FORM 10-Q                                
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

 
(Mark One)
[X]              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                For the quarterly period ended September 30, 1997
                                       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 0-26526


                                  MOOVIES, INC.
             (Exact name of registrant as specified in its charter)

         Delaware                                            57-1012733
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                           Identification No.)


                        201 Brookfield Parkway, Suite 200
                        Greenville, South Carolina 29607
                    (Address of principal executive offices)

                                   (Zip code)

                                 (864) 213-1700
              (Registrant's telephone number, including area code)

                                 Not Applicable
              (Former name, former address and formal fiscal year,
                         if changed since last report)



         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 such shorter  period that the registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No


The number of shares of common stock, par value $0.001 per share, outstanding at
November 13, 1997 is 12,359,800.


<PAGE>
________________________________________________________________________________
________________________________________________________________________________

                         PART I - FINANCIAL INFORMATION



Item 1.  Consolidated Financial Statements

                                  MOOVIES, INC.
                           Consolidated Balance Sheets
                                 (in thousands)

<TABLE>
<CAPTION>
<S>                                                            <C>             <C>    
                                                               September 30,   December 31,
                             Assets                               1997             1996
                             ------                               ----             ----
                                                               (unaudited)

Current assets:
     Cash and cash equivalents                                  $   2,295      $  4,196
     Receivables                                                    1,302           927
     Merchandise inventory                                          5,220         8,265
     Deferred income tax benefit                                    7,978         1,517
     Other                                                          3,662         2,276
                                                                  -------       -------
         Total current assets                                      20,457        17,181

Videocassette rental inventory, net                                26,987        24,885
Furnishings and equipment, net                                     37,763        30,903
Goodwill                                                           46,644        39,718
Deposits and other assets                                           3,202         1,099
                                                                  -------       -------

                                                                $ 135,053      $113,786
                                                                  =======       =======

              Liabilities and Stockholders' Equity
              ------------------------------------ 

Current liabilities:
     Line of credit                                             $  19,000     $  19,000
     Notes payable                                                      -         2,600
     Current portion of long-term debt                              4,500           168
     Accounts payable                                              16,605        18,864
     Accrued liabilities                                           12,526         3,165
                                                                  -------       -------
         Total current liabilities                                 52,631        43,797

Long-term debt, less current portion                               26,375           101
Deferred income tax payable                                         4,599         7,677
                                                                  -------       -------
                                                                   83,605        51,575

Commitments

Stockholders' equity:
     Preferred stock, $.001 par value; 1,000,000 shares
         authorized; no shares issued and outstanding                  -             -
     Common stock, $.001 par value; 25,000,000 shares
         authorized; issued and outstanding 12,359,800
         shares at September 30, 1997 and 11,926,620 shares
         at December 31, 1996                                          12            12
     Additional paid-in capital                                    61,885        58,336
     Retained earnings (deficit)                                  (10,449)        3,863
                                                                  --------      -------
         Total stockholders' equity                                51,448        62,211
                                                                  -------       -------

                                                                $ 135,053      $113,786
                                                                  =======       =======

</TABLE>
See accompanying notes to consolidated financial statements.

                                       2


<PAGE>


                                                       MOOVIES, INC.

                                           Consolidated Statements of Operations
                                                 (unaudited, in thousands)

<TABLE>
<CAPTION>
                                                            Three Months                Nine Months
                                                         ended September 30,        ended September 30,
                                                         -------------------        -------------------   
                                                         1997        1996           1997         1996
                                                         ----        ----           ----         ----
<S>                                                   <C>          <C>            <C>          <C>    
Revenues:
     Rental revenues                                  $  23,624    $ 19,126       $  69,083    $ 1,760
     Product sales                                        3,794       2,968          12,487      7,934
                                                        -------     -------        --------     ------
                                                         27,418      22,094          81,570      9,694

Operating costs and expenses:
     Operating expenses                                  26,363      16,242          67,366      2,580
     Cost of product sales                                3,375       1,791           9,856      4,958
     Selling, general and administrative                  2,181       2,409           7,214      7,019
     Amortization of Goodwill                               622         465           1,762      1,219
     Merger related costs                                   472           -             472          -
     Restructuring and other charges                     14,060           -          15,560          -
                                                        -------     -------        --------     ------
                                                         47,073      20,907         102,230      5,776
                                                        -------     -------        --------     ------

