses a broader peer group since competition for qualified executive talent is not limited to the few direct competitor companies and also to make sure that there is enough data for meaningful comparisons. The Committee does not target a fixed percentile positioning against these peers. Instead, the members of the Committee rely on their business judgment and industry experience to establish compensation programs and opportunity that they believe will drive Company performance.

Peer companies are selected based on their similarity to the Company in terms of revenue, profitability, and revenue per outlet. The Committee reviews the criteria and the composition of the peer group periodically, and adds or removes companies as appropriate. The 2006 peer group included the following 16 companies.

Compensation Peer Group

Annual Cash

Annual cash compensation includes salary and annual incentive bonuses. The Committee establishes salary levels and annual bonus opportunity at the beginning of each year and also the performance measure(s) and level of achievement required to earn a bonus. The Committee reviews several factors in setting annual cash compensation:

·       Assessment of overall individual prior performance and potential;

·       Importance of the executive’s position to the Company’s strategy; and

·       Competitive information determined by peer group analysis.

The annual incentive program provides an opportunity to earn a cash bonus based on the Company’s annual performance. It is designed to focus executive officers on the financial performance measures that are critical to our success.

Equity Awards

The Committee believes that providing executive officers with an equity stake in the Company encourages them to think and act like owners and take actions that serve the best interests of our stockholders. The Company does not have a practice of automatically granting equity awards to its

executive officers on an annual basis, but has historically from time to time granted equity awards to its executive officers as well as to a broader employee base.

The Committee reviews and recommends to the Board for approval, all equity awards. The Committee determines the size of equity awards to be granted to the Chief Executive Officer and seeks the input of the Chief Executive Officer in determining individual grants to other executive officers. The Company’s Human Resource and Benefits function supports this process by providing pay and prior grant history. The Committee takes this information, as well as an assessment of an individual’s relative importance to the Company, into consideration when discussing and approving equity grants.

The Company does not have any program, plan or practice of coordinating the timing of equity grants with the release of material non-public information. All grants are made under a stockholder-approved equity incentive plan, pursuant to the guidelines outlined later in this CD&A. Since they are not regular, equity awards are determined independently from the award process for annual cash incentives. The Committee has considered adopting a regular grant cycle, and may adopt one in the future. However, for the Company’s current needs, the Committee has retained the flexibility to make awards on a periodic basis. The Company does not have equity ownership guidelines for executive officers.

Compensation Mix

The Committee believes that a significant portion of compensation should be performance-based (in the form of annual or long-term incentives) to effectively focus executive officers on short- and long-term profitability, and return to stockholders.

The Committee does not target an overall mix of fixed and variable compensation elements. The mix of compensation delivered to executive officers is an outcome of the approaches to annual cash and equity awards described above. The amount of an executive’s performance-based compensation should be directly related to his or her ability to impact the Company’s performance. This is reflected in the fact that the Chief Executive Officer has the largest portion of his total direct compensation as variable “at risk” compensation, and the other Named Executive Officers have a more balanced mix.

2006 Compensation Elements As a Percent of Actual Total Annual Compensation

(1)          Consists of actual annual incentive bonuses paid in 2006.

(2)          Consists of restricted stock.

2006 Executive Compensation

Context for 2006 Executive Compensation Decisions.   2006 was a year of continued significant change for the Company. The Company increased significantly in size and complexity with the acquisition of Hollywood Entertainment Corporation (“Hollywood”) in April 2005. This acquisition occurred just prior to a downturn in the video rental industry that continued through 2006. To respond to these changes, the

Company undertook a full reassessment of its structure and senior executive team, and believes that the Named Executive Officers outlined in this CD&A are the appropriate ones to lead the Company. Accordingly, all compensation programs have been structured to provide appropriate incentives to maximize Company performance.

Base Salary.   The Committee approved salary increases for two executive officers in 2006. The changes, outlined in the table below, reflect significant increases in those executive’s responsibilities due to promotions. In particular, the increase in Mr. Cousins’ salary reflects the increased strategic importance of the Company’s real estate portfolio and the increase in Mr. Johnson’s’ salary reflects his promotion to Chief Financial Officer and the increased complexity of that role resulting from the acquisition of Hollywood.

