In a prepared release, Movie Gallery's chief executive Joe Malugen says his company is "excited" to participate in the reorganization of Video Update and in "having input in the disposition of each of the Video Update stores" over the next few months. Dan Potter, chief executive and co-founder of Video Update, declined to comment.

Just three years ago, Video Update had more than 675 stores -- No. 3 in the industry to Blockbuster and Hollywood Entertainment at the time. But that growth was in part due to its purchase of Moovies, a 269-store chain based in South Carolina; that dealalso proved to be a significant factor in the company's undoing. The merger swamped Video Update with debt and strained its management resources at a time of increasing competition and uncertainty for the video rental industry.

Movie Gallery, based in Dothun, AL, owes its success to dominating the small markets ignored by such industry behemoths as Blockbuster and Hollywood Entertainment. Of its 1,036 stores, about 70% are in small markets, while the rest are in larger, metropolitan markets, DeLean says.

Video Update now has about 350 stores, many of which are in competitive metropolitan areas in the Upper Midwest and the Northwest. Video Update also has a big chunk of its stores in Canada. The only area in which they both compete is the Southeast, DeLean says.

Unlike Video Update, Movie Gallery has been profitable the last few years. Earlier this month, the company says it earned $4 million in the first quarter, up 3.1% from the first quarter a year ago. Last year, the company earned $9.5 million on sales of $319 million.