Operating income (loss)                                 (19,655)      1,187         (20,660)     3,918

Interest expense, net                                    (1,305)       (296)         (2,756)      (997)
Other, net                                                  (26)          3             (55)       (11)
                                                        --------    -------        ---------    ------

Income (loss) before income taxes and loss
     on early extinguishment of debt                    (20,986)        894         (23,471)     2,910


Income tax expense (benefit)                             (8,394)        353          (9,388)     1,155
                                                        --------    -------        ---------    ------

Income (loss) before extraordinary item                 (12,592)        541         (14,083)     1,755

Extraordinary item - loss on early
     extinguishment of debt                                   -         (64)           (229)       (64)
                                                        -------     --------       ---------    -------

Net income (loss)                                      $(12,592)   $    477       $ (14,312)   $ 1,691
                                                        ========    =======        =========    =======

Net income (loss) per share:
     Income (loss) before extraordinary item           $  (1.01)    $  0.05       $   (1.13)   $  0.18
     Extraordinary item                                       -      (0.01)           (0.02)     (0.01)
                                                        -------     -------        ---------    -------
     Net income (loss) per share:                      $  (1.01)    $  0.04        $  (1.15)   $  0.17
                                                        =======     =======        =========    =======

Weighted average shares outstanding                      12,517      11,850          12,414      9,904
                                                        =======     =======        ========     =======

</TABLE>
See accompanying notes to consolidated financial statements.

                                       3

<PAGE>


                                                       MOOVIES, INC.

                                           Consolidated Statements of Cash Flows
                                                        (unaudited)

<TABLE>
<CAPTION>
                                                                              Nine months ended September 30,
                                                                              -------------------------------
                                                                               1997                 1996
                                                                               ----                 ----
                                                                                     (in thousands)
Operating activities:
<S>                                                                        <C>                <C>       
     Net income (loss)                                                     $   (14,312)       $    1,691
     Adjustments to reconcile net income (loss) to net cash
         provided by operating activities:
              Depreciation and amortization                                     22,218            14,827
              Restructuring and other charges                                   14,060                 -
              Changes in operating assets and liabilities:
                  Receivables                                                     (413)            1,861
                  Merchandise inventory                                          2,323            (2,585)
                  Other current assets                                          (1,604)           (1,495)
                  Deposits and other assets                                     (2,434)             (184)
                  Accounts payable                                              (2,298)            2,036
                  Accrued liabilities                                              278               512
                  Deferred income taxes                                         (9,539)            1,100
                                                                             ----------         --------

                  Net cash provided by operating activities                      8,279            17,763
                                                                             ----------         --------

Investing activities:
     Purchases of videocassette rental inventory, net                          (19,457)          (15,351)
     Purchases of furnishings and equipment, net                               (12,850)          (15,600)
     Proceeds from the sale of the grocery division                                  -               746
     Business acquisitions                                                      (5,004)          (11,323)
                                                                             ----------         ---------

                  Net cash used in investing activities                        (37,311)          (41,528)
                                                                             ----------         ---------

Financing activities:
     Proceeds from line of credit borrowings                                    20,000            11,296
     Proceeds from issuance of long-term debt                                   30,000             2,000
     Principal payments on line of credit borrowings                           (19,000)                -
     Principal payments on long-term debt                                       (3,869)          (10,370)
     Proceeds from issuance of common stock, net                                     -            22,481
                                                                            -----------        ----------

                  Net cash provided by financing activities                     27,131            25,407
                                                                            -----------        ----------

Increase (decrease) in cash and cash equivalents                                (1,901)            1,642

Cash and cash equivalents at beginning of period                                 4,196             3,564
                                                                            -----------        ----------

Cash and cash equivalents at end of period                                $      2,295        $    5,206
                                                                            ===========        ==========

Supplemental disclosure of cash flow information:

     Cash paid for interest                                               $      2,520        $     726
                                                                            ==========         ==========

</TABLE>

See accompanying notes to consolidated financial statements.