Annual Incentives.   The Committee established EBITDA (earnings before interest, taxes, depreciation and amortization) as the performance measure for 2006. EBITDA targets for each of the participants in the plan were set at the Corporate level, at the Movie Gallery division, or at the Hollywood division, depending on each executive officer’s primary area of responsibility. Target bonus opportunities were set as a percentage of each executive officer’s base salary. The actual bonus amounts earned could range from no bonus for performance below a threshold level to 200% of target bonus for exceptional performance.

The 2006 target performance was established based on the Company’s annual budget projections for EBITDA. This method of establishing targets for the bonus program has been used consistently by the Company in prior years. In 2004 and 2005, the annual incentive plan resulted in minimal payments to executives. With the downturn in the video rental industry, the 2006 target performance EBITDA goal was established based on achieving an increase over the 2006 EBITDA levels required for compliance with the debt covenants under the second amendment to the Company’s previous credit facility.

The threshold level of performance, below which no bonus would be earned, was 12.5% below the target level of EBITDA. The maximum performance level was set at 12.5% above the target level of EBITDA. The relevant measurement level and target bonus award available to each of the Named Executive Officers are outlined in the table below.

In 2006, EBITDA performance at all three measurement levels exceeded target levels, resulting in incentive payouts above target awards. Those participants with corporate responsibility earned a bonus equal to 162.5% of target, those with Movie Gallery responsibility earned 200% of target (maximum payout), and those with Hollywood responsibility earned 150% of target. The Committee did not exercise positive or negative discretion with respect to any annual incentive award under this plan.

Equity Awards.   The Company granted equity awards to all of its Named Executive Officers in 2006. The objective of the awards was to focus executives on long-term company performance and to create retention value among our executive officers. Because retention was a key concern and accounting rules had changed, grants of restricted stock were used in place of options. Restricted shares have intrinsic value on the date of grant and retain some value during times of poor stock price performance, whereas options have no immediate value and provide diminished incentive during times of poor stock price performance. These awards vest over three years at the rate of one-third per year. Amounts granted are outlined in the table below.

(1)          Based on $6.95 closing share price on date of grant (6/8/2006), as determined under FAS 123R and used for accounting purposes.

The Committee did not use the peer group or market information as a reference point in establishing 2006 awards. The 2006 awards were established at levels that the Committee believed would provide meaningful gains to recipients if the Company is successful.

Benefits and Perquisites.   The Company provides basic employee benefits—health and welfare, basic employee life insurance and short-term and long-term disability—to all employees, including executive officers, on an equal basis.

The Chief Executive Officer is permitted to use the company aircraft for his personal travel and that of family members flying with him while he is traveling on Company business. He is reimbursed for such use and resulting taxes up to a total amount of $250,000.

Other executive officers of the Company may use the aircraft for personal travel with the approval of the Chief Executive Officer.

Employment Agreements

The Company currently maintains employment agreements with Messrs. Malugen, Johnson, Todd, Stubbs and Cousins. In addition to the benefits provided, the agreements, with the exception of Mr. Johnson’s agreement, contain non-compete and non-disclosure provisions that apply during the term of employment and for one year after any termination of employment. These agreements generally include the following provisions:

·       Minimum compensation levels, benefits and perquisites;

·       Severance payments upon certain terminations, such as other than for cause;

·       Non-compete and non-disclosure covenants; and

·       Change of control benefits, including terms governing vesting of any outstanding unvested equity awards.

Mr. Malugen does not receive benefits in connection with a change of control under the terms of his employment agreement, which the Committee believes is appropriate given his overall equity stake in the Company.

Mr. Johnson receives change in control benefits only if he is terminated without cause or resigns upon a change of control of the Company. Messrs. Todd, Stubbs and Cousins receive change-in-control benefits only if they are terminated without cause or resign with good reason during the period 180 days prior to or after a change in control of the Company. The Company believes that this “double trigger” approach is appropriate because executive officers are only materially harmed if a change in control results in a reduction in responsibilities, benefits or compensation, a significant change in the location of employment, or loss of employment.

The terms of these employment agreements are described in greater detail beginning on page 22 of the Proxy Statement, and the severance and change in control benefits are outlined in more detail in the “Potential Payments Upon Termination or Change in Control” section of this Proxy Statement.

Policies Governing Compensation Programs

Timing of Equity Awards and Establishment of Grant Price.   To ensure that equity grants are made appropriately, the Company follows a series of practices regarding timing or grant and exercise price determination:

·       The Committee approves and recommends to the Board for approval every grant of equity;

·       The grant date is the date of Board approval; and

·       The exercise price of stock options is equal to the closing price on the grant date.

