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

                                    FORM 10-K

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

                For the fiscal year ended January 2, 2000

                                       OR

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

                For the transition period from ___________ to ___________.

                         Commission file number: 0-24548

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

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

    739 W. Main Street, Dothan, Alabama                        36301
 (Address of principal executive offices)                   (Zip Code)

                                 (334) 677-2108
              (Registrant's Telephone Number, Including Area Code)

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


           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.001 par value
                                (Title of class)

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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of  registrant's  knowledge,  in definitive  proxy statement or information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [X]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the registrant as of March 10, 2000, was approximately  $24,922,631.  The number
of shares of Common Stock outstanding on March 10, 2000, was 12,119,667 shares.

     Documents incorporated by reference:

    1.Notice of 2000 Annual Meeting and Proxy Statement (Part III of Form 10-K).
--------------------------------------------------------------------------------
              The exhibit index to this report appears at page 28.
<PAGE>

ITEM 1.  BUSINESS

General

     As of March  10,  2000,  Movie  Gallery,  Inc.  (the  "Company")  owned and
operated  954 video  specialty  stores  located in 31 states  that rent and sell
videocassettes  and video games.  Since the Company's initial public offering in
August  1994,  the Company has grown from 97 stores to its present  size through
acquisitions  and the development of new stores.  The Company is among the three
largest video specialty retailers in the United States.

     The Company was  incorporated in Delaware in June 1994 under the name Movie
Gallery,  Inc. From March 1985 until the present time,  substantially all of the
Company's  operations have been conducted  through its wholly-owned  subsidiary,
M.G.A.,  Inc. The Company's executive offices are located at 739 W. Main Street,
Dothan, Alabama 36301, and its telephone number is (334) 677-2108.

Video Industry Overview

     Video Retail  Industry.  According to Paul Kagan  Associates,  Inc.  ("Paul
Kagan"), the home video rental and sales industry has grown from $0.7 billion in
revenue in 1982 to a projected  $18.5  billion in 1999 and is projected to reach
$23.3  billion  by 2009.  Paul Kagan  estimates  that in 1999  consumers  rented
approximately  3.4 billion  videos,  a 6% increase over 1998, and purchased more
than 750 million  videos.  Growth in videos sold has  exceeded 15% per year over
the past decade,  according to Paul Kagan.  In fact, at the end of 1999 over 85%
of all television  households  owned a videocassette  recorder ("VCR") and total
VCR  penetration is expected to reach 90% by 2003,  according to Paul Kagan.  In
addition,  total VCR sales in the U.S.  have  increased  in each year during the
decade of the 1990s and are  estimated to have  reached  20.5  million  units in
1999, the highest level ever,  according to Paul Kagan.  The growth in VCR sales
has been fueled by the low retail price for VCRs,  which averaged  approximately
$185 in 1999.

     The video retail industry is highly  fragmented and continues to experience
consolidation  pressures.  Trends toward  consolidation  have been fueled by the
competitive  impact of superstores on smaller  retailers,  the need for enhanced
access to working capital and  efficiencies of scale.  The Company believes that
the video  specialty  store industry will continue to consolidate  into regional
and national chains.  While many of the largest retail chains posted  same-store
revenue  growth in both 1998 and 1999,  industry  sources  speculated  that many
independent  operators  struggled to maintain  market share.  The combination of
revenue  sharing  and other copy depth  opportunities  and  increased  marketing
efforts have  solidified  the  positions  of the largest  retail  chains  versus
independent operators over the past couple of years.

     The  domestic  video  retail  industry  includes  both rentals and sales of
videocassettes; however, the majority of revenue is generated through the rental
of prerecorded  videocassettes.  There are three primary pricing strategies that
the movie studios use to influence the relative levels of videocassette  rentals
versus sales.  First,  videocassettes  can be priced at relatively  high levels,
typically  between  $60 and $75  ("rental  priced  movies").  These  movies  are
purchased by video specialty stores and are promoted primarily as rental titles.
Second, videocassettes can be priced at relatively low levels, typically between
$5 and  $25  ("sell-through  movies").  These  movies  are  purchased  by  video
specialty  stores and generally  promoted for both rental and new  videocassette
sales.  Third, movie studios have developed revenue sharing and other copy depth
programs.  Movies  purchased under revenue sharing and other copy depth programs
result in larger  quantities  available to meet consumer  demand.  Movie studios
attempt to maximize total revenue from  videocassette  releases via the combined
utilization of all three pricing structures.

                                       2
<PAGE>

     The concept of revenue sharing and risk sharing between major retailers and
the movie  studios was  embraced by the  industry in 1998 and  continued to grow
during 1999.  Revenue sharing is a concept  whereby  retailers and movie studios
share the risks  associated  with the rental  performance of individual  titles.
Generally,  retailers pay a small upfront fee for each copy leased under revenue
sharing,  typically $0 to $10. As the movies are rented by consumers,  the movie
studio  receives a percentage of the revenue  generated based on a predetermined
formula,  which is generally  less than fifty  percent.  After a period of time,
generally  six months to a year,  these movies are no longer  subject to revenue
sharing and are either owned outright by the retailer,  purchased from the movie
studio for a nominal  amount or returned to the studio.  Revenue  sharing allows
retailers  to vastly  increase  both copy depth and breadth  for the  consumers.
According to Paul Kagan,  retail  revenue  generated  via revenue  sharing deals
increased from just $211 million in 1997 to approximately  $3.7 billion in 1999,
and is expected to reach $4.5 billion during 2000.