                                       4

<PAGE>



                                  MOOVIES, INC.
                    NOTES TO CONDENSED FINANCIAL INFORMATION

(1)       Basis of Presentation
          ---------------------
 
          Moovies,  Inc. (the "Company")  currently operates 267 video specialty
          superstores  located  in  Georgia,  South  Carolina,  North  Carolina,
          Tennessee, Virginia,  Pennsylvania, New Jersey, New York, Connecticut,
          Ohio, Iowa, Colorado, Minnesota, Wisconsin, South Dakota, Nebraska and
          Michigan. In addition, the Company is the franchisor for an additional
          43 stores located in Florida, Texas, Louisiana and Kentucky.  Moovies'
          superstores rent and sell a wide range of videos and video games, rent
          video  players and video game  equipment,  and sell video  accessories
          such  as  blank  cassettes,   cleaning  equipment  and  a  variety  of
          confectionery items.

          The  interim  financial  information  included  herein  is  unaudited.
          Certain information and footnote  disclosures normally included in the
          financial  statements  have been condensed or omitted  pursuant to the
          rules  and  regulations  of the  Securities  and  Exchange  Commission
          ("SEC"),  although the Company  believes that the disclosures made are
          adequate  to make  the  information  presented  not  misleading.  This
          financial   information   should  be  read  in  conjunction  with  the
          consolidated  financial  statements and related notes contained in the
          Company's  Annual Report on Form 10-K which was previously  filed with
          the  SEC.  Other  than  as  indicated  herein,   there  have  been  no
          significant  changes from the financial data published in that report.
          In the opinion of management,  such unaudited information reflects all
          adjustments,  consisting only of normal  recurring  accruals and other
          adjustments as disclosed herein,  necessary for a fair presentation of
          the  unaudited  information.  The  results of  operations  for interim
          periods are not necessarily indicative of the results expected for the
          full year.

 (2)      Senior Credit Facility
          ---------------------- 

          In March 1997,  the Company  signed a new senior credit  facility (the
          "Senior  Facility")  for up to  $75.0  million.  The  Senior  Facility
          consists  of  (i) a  five  year  $30.0  million  long-term  note  with
          quarterly  repayments  beginning on September  30, 1997;  (ii) a $41.0
          million capital facilities line and (iii) a $4.0 million revolver. The
          Company may borrow  amounts  under the capital  facilities  line until
          March  31,  1999 at  which  time it will  begin  repaying  any  amount
          outstanding  quarterly over the next three years. The interest rate of
          the Senior  Facility  is  variable  based on LIBOR and the Company may
          repay the Senior  Facility at any time without  penalty.  At September
          30, 1997,  the Company had  outstanding  borrowings  of $49.0  million
          under the Senior Facility which consisted of a $29.0 million long-term
          note, $16.0 million under the capital facilities line and $4.0 million
          under  the  revolver.  The  Company  determined  it  would  not  be in
          compliance   with  certain   covenants  of  its  Senior  Facility  and
          accordingly  requested and received a waiver for certain covenants for
          the period ended  September  30, 1997;  the Company was in  compliance
          with the remaining covenants.

          In connection with the Senior Facility, the syndication agent received
          a warrant  to  purchase  up to 500,000  shares of common  stock of the
          Company at an  exercise  price of $6.35  which was the  average  stock
          price over the 30 days prior to signing  the  commitment.  The warrant
          was   valued   at   $1,250,000   and   is   included   in   additional
          paid-in-capital,  with the resulting  original issue discount (OID) on
          the  loan  being  amortized  using a  method  which  approximates  the
          interest method over the term of the note.

 (3)      Extraordinary item
          ------------------
 
          In  connection  with the  repayment  and  replacement  of its previous
          senior  credit  facility and the  repayment of its  subordinated  note
          payable, the Company wrote off the remaining  unamortized  capitalized
          costs

                                       5

<PAGE>


          associated  with these  credit  facilities.  Accordingly,  the Company
          recorded  extraordinary  items of approximately  $229,000 and $64,000,
          net of  income  taxes,  in the  first  quarter  of 1997 and the  third
          quarter of 1996, respectively.

(4)       Movie Warehouse Acquisition
          ---------------------------
 
          Concurrently  with the  closing of the Senior  Facility,  the  Company
          acquired  certain  assets and  business of Movie  Warehouse,  Inc. and
          affiliates ("Movie Warehouse") in an asset purchase  transaction.  The
          Company  acquired  21  video  specialty  stores  and the  franchisor's
          interest with respect to an additional 43 video specialty stores which
          will continue to operate under the Movie Warehouse name. The aggregate
          consideration  for the  acquisition  was  approximately  $9.6 million,
          consisting of $5.0 million in cash,  $2.0 million in promissory  notes
          due in March 1999 and $2.6 million in common stock (427,672 shares).