Section 162(m).   Section 162(m) of the Internal Revenue Code (the “Code”) limits the tax deduction on compensation paid to a Named Executive Officer that exceeds one million dollars in any year. An exception is provided for “performance-based” compensation. The Committee believes that the risk of lost tax deductions caused by non-performance-based compensation is minimal. Payments made to the Chief Executive Officer under the Company’s Performance Bonus Plan qualify as “performance-based” under Section 162(m). The Company grants annual incentive awards and stock options under a stockholder approved plan intended to qualify for deductibility under Section 162(m).

Section 280G.   Section 280G of the Code disallows a company’s tax deduction for what are defined as “excess parachute payments” in connection with a change in control, and Section 4999 of the Code imposes a 20 percent excise tax on any person who receives excess parachute payments.

Under the terms of their contracts, the Company will not make any “gross-up” payments to Messrs. Cousins, Stubbs, and Todd to cover any potential excise taxes resulting from payments made in relation to severance or change in control.

Executive Compensation

Summary Compensation Table

The following table sets forth the cash and other compensation that we paid to our Named Executive Officers or that was otherwise earned by our Named Executive Officers for their services rendered to us in all capacities for theduring fiscal years ended January 1, 2006, January 2, 2005 and January 4, 2004 by our Chief Executive Officer and our four next most highly compensation executive officers who earned more than $100,000 during the fiscal year ended January 1, 2006, whom we refer to as the named executive officers.2006.

(1)          Mr. Price joined Movie GalleryReflects the proportionate amount of the total fair value of the stock awards recognized by the Company as an expense in fiscal 2006 for financial accounting purposes, disregarding for this purpose the estimate of forfeitures related to service-based vesting conditions. The fair values of these awards and the amounts expensed in fiscal 2006 were determined in accordance with FAS 123R. The awards for which expense is shown in this table include stock awards granted in 2006 and described in the 2006 Grants of Plan-Based Awards table beginning on April 27,page 22 of this proxy statement, as well as stock awards granted in 2005 and his compensation reflects amounts paidfor which we continued to him since that date. Mr. Price resignedrecognize expense in 2006. The assumptions used in determining the grant date fair values of these awards are set forth in Note 9, “Stock Based Compensation,” in the Notes to Consolidated Financial Statements included in our Annual Report on April 7,Form 10-K for the year ended December 31, 2006.

(2)          Reflects annual cash incentive awards earned under our annual incentive program. For fiscal 2005, represents amounts earnedinformation regarding our annual incentive program, see the discussion in 2005, but paid in fiscal 2006. For fiscal 2004, represents amounts earned in fiscal 2004, but paid in fiscal 2005. For fiscal 2003, represents amounts earned in fiscal 2003, but paid in fiscal 2004.“Compensation, Discussion and Analysis—2006 Executive Compensation—Annual Incentives.”

(3)          BecauseTax Gross-Up.   Messrs. Malugen and Todd received tax reimbursements of $13,016 and $5,288, respectively, representing reimbursement for the payment of taxes incurred as a result of their personal use of the Company requires executives using company aircraft for aircraft. Mr. Johnson received a tax reimbursement of $3,574 relating to taxes incurred as a result of relocation assistance payments from the Company.

Contributions to 401(k) Plan.   Messrs. Malugen, Moreland, Todd, Stubbs and Cousins received contributions of $2,200, $674, $2,750, $2,750 and $2,750, respectively, to their 401(k) plans.

Personal Use of Company Aircraft.   Messrs. Malugen and Todd received transportation related benefits of $14,737 and $3,494, respectively, representing the incremental aggregate cost to the Company of the personal use to reimburseof the Company for certainaircraft by Messrs. Malugen and Todd. The Company’s incremental costs such ascost is based on actual aircraft hours flown per leg per personal trip and does not include amounts reimbursed to the Company by the executive for landing fees, catering and crew expenses (such as meals and lodging), the amounts reported for personal use of company. Since corporate aircraft are calculated using the Standard Industrial Fare Level (SIFL) tables found in Internal Revenue Services regulations. The Company believes the amounts determined usingused primarily for business travel, this method generally exceed the incrementalmethodology excludes fixed costs to the Company attributable to personal usewhich do not change based on usage, such as pilots’ and other employees’ salaries, purchase costs of the Company’s aircraft by the Company’s executive officers.and non-trip-related hangar expenses.