     The increase in sell-through priced movies and revenue sharing programs has
greatly increased the availability of previously viewed movies. These movies are
made available to the consumer for sale once initial rental demand is met.

     Movie Studio Dependence on Video Rental Industry.  The videocassette rental
and sales  industry is the largest  single  source of domestic  revenue to movie
studios and independent suppliers of theatrical and direct-to-video  movies and,
according to Paul Kagan, represented  approximately $7.4 billion, or 49%, of the
$15.2  billion of revenue  generated in 1999.  The Company  believes that of the
many movies  produced by major  studios and  released in the United  States each
year,  relatively few are profitable for the studios based on box office revenue
alone. In addition to purchasing box office hits, video specialty stores provide
the movie studios with a reliable  source of revenue for a large number of their
movies by purchasing movies on videocassette that were not successful at the box
office.  The Company  believes  the consumer is more likely to view movies which
were not box  office  hits on a rental  videocassette  than on any other  medium
because video  specialty  stores  provide an inviting  opportunity to browse and
make impulse choices among a very broad selection of movie titles.  In addition,
the  Company  believes  the  relatively  low  cost of video  rentals  encourages
consumers to rent films they might not pay to view at a theater.

     Historically,  new  technologies  have led to the  creation  of  additional
distribution  channels for movie  studios.  Movie studios seek to maximize their
revenue by releasing  movies in  sequential  release  date  "windows" to various
movie  distribution  channels.  These  distribution  channels  include,  in  the
customary  order of release date,  movie  theaters,  airlines and hotels,  video
specialty   stores,   pay-per-view   satellite  and  cable  television   systems
("Pay-Per-View"), premium cable television, basic cable television and, finally,
network  and  syndicated   television.   (See   "Business  --  Competition   and
Technological Obsolescence") The Company believes that this method of sequential
release  has  allowed  movie  studios  to  increase  their  total  revenue  with
relatively  little  adverse  effect  on  the  revenue  derived  from  previously
established  distribution channels and it is anticipated that movie studios will
continue  the  practice  of  sequential  release  even as near  video on  demand
("NVOD") and, eventually,  video on demand ("VOD") become more readily available
to the consumer. Most movie studios release hit movie videocassettes to the home
video  market  from 30 days to 80 days  (extending  up to 120 days  for  certain
titles  priced for sale rather than rental)  prior to the  Pay-Per-View  release
date. This proprietary  window of release from the movie studios shows the level
of commitment to the home video  industry and is indicative of the importance of
this channel of distribution to the overall  profitability  of movie studios and
other independent movie suppliers.

                                       3
<PAGE>

Growth Strategy

     During  the  fiscal  years  1994  through  1996,  approximately  78% of the
Company's  growth in total number of stores occurred  through the acquisition of
stores and the balance  occurred  through  the  development  of new stores.  The
Company spent all of 1997 and much of 1998  absorbing the large  increase in the
number of stores which began in 1994.  During 1999, the Company began to ramp up
its new  store  development  efforts  and  closed  the  year  having  opened  53
internally-developed  stores. In addition,  during 1999 the Company acquired 131
stores,  including 88 stores previously operated by Blowout Entertainment,  Inc.
("Blowout").  For 2000, the Company intends to open approximately 100 new stores
and will evaluate  acquisition  opportunities that arise.  However,  the Company
anticipates  that  most of its  store  growth  in 2000  will come in the form of
internally-developed  stores. The Company's ability to execute its stated growth
strategy  will be  dependent  upon  its  ability  to  generate  cash  flow  from
operations.  The key  elements  of the  Company's  development  and  acquisition
strategy include the following:

     Development.  From January 1, 1994 through March 10, 2000,  the Company has
developed 301 stores.  The Company utilizes store  development to complement its
existing base of stores in rural and secondary markets where it finds attractive
locations and a sufficient  population  to support  additional  video  specialty
stores.  The Company  attempts to develop  real estate in 3,000 to 5,000  square
foot  locations  primarily  in towns  with  populations  from  3,000 to  60,000.
Although  developed stores generally require  approximately one year for revenue
to reach the level of a mature store,  they typically become  profitable  within
the first six months of  operations  and produce  greater  returns on investment
than acquired stores.

     The Company's real estate and construction  departments are responsible for
new store  development,  including  site  selection,  market  evaluation,  lease
negotiation and construction. The Company usually acts as the general contractor
with respect to the construction of its new stores and, in that regard,  employs
full-time  construction  managers who have  significant  video  specialty  store
construction experience.

     Set  forth  below  is  a  historical   summary   showing  store   openings,
acquisitions and store closings by the Company since January 1, 1994.