(5)       Video Update Acquisition
          ------------------------
 
          In July  1997,  the  Company  announced  that it had  entered  into an
          agreement with Video Update,  Inc. ("Video Update")  pursuant to which
          Video  Update  would  acquire  Moovies  in  a  stock-for-stock  merger
          transaction.  Terms of the agreement  called for each  stockholder  of
          Moovies to receive 1.1 shares of Video Update Class A Common Stock for
          each share of  Moovies  Common  Stock.  In  October  1997,  the Merger
          Agreement  was  amended  and now  provides  that each  stockholder  of
          Moovies  will  receive .75 shares of Video Update Class A Common Stock
          for each share of Moovies' Common Stock. The transaction is subject to
          stockholder  approval of both  companies  and certain  other terms and
          conditions,  and is anticipated to be completed in early 1998.  During
          the quarter ended September 30, 1997, the Company incurred $472,000 of
          merger related costs.

(6)       Restructuring and Other Charges
          -------------------------------
 
          In May 1997,  the Company  announced it would reduce the number of new
          stores to be developed  in 1997 and as a result of the reduced  growth
          plans it would make immediate reductions in general and administrative
          expenses.  The cost of  implementing  these  reductions  resulted in a
          one-time charge of $1.5 million or $0.07 per share, which was recorded
          in the second quarter.

          During the third  quarter of 1997,  the Company began and completed an
          extensive  analysis  of its  store  base  performance  and  adopted  a
          business  restructuring  plan to close  approximately 20 of its stores
          and eliminate future store growth for at least the next twelve months.
          Management  concluded that certain stores were under performing,  that
          it was not  prudent to continue to operate  these  locations  and that
          cash from  operations  and the lack of  borrowing  capacity  would not
          allow for continued cash outlay for opening additional stores.

          This  restructuring  plan has  resulted  in the Company  recording  an
          additional  $14.1 million  pretax charge for  restructuring  and other
          charges in the third  quarter of 1997.  The  components  of the charge
          include  approximately  (i) $4.8  million in reserves  for future cash
          outlays for lease terminations,  miscellaneous closing costs and legal
          and  accounting   costs,  (ii)  $2.8  million  in  asset  write  downs
          associated with the store  closings,  (iii) $2.9 million in write down
          of rental inventory  previously expected to be transferred to and used
          in new stores that will now be liquidated,  (iv) $2.1 million in write
          off of store design  prototypes and capitalized  costs associated with
          the  development  of new sites which will not be  developed,  (v) $1.1
          million in reserves for future cash outlays under  existing  contracts
          for  purchases  of fixtures  and  equipment  that were  intended to be
          placed  in new  stores  and  (vi)  $400,000  for  the  closure  of the
          Company's product management center for new store inventory.

          The  expected  store  closings  are not  concentrated  in a particular
          geographic  area.  The principal  factors  considered  in  identifying
          stores for closure included:  (i) whether a store generated sufficient
          cash  flow at the  store  level to  provide  an  acceptable  return on
          current

                                     6
<PAGE>

          investment;  (ii) whether the latest  sales trends  indicated a likely
          improvement in the historical store results; (iii) whether the current
          or future  competitive  climate  would  make sales  improvements  less
          likely; and (iv) whether a store's performance  warrants lease renewal
          where the lease was  scheduled to expire within the next year. In some
          situations,  the timing of store closures will depend on the Company's
          ability to negotiate  reasonable  lease  termination  agreements.  The
          lease  commitments  associated with the closing stores will be retired
          entirely or materially diminished by one of three methods: (i) through
          the normal  expiration of the lease within the next year; (ii) through
          the subletting of the property to another  entity;  or (iii) through a
          negotiated  lease  buyout  with the  individual  landlord.  The  store
          closures are expected to be completed by the end of the second quarter
          of 1998.  The stores  identified  for closure had  revenues  and store
          operating expenses (including  amortization of videocassettes and cost
          of goods  sold)  of  approximately  $3.0  million  and  $4.2  million,
          respectively, for the nine months ended September 30, 1997.