Relocation Assistance.   Mr. Johnson received relocation assistance payments of $7,789.

Reimbursement of Medical Expenses.   Mr. Johnson received reimbursement of out-of-pocket medical expenses of $2,000.

(4)          Represents $26,160 forMr. Moreland served as our principal financial officer on an automobile allowance and $94,798 for personal useinterim basis from April 7, 2006 until his resignation on June 1, 2006. In connection with his resignation, Mr. Moreland forfeited 4,475shares of the Company’s aircraft (including amounts reimbursed for payment of taxes on that personal use).restricted stock.

(5)          Represents $26,160 for an automobile allowance and $97,410 for personal useMr. Price served as our principal financial officer from June 22, 2005 until his resignation on April 7, 2006. In connection with his resignation, Mr. Price forfeited 16,250 shares of the Company’s aircraft (including amounts reimbursed for payment of taxes on that personal use).restricted stock.

(6)          Represents $26,160 for an automobile allowance and $42,626 for personal use of the Company’s aircraft (including amounts reimbursed for payment of taxes on that personal use).

(7)Represents $5,500 for an automobile allowance and $1,777 for personal use of the Company’s aircraft (including amounts reimbursed for payment of taxes on that personal use).

(8)Represents automobile allowance.

(9)Represents $6,000 for an automobile allowance and $2,203 for personal use of the Company’s aircraft (including amounts reimbursed for payment of taxes on that personal use).

(10)Represents $7,333 for an automobile allowance and $20,775 for personal use of the Company’s aircraft (including amounts reimbursed for payment of taxes on that personal use).

(11)Represents $8,000 for an automobile allowance and $16,608 for personal use of the Company’s aircraft (including amounts reimbursed for payment of taxes on that personal use).

(12)Represents $8,000 for an automobile allowance and $2,858 for personal use of the Company’s aircraft (including amounts reimbursed for payment of taxes on that personal use).

(13)Represents $5,500 for an automobile allowance and $13,391 for personal use of the Company’s aircraft (including amounts reimbursed for payment of taxes on that personal use).

(14)Represents $6,000 for an automobile allowance and $6,482 for personal use of the Company’s aircraft (including amounts reimbursed for payment of taxes on that personal use).

(15)Represents $6,000 for an automobile allowance and $2,276 for personal use of the Company’s aircraft (including amounts reimbursed for payment of taxes on that personal use).

(16)Represents personal use of the Company’s aircraft (including amounts reimbursed for payment of taxes on that personal use).

(17)Amounts reflect the dollar value of restricted stock awards made pursuant to the Movie Gallery, Inc. 2003 Stock Plan during the fiscal year ended January 1, 2006, calculated by multiplying the closing market price of our common stock on the date of grant by the number of shares awarded. The number and value of the aggregate restricted stock holdings as of January 1, 2006 for each of the named executive officers is as follows:  Mr. Malugen—35,000, $196,350; Mr. Stubbs—16,250, $91,163; Mr. Todd—16,250, $91,163; Mr. Loyd—16,250, $91,163; Mr. Price—16,250, $91,163 (all of which were forfeited upon Mr. Price’s resignation). The aggregate value at January 1, 2006 is based on the closing price of $5.61 as of December 30, 2005, the last trading day prior to the fiscal year end. The restricted stock granted to each of the named executive officers includes shares that vest ratably over a four year period and shares that will vest upon the attainment of certain cost savingsReflects severance payments in connection with the integration of our acquisition of Hollywood Entertainment Corporation. For fiscal 2005, 55,000 shares of restricted stock with time-based vesting provisions and 28,750 shares of restricted stock with vesting based upon the attainment of cost savings were granted to the named executive officers (excluding the shares granted to Mr. Price that were subsequently forfeited). Dividends will be paidPrice’s resignation as Chief Financial Officer on shares of restricted stock to the extent paid on our common stock generally.April 12, 2006.

(18)Represents an extraordinary cash bonus paid in connection with the completion of the Company’s acquisition of Hollywood Entertainment Corporation.

Option2006 Grants in Fiscal 2005

We did not grant any stock options or stock appreciation rights to any of the named executive officers during the fiscal year ended January 1, 2006.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option ValuesPlan-Based Awards

The following table sets forth certain information with respectthe individual grants of plan-based awards made to stock options exercised by the named executive officers undereach of our stock plansNamed Executive Officers during the fiscal year ended January 1, 2006, and the value of unexercised stock options as of January 1, 2006.