<TABLE>
<CAPTION>

                                                              Fiscal Year Ended
                            Year Ended         ------------------------------------------------
                            December 31,                                                           January 3
                          --------------       January 5,   January 4, January 3,     January 2,  to March 10,
                          1994      1995         1997         1998        1999           2000         2000
                          ----      ----       ---------    ---------  ---------      ---------   -----------

<S>                        <C>       <C>         <C>          <C>        <C>            <C>          <C>
New store openings          25        66          75           50         18             53           14
Stores Acquired            196       327         174(1)         2          4            131          --
Stores Closed                2        23          48           59         41             58           23
Total Stores at End
 of Period                 292       662         863          856        837            963          954

<FN>
-------------------
(1)  Includes  98  stores  acquired  on  July  1,  1996  and  accounted  for  as
     poolings-of-interests. Store counts, prior to the fiscal year ended January
     5, 1997, have not been restated for purposes of this table.
</FN>
</TABLE>

     Acquisitions.  From  January 1, 1994 through  March 10,  2000,  the Company
acquired 834 stores.  Acquisitions  permitted the Company to quickly gain market
share and  experienced  management  in markets  that the  Company  believed  had
potential for growth. Through a combination of volume purchase discounts, larger
advertising credits, more efficient inventory management and lower average labor
costs,  the Company  believes it is  generally  able to operate  these  acquired
stores more profitably than their prior owners,  typically single store or small
chain  operators.  During  2000,  the Company  intends to  evaluate  acquisition
opportunities that may arise, but anticipates that most of its store growth will
result from internally-developed stores.

     If future store  acquisitions  occur,  target stores will be selected based
upon location, quality of operations and financial criteria as determined by the
Company to be consistent  with its growth  strategy.  In connection  with future
acquisitions,  the Company  anticipates  that some of the owners and most of the
key personnel will be employed by the Company.  Historically,  the owners of the
stores acquired by the Company have entered into noncompetition  agreements with
the Company which are generally for a five- to ten-year term.

                                       4
<PAGE>

     During May 1999, the Company purchased the assets and assumed the leases of
88 Blowout stores for an aggregate purchase price of approximately $2.4 million.
The majority of Blowout stores operate within Wal-Mart Supercenters. The Company
anticipates  that  other  acquisition  opportunities  may  arise in the  future.
However, there can be no assurance that future acquisition opportunities will be
available or that the integration of future acquisitions will not materially and
adversely affect the Company.

Operating Strategy

     Focus on Smaller  Markets.  Generally,  the Company's stores are located in
small towns or suburban areas surrounding  mid-sized cities. In these areas, the
Company's principal  competition usually consists of single store or small chain
operators who have less buying power,  smaller advertising budgets and generally
offer fewer copies of new release videocassettes. The Company attempts to become
the leading  video  retailer in its markets and  believes  that it can achieve a
higher return on invested  capital in these smaller markets than it could in the
larger  urban  areas  because  of the  reduced  level of  competition  and lower
operating costs.

     Market  Concentration.  By concentrating  its new store  development in and
around existing markets, the Company is able to achieve operating  efficiencies,
primarily consisting of cost savings relating to advertising, training and store
supervision.

     New Market  Development.  The  Company  has begun to target new  markets in
which to develop stores.  Most of the new markets are located within states that
are either  contiguous  to states in which the Company has stores or states that
have not reached full market penetration.

     New Release  Purchases.  The Company actively manages its new videocassette
purchases  in  order  to  balance  customer  demand  with  the  maximization  of
profitability.  Buying  decisions are made centrally which allows the Company to
obtain volume discounts,  market  development funds and cooperative  advertising
credits  that are  generally  not  available  to  single  store  or small  chain
operators.

     Centralized  Operations.  In order to increase  operating  efficiency,  the
Company  centrally  manages  labor costs,  real estate costs,  accounting,  cash
management and collections and utilizes centralized purchasing,  advertising and
information  systems.  Company-wide  operational  standards  help  ensure a high
degree of customer service and visually appealing stores.

     Store Location and Format.  The Company  maintains a flexible store format,
tailoring the size, inventory and look of each store to local demographics.  The
Company's  stores,  with  the  exception  of  its  store-within-a-store   units,
generally  range  from  approximately  2,000 to  9,000  square  feet  (averaging
approximately  4,700 square feet), with inventories  ranging from  approximately
4,000 to 15,000  videocassettes.  Most of the  Company's  stores are  located in
strip  centers,  anchored by major grocery or discount drug store chains,  which
provide easy access, good visibility and high traffic.

                                       5
<PAGE>

Movie Gallery Stores

     At March 10, 2000,  the Company owned and operated 954 stores,  all but one
of  which  were  located  in  leased  premises.  The  following  table  provides
information at March 10, 2000, regarding the number of Company stores located in
each state.

                                                   Number
                                                     Of
                                                   Stores
                                                   ------
               Alabama.............................  144
               Florida.............................  119
               Texas ..............................   95
               Georgia.............................   82
               Virginia............................   59
               Tennessee...........................   49
               Ohio................................   46
               Maine...............................   44
               Indiana.............................   37
               Mississippi ........................   37
               Missouri............................   32
               Wisconsin...........................   31
               South Carolina .....................   31
               Kentucky............................   23
               Kansas..............................   18
               North Carolina......................   18
               Louisiana...........................   17
               New Hampshire.......................   14
               Massachusetts.......................   14
               Illinois............................   11
               Oklahoma............................   10
               Pennsylvania........................    5
               Iowa................................    4
               Arkansas............................    3
               Connecticut.........................    3
               California..........................    2
               Michigan............................    2
               New York............................    1
               Colorado............................    1
               W. Virginia.........................    1
               Vermont.............................    1
                                                   -----
                      TOTAL........................  954
                                                   =====
     The Company's  stores are generally open seven days a week, from 10:00 a.m.
to 11:00 p.m. on weekends  and from 10:00 a.m.  to 10:00 p.m. on  weekdays.  The
store  fixtures,  equipment  and layout are  designed by the Company to create a
visually-appealing,  up-beat  ambiance,  which is augmented  by a background  of
television  monitors  displaying  MGTV (Movie Gallery  Television),  which shows
movie previews and promotions of coming attractions, and by posters and stand-up
displays  promoting  specific  movie  titles.  Movies are arranged in attractive
display boxes organized into categories by topic, except for new releases, which
are  assembled  alphabetically  in their own  section for ease of  selection  by
customers.