          During  the first  quarter  of 1996,  the  Company  adopted  Financial
          Accounting  Standards  Board  Statement No. 121,  "Accounting  for the
          Impairment  of  Long-Lived  Assets  and for  Long-Lived  Assets  to be
          Disposed Of," issued in March 1995. In  conjunction  with the business
          restructuring,  an estimated $2.8 million impairment loss was incurred
          for  those  stores  identified  to  close  where  projected  operating
          performance  indicated an  impairment.  This  impairment  loss related
          primarily to the  write-off of  leasehold  improvements,  fixtures and
          intangibles  and  a  valuation  allowance  for  videocassette   rental
          inventory associated with the stores to be closed.

          Since its inception,  the Company has experienced rapid growth through
          new store openings and acquisitions.  To meet this growth expectation,
          the Company had built a strong store development department,  opened a
          new  store  product   management   center,   developed   store  design
          prototypes,  accumulated videocassette tapes to be used in opening new
          stores,  started  the  development  of a  software  system  capable of
          tracking each tape and entered into selected  contracts with suppliers
          for the purchase of store fixtures.  As a result of the elimination of
          future growth,  these designs,  systems,  centers and contracts are no
          longer necessary.


                                       7

<PAGE>


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


Results of Operations
---------------------

The  Company's  results  of  operations  for the  three  and nine  months  ended
September 30, 1997 and 1996,  reflect the  operations of the Company and include
the results of various acquisitions from and after their acquisition date.

Revenues.  Revenues for the three and nine months ended  September 30, 1997 were
$27,418,000 and $81,570,000,  respectively,  compared to revenues of $22,094,000
and  $59,694,000  for the same periods in 1996.  The  increased  revenues were a
result of the additional 51 stores opened and 23 stores  acquired by the Company
subsequent  to  September  30,  1996.  Product  sales as a  percentage  of total
revenues were 12.8% and 14.7% for the three and nine months ended  September 30,
1997, respectively, compared to 13.4% and 13.3% for the same periods in 1996.

During the third quarter of 1997, same store revenues  declined by approximately
12%.  Management  believes  this  decline was  principally  due to (i) a lack of
consumer  acceptance of a weaker  selection of new release  product during 1997,
(ii) an increased  number of  competitive  openings in several of the  Company's
major  markets,  and (iii)  overall  industry  softness  that began in the first
quarter of 1997. The Company  anticipates that same store revenues will continue
to  decline in the  quarter  ended  December  31,  1997 due to the same  factors
discussed above.

Operating  Costs  and  Expenses.   Operating   expenses  were   $26,363,000  and
$67,366,000  for the three and nine months ended  September 30, 1997 compared to
$16,242,000  and  $42,580,000  for  comparable  prior  year  periods.  Operating
expenses  as a  percentage  of total  revenues  were  96.2%  and  82.6% for 1997
compared to 73.5% and 71.3% for 1996. The increases primarily reflect the effect
of  substantially  fixed  operating  expenses on a per store  basis  compared to
revenue  levels that were  significantly  less than the  previous  year on a per
store basis and higher  levels of expenses for new stores as new store  revenues
have not  ramped up to  expected  levels.  In  addition,  the  Company  incurred
additional  operating  expenses  related  to (i)  increased  advertising  costs,
including a direct mail  advertising  campaign  to inactive  customers  and (ii)
increased tape amortization and use of leased product.  Management believes that
operating  expenses  as a  percentage  of  revenue  will  improve  in the fourth
quarter, but that it will still be higher than the previous year.

Cost of product sales increased by $1,584,000 to $3,375,000 and by $4,898,000 to
$9,856,000  for the  three and nine  months  ended  September  30,  1997.  These
increases are directly related to the increase in product sales. Cost of product
sales as a  percentage  of product  sales were 88.9% and 78.9% for the three and
nine months ended  September 30, 1997 compared to 60.3% and 62.5% for 1996.  The
percentage  increases  are due to the lower  margins  accepted by the Company on
selected sell-through promotions conducted during the respective periods and the
increased sales of previously  viewed tapes at  substantially  reduced  margins,
which tapes have  historically  been used to build the rental  inventory  of new
stores.  Management believes that the Company will continue to experience margin
pressures in the fourth quarter; however, it does expect to see improvement from
the third quarter of 1997 results.

General and administrative expenses were $2,181,000 and $7,214,000 for the three
and nine months ended September 30, 1997,  respectively,  compared to $2,409,000
and $7,019,000 for the comparable prior year periods. General and administrative
expenses  were 8.0% and 8.8% of total  revenues  for the  three and nine  months
ended  September  30,  1997,  respectively,  as  compared  to 10.9%  and  11.8%,
respectively, for the same nine months period in 1996. These reduced percentages
reflect the additional  leverage  achieved by the Company in 1997 as well as the
results of the restructuring of the Company's  operations,  which started in May
1997.  Management  believes  that  general  and  administrative  expenses  as  a
percentage of revenue will continue to decline in the fourth quarter.

Interest  Expense,  net. Interest expense increased to $1,305,000 and $2,756,000
for the three and nine  months  ended  September  30,  1997  from  $296,000  and
$997,000  for the  comparable  prior year  periods.  

The  increases  are related  primarily  to the  increased  borrowings  under the
Company's Senior Facility which were used to fund  acquisitions,  additional new
store development and operations.

Income Tax  Expense.  Income tax  benefit  for the three and nine  months  ended
September 30, 1997 was  $8,394,000  and  $9,388,000,  respectively,  compared to
income tax  expense for the three and nine months  ended  September  30, 1996 of
$353,000 and $1,155,000, respectively, representing an effective income tax rate
of 40% for each period presented.

                                       8
<PAGE>


Liquidity and Capital Resources
-------------------------------

Historically,  the  Company's  primary  long-term  capital  needs  have been for
opening and acquiring new stores. The Company has funded such needs through cash
flows from operations,  borrowing under credit facilities,  operating  equipment
leases and the net proceeds from the sale of debt and equity securities.

In March 1997,  the Company  signed a new senior  credit  facility  (the "Senior
Facility") for up to $75.0 million.  The Senior Facility  consists of (i) a five
year  $30.0  million  long-term  note with  quarterly  repayments  beginning  on
September 30, 1997;  (ii) a $41.0 million  capital  facilities  line and (iii) a
$4.0 million  Revolver and replaced the Company's then existing credit facility.
The Company may borrow amounts under the capital facilities line until March 31,
1999 at which time it will begin repaying any amount outstanding  quarterly over
the next three years. The interest rate of the Senior Facility is variable based
on LIBOR and the  Company  may repay the  Senior  Facility  at any time  without
penalty. At September 30, 1997, the Company had outstanding  borrowings of $49.0
million under the Senior Facility which consisted of the $29.0 million long-term
note,  $16.0 million under the capital  facilities line and $4.0 million under a
revolving line of credit.  The Company  determined it would not be in compliance
with certain  covenants of its Senior  Facility and  accordingly  requested  and
received a waiver for certain covenants for the period ended September 30, 1997;
the Company was in  compliance  with the  remaining  covenants.  There can be no
assurance that future waivers will be received if needed.

Concurrently  with the  closing of the Senior  Facility,  the  Company  acquired
certain  assets and business of Movie  Warehouse,  Inc. and  affiliates  ("Movie
Warehouse")  in an asset  purchase  transaction,  including  21 video  specialty
stores and the franchisor's  interest with respect to an additional 43 specialty
stores  which will  continue  to operate  under the Movie  Warehouse  name.  The
aggregate  consideration  for the  acquisition was  approximately  $9.6 million,
consisting  of $5.0  million in cash,  $2.0 million in  promissory  notes due in
March 1999, and $2.55 million in common stock (427,672 shares).

The  Company  funds  its  short-term   working  capital  needs,   including  the
acquisition  of  videos  and  other  inventory,   primarily  through  cash  from
operations.  For the quarter ended  September 30, 1997, cash from operations did
not meet the  Company's  expectations  and,  as a  result,  the  amounts  due to
selected  vendors are now past due. The Company is working with these vendors to
develop repayment plans. The Company has maintained a satisfactory  relationship
with its current vendors, including its two primary product vendors. The loss of
these two product  vendors could have a material  adverse effect on the Company.
Assuming  the  Company  is able to  reach  satisfactory  arrangements  with  the
selected  vendors,  the  Company  expects  that  cash  from  operations  will be
sufficient to fund future video and other inventory  purchases and other working
capital needs, although unanticipated expenses or revenue shortfalls likely will
cause the Company to require additional financing to fund operations.  There can
be no  assurance  that any  such  sources  of funds  will be  available  or,  if
available,  that they will be on terms and conditions  satisfactory or favorable
to the Company.