                                       6
<PAGE>

     The Company's  policy is to constantly  evaluate its existing store base to
determine where improvements may benefit the Company's  competitive position. In
negotiating its leases and renewals,  the Company attempts to obtain short lease
terms to allow for the mobility necessary to react to changing  demographics and
other market  conditions.  The current  average  remaining life of the Company's
leases is approximately  two years with  approximately 300 leases considered for
renewal each year. The Company  actively  pursues  relocation  opportunities  to
adapt to market  shifts.  Similarly,  the  Company  may  elect to expand  and/or
remodel  certain  of its stores in order to improve  facilities,  meet  customer
demand  and  maintain  the visual  appeal of each  store.  In order to  maximize
profits,  the Company  varies the  quantity of its new  release  inventory,  the
rental and sales prices for videocassettes and video games and the rental period
for catalog titles from location to location to meet competition and demographic
demand in the area.  The  Company  generally  has a one-day  rental term for new
release  movies less than 90 days old (five days for titles greater than 90 days
old),  which tends to keep new releases more readily  available and requires the
purchase of fewer copies of new releases  than a two-day  rental  policy.  Video
games  generally  have a  five-day  rental  term for both  the most  recent  new
releases and older titles.

Products

     For the fiscal year ended January 2, 2000, over 85% of the Company's rental
revenue  was  derived  from the rental of movies on  videocassettes  and digital
video discs (DVDs),  with the remainder being derived  primarily from the rental
of video games.  Substantially  all of the Company's  revenue from product sales
during  this  period  was  derived  from the sale of new and  previously  viewed
videocassettes,  confectionery  items  and  video  accessories,  such  as  blank
cassettes, cleaning equipment and movie memorabilia.

     The Company's  stores  generally offer from 4,000 to 15,000 movies and from
200 to 1,000  video  games for rental and sale,  depending  upon  location.  New
release  movies are  displayed  alphabetically  and older  titles are  displayed
alphabetically by category,  such as "Action," "Comedy," "Drama" and "Children."
Buying decisions are made centrally and are based on box office results,  actual
rental history of comparable titles within each store and industry research.

     During 1999 and early 2000,  the Company  rolled out DVD product for rental
and sale to all Company stores. During December 1999, DVD revenues accounted for
approximately 2% of total revenues for the Company. This product area is growing
rapidly and the Company  intends to follow the desires of its  consumers for DVD
by expanding its product offerings of DVD over time.  Because of the ease of use
and  durability  of DVD,  it is  anticipated  that  eventually  DVD may  replace
videocassettes.  The Company  anticipates  that when  recordable DVD hardware is
available to the public at a reasonable  price,  this product area could grow at
an accelerated pace.

     Videocassettes,  DVDs and video games utilized as initial  inventory in the
Company's  developed  stores  consist of excess  copies of older  titles and new
release  titles from  existing  stores,  supplemented  as necessary by purchases
directly from suppliers.  This inventory for developed stores is packaged at the
Company's processing and distribution facility located in Dothan,  Alabama. Each
videocassette  and video game is removed  from its  original  packaging,  and an
optical bar code label, used in the Company's  computerized inventory system, is
applied to the plastic  rental case.  The cassette is placed in the rental case,
and a display carton is created by inserting foam or cardboard into the original
packaging and shrink-wrapping the carton. The repackaged  videocassettes,  video
games and display cartons are then shipped to the developed store ready for use.

     Management  believes  that  internal  factors  which most  affect a typical
store's revenues are its new release title selection and the number of copies of
each new  release  available  for rental as  compared  to the  competition.  The
Company is  committed  to offering as many copies and the widest  variety of new
releases as necessary to be competitive within a market,  while at the same time
keeping its costs as low as possible.  New  videocassettes  offered for sale are
primarily  "hit"  titles  promoted by the studios for  sell-through,  as well as
special interest and children's titles and seasonal titles related to particular
holidays.

                                       7
<PAGE>

     In an effort to provide more depth of copy on hit titles to better  satisfy
initial   customer   demand,   the  Company  has   continued  to  pursue  direct
relationships  with major and independent  studios  providing product copy depth
programs.  These  programs  have  lowered  the  average  per unit cost of rental
inventory and permit the Company to carry larger levels of new release inventory
while making available more titles that were previously unaffordable.  Thus, the
Company has pursued such  opportunities  and believes  that during late 1998 and
1999,  these programs had a positive impact on revenues by helping to retain the
existing customer base and attract new customers. There can be no assurance that
studios will continue to offer such programs or that such programs will continue
to have positive results.

     The Company  rents and sells video games,  which are licensed  primarily by
"Nintendo,"  "Sony" and "Sega." Game rentals as a  percentage  of the  Company's
total  revenues  have  increased  since  early 1997 due to the  increase  in the
installed  base of 32-bit and 64-bit game  platforms.  Sega launched the 128-bit
Dreamcast  system in  September  1999.  Sony is  expected  to release a backward
compatible  128-bit  PlayStation 2 system in September 2000. The Company expects
the video game rental  portion of the business to be flat during the  transition
to the 128-bit  platform,  while the sales portion of its business will continue
to grow during 2000.

Videocassette and Video Game Suppliers

     During 1999, the Company purchased its  videocassettes/DVDs and video games
for rental and its movies held for sale from three primary vendors,  Major Video
Concepts, Inc. ("MVC"), Ingram Entertainment,  Inc. ("Ingram") and Valley Media,
Inc. ("Valley"),  respectively.  During early 2000, the Company consolidated its
vendor relationships through changing its primary videocassette/DVD movie rental
distributor from MVC to Ingram. During 1999, the Company spent approximately 60%
of its  purchasing  budget  with its three  primary  suppliers  and the  balance
directly with studios and secondary vendors.  Because of revenue sharing and the
impact  it has had on  distributors,  the  Company  believes  that if one of its
primary  distributors  were  unable or  unwilling  to continue  the  contractual
relationship  with  the  Company  a  viable  replacement  can be  found  without
materially adversely impacting the Company's business.

     Since a majority of the Company's rental movie inventory is purchased under
contract  directly  from various  studios,  the  importance  of the  distributor
relationships has been somewhat  diminished.  Generally,  the relationships with
distributors  for  product  directly  purchased  from  the  studios  is  one  of
fulfillment  agent.  The Company pays the distributor a flat fulfillment fee for
the distributors to pack and ship product directly to the Company's stores.  The
price paid  directly to studios for each title varies and depends on whether the
movie is priced to encourage  rental or sale to consumers as discussed  earlier.
The components of the cost of a title to the Company would generally be a small,
upfront fee paid to the studio, revenue sharing expenses and end-of-term buyouts
that transfer the ownership of the product to the Company after a pre-determined
period of time, generally six months.

     Being  one of the top three  video  retailers  in the  United  States,  the
Company believes its relationships with the movie studios are strong.  While the
content  providers  will always have the most  control in the  supplier-retailer
relationship,  the Company  believes the studios  have a vested  interest in the
Company's  success,  not only because of the impact of revenue  sharing but also
because of the competitive  landscape within the video retail  industry.  Having
one or more viable  competitors  to the industry  leader  enables the studios to
maintain a balance  within the  retailer  and studio  relationship.  The Company
believes that its position is a positive force in  interacting  with studios and
forging partnerships for the future.

                                       8
<PAGE>

     Several  companies  acquired  by the  Company  had  pre-existing  long-term
contracts with Rentrak Corporation ("Rentrak") whereby product would be provided
under  pay-per-transaction  revenue sharing arrangements.  During late 1996, the
Company   consolidated   existing  contracts  with  Rentrak  into  one  national
agreement. Under this ten-year agreement, the Company has a minimum gross annual
purchase  commitment in revenue sharing,  handling fees,  sell-through  fees and
end-of-term  buyouts. The Company utilizes Rentrak on a selective title by title
basis. The Company has exceeded the minimum  purchase  requirements in each year
since 1996.

Marketing and Advertising

     The Company uses market  development funds and cooperative  allowances from
its  suppliers  and movie studios to purchase  radio  advertising,  direct mail,
newspaper  advertising,  in-store  visual  merchandising  and in-store  media to
promote new releases.  The video  specialty  stores and the Company's trade name
are promoted along with the  appropriate  suppliers'  product.  Creative copy is
prepared  by the Company  and the  studios,  with  advertising  being  placed by
in-house  media buyers.  Expenditures  for marketing and  advertising  above the
amount of the  Company's  advertising  allowances  from its  suppliers and movie
studios have been minimal. The Company anticipates that it will continue to make
substantial marketing and advertising expenditures,  and that movie studios will
continue to support  such  expenditures.  The  Company  also  benefits  from the
advertising  and  marketing  by studios and  theaters in  connection  with their
efforts to promote films and increase box office revenue. The Company prepares a
monthly  consumer  magazine  called  Video Buzz and a customized  video  program
(MGTV), both of which feature Company programs, promotions and new releases.

Information Systems

     The Company utilizes a proprietary  point-of-sale  ("POS") system.  The POS
system provides detailed information with respect to store operations (including
the rental  history  of titles and daily  operations  for each  store)  which is
telecommunicated  to the  corporate  office on a daily basis.  The POS system is
installed in all developed stores prior to opening, and the Company installs the
system in all acquired stores shortly after the closing of the acquisition.

     The  Company's  POS system  records  all rental and sale  information  upon
customer checkout using scanned bar code information and updates the information
when the videocassettes and video games are returned.  This POS system is linked
to a management  information system ("MIS") at the corporate office.  Each night
the POS system  transmits  store data into the MIS where all data is  processed,
generating   reports  which  allow  management  to  effectively   monitor  store
operations  and  inventory,  as well as to review  rental  history  by title and
location to assist in making purchasing  decisions with respect to new releases.
The POS  system  also  enables  the  Company  to perform  its  monthly  physical
inventory using bar code recognition.

     In  addition,  during the last three  years the  Company  has  installed  a
financial   reporting   system,   relating   to  the   general   ledger,   human
resources/payroll,  revenue and accounts payable functions,  capable of handling
the Company's  current needs and anticipated  growth.  Additional  systems which
have been developed and implemented by the Company include a Collections  system
and a Processing/Distribution Center system.