Under generally accepted accounting  principles,  rental inventories are treated
as non-current  assets because they are not assets that are reasonably  expected
to be completely realized in cash or sold in the normal business cycle. Although
the rental of this  inventory  generates a substantial  portion of the Company's
revenue, the classification of these assets as noncurrent excludes them from the
computation of working capital. The cost of video inventory purchases,  however,
is reported as a current  liability until paid, and accordingly,  is included in
the computation of working capital.  Consequently,  the Company believes working
capital is not an appropriate  measure of its liquidity and it anticipates  that
it will operate with a working capital deficit during 1997.

The Company's capital  expenditures during the remainder of 1997 will be limited
by cash from  operations  and lack of additional  borrowing  capacity  under its
Senior Facility.  In May 1997, the Company  reassessed its new store development
program and reduced the number of new stores  expected to be opened during 1997.
The  Company  opened  four new stores  during  the third  quarter of 1997 and 33
during the first nine 


                                       9
<PAGE>

months of 1997. No additional new stores are presently being contemplated due to
cash flow  constraints  and the  current  merger  plans.  The  Company is in the
process of closing  approximately  20 stores.  Management  does not believe that
these store  closings will have a material  adverse effect on the Company's cash
flow (See also footnote 6).

In July 1997,  the Company  announced it had entered into an agreement  ("Merger
Agreement")  with Video  Update Inc.  ("Video  Update")  pursuant to which Video
Update  would  acquire  Moovies in a  stock-for-stock  merger  transaction  (the
"Merger").  (See also  footnote  5).  The  obligations  of Video  Update and the
Company to  consummate  the Merger are  subject to the  satisfaction  of certain
conditions,  including, but not limited to, obtaining requisite approvals of the
stockholders  of Video  Update and the  Company,  obtaining  consents  under the
respective  bank credit  agreements  of Video  Update and the Company  (which in
respect  to the  Company's  Senior  Facility  agreement  requires  payoff of all
amounts  outstanding  at the time the  Merger  is  consummated  (the  "Effective
Time")), obtaining adequate financing,  obtaining requisite regulatory approvals
(including under the  Hart-Scott-Rodino  Antitrust  Improvements Act of 1976, as
amended (the "HSR Act")), the continuing accuracy,  in all material respects, as
of the Effective Time of the representations and warranties made by Video Update
and the Company in the Merger Agreement, and the receipt of a legal opinion with
respect to certain tax matters. Each party has the right to waive certain of the
closing  conditions  referred  to above.  There can be no  assurance  that these
conditions will be met and that the Merger will be consummated.

Note regarding Private Securities  Litigation Reform Act: Statements made by the
Company  which are not  historical  facts are forward  looking  statements  that
involve risks and  uncertainties.  Actual results could differ  materially  from
those  expressed  or implied in forward  looking  statements.  All such  forward
looking  statements  are  subject  to the safe  harbor  created  by the  Private
Securities  Litigation  Reform Act of 1995.  Important  factors that could cause
financial  performance  to differ  materially  from past  results and from those
expressed or implied in this document include, without limitation,  the risks of
acquisition  of  businesses  (including  limited  knowledge  of  the  businesses
acquired and  misrepresentations  by sellers),  changes in business  strategy or
development plans, new store openings,  availability of financing,  competition,
management,  ability to manage growth,  loss of customers,  the  availability of
products,  the  difficulty of managing  leased  inventory,  the effects of store
closings  and  restructuring  on the  Company's  operations,  lack  of  customer
acceptance  of  new  video  releases,  and  a  variety  of  other  factors.  The
obligations of Video Update and the Company to consummate the Merger are subject
to the  satisfaction  of certain  conditions,  including,  but not  limited  to,
obtaining  requisite  approvals  of the  stockholders  of Video  Update  and the
Company,  obtaining consents under the respective bank credit agreement of Video
Update and the Company (which in respect to the Company  Senior Credit  Facility
agreement  requires  payoff  at of all an  outstanding  thereon  at the time the
Merger is consummated (the "Effective  Time")),  obtaining  adequate  financing,
obtaining  requisite  regulatory  approvals  (including  under the HSR Act), the
continuing accuracy,  in all material respects,  as of the Effective Time of the
representations  and  warranties  made by Video  Update  and the  Company in the
Merger Agreement, and the receipt of a certain legal opinion with respect to tax
matters.  There can be no assurance that these  conditions  will be met and that
the Merger  will be  consummated.  For  further  information  on these and other
risks,  see the "Risk Factors"  section of Item 1 of the Company's Annual Report
on Form 10-K for the year ended  December  31,  1996,  as well as the  Company's
other filings with the Securities and Exchange Commission.


                                       10



<PAGE>


Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not applicable.


                                       11
<PAGE>


PART II-OTHER INFORMATION

Item 1.  Legal Proceedings.

         None

Item 2.  Changes in Securities.

     (a) None

     (b)  None

     (c)  Recent Sales of  Unregistered Securities

          The  following  information  relates to  securities  of Moovies,  Inc.
          issued or sold during the quarter ended  September 30, 1997 which were
          not  registered  under the  Securities  Act in 1933,  as amended  (the
          "Securities Act"):

               From July 1997  through  September  1997,  an  aggregate of 422_
               shares of Common Stock were  purchased on the Nasdaq Stock Market
               and credited to participant's  accounts  pursuant to the Moovies,
               Inc. 401(k) Plan. The Company  believes that these issuances were
               exempt from  registration  under the  Securities Act by virtue of
               Section 4(2) as transactions not involving a public offering.

Item 3.  Defaults Upon Senior Securities.

         Not Applicable

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

         None

Item 5.  Other Information.

         None

Item 6.  Exhibits and Reports on Form 8-K

     (a)  See the Index to Exhibits.

     (b)  Current Reports on Form 8-K

         The  Registrant  filed a Current Report on Form 8-K with the Commission
         on July 10, 1997 with respect to the  Company's  Merger  Agreement with
         Video Update


                                       12

<PAGE>


                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has caused  this  quarterly  report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized on November 14, 1997.

                           MOOVIES, INC.

                           By:/s/ John L. Taylor
                              --------------------------------------------
                              John L. Taylor
                              President and Chief Executive Officer
                              (principal executive officer)

                           By:/s/ F. Andrew Mitchell
                              --------------------------------------------
                              F. Andrew Mitchell
                              Chief Financial Officer and Director
                              (principal financial officer)





                                       13



<PAGE>


                                  EXHIBIT INDEX

(a) The following  exhibits,  which are furnished with this Form 10-Q, are filed
as part of this Form 10-Q:

Exhibit No.         Exhibit Description
-----------         -------------------

2.1           --    Agreement  and Plan of  Merger by and  among  Video  Update,
                    Inc., VUI Merger Corp. and Moovies, Inc., dated July 9, 1997
                    (incorporated  by reference to Exhibit 2 in the Registrant's
                    Current Report on Form 8-K dated July 9, 1997)

2.2           --    Amendment dated as of October 27, 1997 to Agreement and Plan
                    of Merger by and among Video Update,  Inc., VUI Merger Corp.
                    and Moovies,  Inc., dated as of July 9, 1997.  (Incorporated
                    by reference to Exhibit 2 in the Registrant's Current Report
                    on Form 8-K filed on November 10, 1997).

3.1*          --    Restated Certificate of Incorporation of Moovies, Inc.

3.2           --    Restated Bylaws of Moovies, Inc.  (Incorporated by reference
                    to Exhibit 3.2 in the Registrant's  Quarterly Report on Form
                    10-Q for the quarter ended March 31, 1996).

3.3**         --    Certificate  of  Designation,   Preferences  and  Rights  of
                    Participating Preferred Stock.

10.2***       --    Agreement   dated   July  9,  1997  by  and  among   Rentrak
                    Corporation, Video Update, Inc. and Moovies, Inc.

10.3****      --    Voting  Agreement  dated  July 9,  1997 by and  among  Video
                    Update,  Inc., VUI Merger Corp.,  Inc.,  Moovies,  Inc., and
                    certain persons listed therein as Amended and Restated as of
                    October 27, 1997.

11.1****      --    Statement Re Computation of Per Share Earnings

27.1****      --    Financial Data Schedule



*         Incorporated   by  reference  to  the  same  Exhibit   number  in  the
          Registrant's Registration Statement on Form S-1 (No. 33-93562).

**        Incorporated   by  reference  to  the  same  Exhibit   number  in  the
          Registrant's quarterly Report on Form 10-Q for the Quarter ended March
          31, 1997.

***       Incorporated   by  reference  to  the  same  Exhibit   number  in  the
          Registrant's  quarterly Report on Form 10-Q for the Quarter ended June
          30, 1997.

****      Filed herewith.