E-Commerce Initiative

     During 1999 the Company  developed  and released to the general  public its
e-commerce business, located at www.moviegallery.com.  The Company has developed
a  consumer-oriented,  on-line business that sells new and used movies and games
to consumers. The Company's main goal with MovieGallery.com is to strengthen its
existing relationship with its millions of customers that frequent the Company's
brick and mortar  stores.  The Company has gathered in excess of 100,000  e-mail
addresses  from Movie Gallery  customers  and is actively  marketing its immense
product  library,  in excess  of  100,000  titles,  to these  customers.  Due to
physical  constraints  within the stores,  the Company can offer, at most, a few
hundred  movie  titles  for  sale to its  customers.  However,  MovieGallery.com
enables  consumers to find the exact movie of their choice by simply  logging on
to  www.moviegallery.com.  Customer  traffic  and sales have grown  consistently
since the inception of the business in September 1999.

                                       9
<PAGE>

     The Company is  currently  testing  special  kiosk  locations  within a few
stores that  encourage  customers  to shop online at  MovieGallery.com  within a
Movie Gallery  store.  If successful,  the Company  believes that, not only will
customers have a greater incentive to shop with the Company, but the Company can
develop  partnerships  with other vendors to market their e-commerce  businesses
within the Company's brick and mortar stores.

     The Company does not intend to spend a  disproportionate  amount of capital
on its e-commerce business.  The Company currently has budgeted approximately $1
million in  expenditures  to run this business during the year 2000. The Company
believes that this more moderate  approach to  developing  its on-line  business
will  build  strong  customer  loyalty  for the Movie  Gallery  concept  without
materially diminishing the Company's future earnings.

Competition and Technological Obsolescence

     The video retail industry is highly  competitive,  and the Company competes
with other video specialty  stores,  including stores operated by other regional
chains and national chains such as Blockbuster Video  ("Blockbuster"),  and with
other businesses  offering  videocassettes and video games such as supermarkets,
pharmacies,   convenience  stores,   bookstores,   mass  merchants,  mail  order
operations  and  other  retailers.  Approximately  30% of the  Company's  stores
compete with stores operated by Blockbuster.  In addition,  the Company competes
with all  forms of  entertainment,  such as movie  theaters,  network  and cable
television, direct broadcast satellite television,  Internet-related activities,
live theater,  sporting  events and family  entertainment  centers.  Some of the
Company's   competitors  have  significantly  greater  financial  and  marketing
resources and name recognition than the Company.

     The Company believes the principal  competitive factors in the video retail
industry  are store  location and  visibility,  title  selection,  the number of
copies of each new release available,  customer service and, to a lesser extent,
pricing. The Company believes it generally offers superior service,  more titles
and more copies of new releases than most of its competitors.

     The Company also competes with  Pay-Per-View in which subscribers pay a fee
to view a movie selected by the  subscriber.  Recently  developed  technologies,
referred to as NVOD, permit certain cable companies,  direct broadcast satellite
companies (such as Direct TV), telephone companies and other  telecommunications
companies to transmit a much greater  number of movies to homes  throughout  the
United  States at more  frequent  intervals  (often as  frequently as every five
minutes)  throughout  the day.  NVOD does not offer  full  interactivity  or VCR
functionality,  such as allowing  consumers  to control the playing of the movie
(i.e., starting,  stopping and rewinding).  Ultimately,  further improvements in
these  technologies  could lead to the  availability  to the consumer of a broad
selection  of movies on  demand,  referred  to as VOD,  at a price  which may be
competitive with the price of videocassette  rentals and with the  functionality
of VCRs.  Certain cable and other  telecommunications  companies have tested and
are  continuing  to test  limited  versions  of NVOD and VOD in various  markets
throughout the United States and Europe.

                                       10
<PAGE>

     The advent of DVD may result in consumers purchasing more films than in the
past,  which could have a material adverse effect on the Company's rental volume
and, as a result,  on its profit  margins.  While DVD may in the future supplant
VHS videocassettes as the preferred rental and purchase medium,  there are a few
hardware  and content  issues that will  probably  lengthen the time horizon for
full DVD acceptance.  In the near term,  hardware costs for  non-recordable  DVD
technologies  are expected to remain higher than VCRs.  Although  recordable DVD
players  should be introduced in late 2000 or 2001,  the estimated cost of these
players is  significantly  higher than current  VCRs.  Finally,  while DVD title
releases  continue to grow,  hit titles are  released  to the VHS  videocassette
format on average  before they are released to the DVD format and in no instance
has a title been released to DVD before being released on the VHS videocassette.
Whether or not DVD replaces VHS is not an overriding concern to the Company. The
Company  anticipates that it will react to changing  consumer format demands and
intends to provide its customers with the rental medium demanded over time.

     The  Company  believes  movie  studios  have  a  significant   interest  in
maintaining a viable movie rental business because the sale of videocassettes to
video retail stores currently represents the studios' largest source of domestic
revenue. Specifically, video stores provide the best medium for movie studios to
market their non-box  office hit titles ("B movies"),  which either produce less
than $5  million  in box  office  receipts  upon  theatrical  release or are not
released  theatrically.  These B movies comprise a large portion of total studio
revenues,  and video  retailers are  responsible for a majority of that revenue.
Consumers,  while  browsing the new release  section,  will many times choose to
watch a B movie even  though they did not have the  specific  movie in mind when
they  entered the store.  Pay-per-view,  NVOD and VOD do not  currently  nor are
anticipated  to be able to provide the type of impulse  marketing  benefits that
video stores provide related to B movies. As a result,  the Company  anticipates
that movie studios will continue to make movie titles available to Pay-Per-View,
cable  television or other  distribution  channels only after revenues have been
derived from the sale of  videocassettes,  and perhaps  digital disks,  to video
stores.  In addition,  the Company believes that for Pay-Per-View  television to
match the low price,  viewing  convenience and selection available through video
rental, substantial capital expenditures and further technological advances will
be  necessary.  Although the Company  does not believe  NVOD or VOD  represent a
near-term competitive threat to its business,  technological  advances and broad
consumer  availability  of NVOD and VOD or changes in the manner in which movies
are  marketed,  including the earlier  release of movie titles to  Pay-Per-View,
cable television or other distribution  channels,  could have a material adverse
effect on the Company's business.

Employees

     As of March 10, 2000,  the Company  employed  approximately  7,300  persons
referred to by the Company as  "associates,"  including  approximately  7,000 in
retail stores and the remainder in the Company's corporate offices,  field staff
and distribution  facility  ("Support Center Staff").  Of the retail associates,
approximately  1,500 were  full-time  and 5,500  were  part-time.  One  recently
acquired store is represented by a labor union,  however,  none of the Company's
other associates are represented by a labor union, and the Company believes that
its relations with its associates are good.

     Each of the Company's  stores  typically  employs five to fifteen  persons,
including one Store Manager and, in larger stores, one Assistant Manager.  Store
Managers  report to District  Managers who supervise the  operations of 10 to 15
stores. The District Managers report to one of ten Regional Managers, who report
directly to the  Company's  Senior Vice  President  - Store  Operations.  As the
Company has grown, it has increased the number of District Managers and Regional
Managers.  The Support  Center Staff has regular and periodic  meetings with the
Regional  Managers and District Managers to review  operations.  Compliance with
the  Company's   policies,   procedures  and   regulations  is  monitored  on  a
store-by-store  basis through  quarterly  quality  assurance audits performed by
District  Managers.  The  performance  and  accuracy of the  quarterly  District
Manager audits is monitored by the Company's quality assurance function.

     The Company has an incentive and  discretionary  bonus program  pursuant to
which retail management  personnel receive quarterly bonuses when stores meet or
exceed  criteria  established  under the program.  Management  believes that its
program  rewards  excellence  in  management,  gives  associates an incentive to
improve  operations  and  results  in  an  overall  reduction  in  the  cost  of
operations.  In  addition,  District  Managers,  Regional  Managers  and certain
Support  Center Staff are eligible to receive  discretionary  bonuses,  based on
individual  and  Company  performance,  and  options to  purchase  shares of the
Company's  common  stock  (exercisable  at the fair market  value on the date of
grant), subject to service requirements.

                                       11
<PAGE>

Cautionary Statements

     The  "BUSINESS"  and  "MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF  OPERATIONS"  sections of this Report  contain  certain
forward-looking  statements regarding the Company.  These statements are subject
to certain risks and  uncertainties,  including those  identified  below,  which
could cause actual results to differ materially from such statements.  The words
"believe", "expect", "anticipate", "intend", "aim", "will", "should" and similar
expressions identify  forward-looking  statements.  Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date on which they are made.  The Company  desires to take  advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
and in that regard is  cautioning  the readers of this Report that the following
important  factors,  among others,  could affect the Company's actual results of
operations and may cause changes in the Company's  strategy with the result that
the Company's  operations and results may differ materially from those expressed
in any forward-looking statements made by, or on behalf of, the Company.

     Growth  Strategy.  The Company's  long-term  strategy is to grow  primarily
through new store  openings and  secondarily  through  acquisitions  of existing
stores.  Successful  implementation  of the strategy is  contingent  on numerous
conditions,  some of which are  described  below,  and there can be no assurance
that the Company's  business plan can be executed.  The  acquisition of existing
stores and the opening of new stores require  significant amounts of capital. In
the past,  the  Company's  growth  strategy  has been  funded  through  proceeds
primarily from public  offerings of common stock,  and secondarily  through bank
debt, seller financing,  internally generated cash flow and use of the Company's
common stock as acquisition  consideration.  These and other sources of capital,
including  public  or  private  sales of debt or equity  securities,  may not be
available to the Company in the future.

     New  Store  Openings.  The  Company's  ability  to open new  stores  may be
adversely affected by the following factors,  among others: (i) its availability
of  capital;  (ii) its  ability to  identify  new sites  where the  Company  can
successfully  compete;  (iii) its  ability to  negotiate  acceptable  leases and
implement  cost-effective  development plans for new stores; (iv) its ability to
hire, train and assimilate new store managers and other  personnel;  and (v) its
ability  to  compete  effectively  against  competitors  for prime  real  estate
locations.

     Acquisitions.  The Company's ability to consummate acquisitions and operate
acquired  stores  at the  desired  levels  of  sales  and  profitability  may be
adversely affected by: (i) the inability to consummate identified  acquisitions,
which may result from a lack of  available  capital;  (ii) the  reduction in the
size  of the  pool  of  available  sellers;  (iii)  the  inability  to  identify
acquisition  candidates that fit the Company's criteria (such as size,  location
and  profitability)  and who are willing to sell at prices the Company considers
reasonable;  (iv) more intensive competition to acquire the same video specialty
stores the Company seeks to acquire;  (v) an increase in price for acquisitions;
(vi)  misrepresentations  and  breaches  of  contracts  by  sellers;  (vii)  the
Company's limited knowledge and operating history of the acquired stores; (viii)
the replacement of purchasing and marketing systems of acquired stores; and (ix)
the  integration  of acquired  stores'  systems into the  Company's  systems and
procedures.

                                       12
<PAGE>

     Same-Store  Revenues  Increases.  The  Company's  ability  to  maintain  or
increase  same-store revenues during any period will be directly impacted by the
following  factors,  among  others,  which are often  beyond the  control of the
Company:  (i) increased  competition  from other video stores,  including  large
national or regional chains, supermarkets,  convenience stores, pharmacies, mass
merchants and other  retailers,  which might include  significant  reductions in
pricing to gain market share; (ii) competition from other forms of entertainment
such as  movie  theaters,  cable  television,  Internet-related  activities  and
Pay-Per-View  television,  including  direct  satellite  television;  (iii)  the
development  and  cost-effective  distribution  of movie and game rentals via an
in-home medium,  such as the home computer,  television or any other  electronic
device  either  available  today or in the future,  which would compete with the
current video store experience; (iv) the weather conditions in the selling area;
(v) the timing of the  release of new hit  movies by the  studios  for the video
rental market;  (vi)  competition from special events such as the Olympics or an
ongoing major news event of significant  public interest;  and (vii) a reduction
in, or  elimination  of, the  period of time  between  the  release of hit movie
videocassettes  to the home video  market and the release of these hit movies to
the Pay-Per-View markets (the "release window"), currently 30 to 80 days.

     Income Estimates.  The Company's ability to meet its income projections for
any period are dependent  upon many  factors,  including  the  following,  among
others:  (i) reductions in revenues caused by factors such as those listed under
"Same-Store  Revenues  Increases"  above;  (ii) the extent to which the  Company
experiences an increase in the number of new competitive  openings,  which tends
to divide market share and reduce profitability in a given trade area; (iii) the
extent to which the  movie  studios  substantially  alter  the  current  revenue
sharing or copy depth  programs that results in either the overall per unit cost
increasing  materially  or the  Company  substantially  reducing  the  amount of
product  facings that it provides its customers on a weekly basis;  (iv) changes
in the prices for the Company's  products or a reduction in, or elimination  of,
the  videocassette  release window as compared to Pay-Per-View,  NVOD or VOD, as
determined by the movie studios, could result in a competitive  disadvantage for
the Company relative to other forms of distribution;  (v) the Company's  ability
to control costs and  expenses,  primarily  rent,  store payroll and general and
administrative  expenses;  (vi) the extent to which the Company  experiences any
increase in the number of titles released from studios priced for  sell-through,
which may tend to increase the  satisfaction  of demand  through  product  sales
which carry lower  profit  margins  than rental  revenues;  (vii) the  Company's
ability to react and obtain other  distribution  sources for its products in the
event that the Company's primary suppliers are unable to meet the terms of their
contracts  with the Company;  and (viii)  advancements  and cost  reductions  in
various  new  technological  delivery  systems  such as (a)  Pay-Per-View  cable
television  systems and digital  satellite  systems  offering  NVOD or VOD;  (b)
universal  acceptance  of DVD  technology  which  might  result in lower  profit
margins and increased costs associated with higher inventory  requirements;  and
(c) other forms of new  technology,  which  could  affect the  Company's  profit
margins.
<TABLE>

Directors and Executive Officers of the Company
<CAPTION>

Name                          Age       Position(s) Held
----                          ---       ----------------
<S>                            <C>      <C>
Joe Thomas Malugen(1)          48       Chairman of the Board and Chief Executive Officer
H. Harrison Parrish(1)         52       President and Director
William B. Snow(1)(2)          68       Vice Chairman of the Board
J. Steven Roy                  39       Executive Vice President and Chief Financial Officer
S. Page Todd                   38       Senior Vice President, Secretary and General Counsel
Keith A. Cousins               31       Senior Vice President - Real Estate/Development
William G. Guerrette, Jr.      40       Senior Vice President - E-Commerce
Steven M. Hamil                31       Senior Vice President - Finance and Chief Accounting Officer
Theodore L. Innes              50       Senior Vice President - Sales and Marketing
Richard R. Langford            43       Senior Vice President - Management Information Systems
Mark S. Loyd                   44       Senior Vice President - Purchasing and Product Management
Jeffrey S. Stubbs              37       Senior Vice President - Store Operations
Sanford C. Sigoloff(2)(3)      69       Director
Philip B. Smith(2)(3)          64       Director
Joseph F. Troy (1)(3)          61       Director
<FN>
-------------------
   (1) Member of Executive Committee.
   (2) Member of Compensation Committee.
   (3) Member of Audit Committee.
</FN>
</TABLE>

                                       13
<PAGE>

     Mr. Malugen co-founded the Company in 1985 and has been its Chairman of the
Board and Chief  Executive  Officer  since  that  time.  Prior to the  Company's
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 the Company  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 the Company in 1985 and has been its President and a
Director of the Company since that time.  From December 1988 until January 1992,
Mr.  Parrish was Vice  President of Deltacom,  Inc.,  a regional  long  distance
telephone   provider.   Mr.   Parrish   received  a  B.A.   degree  in  Business
Administration from the University of Alabama.

     Mr. Snow was elected Vice Chairman of the Board in July 1994, and he served
as Chief  Financial  Officer from July 1994 until May 1996.  Since May 1996, Mr.
Snow has  continued  to serve as Vice  Chairman of the Board and has served as a
consultant to the Company.  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
director  of Homeland  Stores,  Inc.,  a publicly  held  company.  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.

     Mr.  Roy  was  elected  Senior  Vice  President  -  Finance  and  Principal
Accounting Officer in June 1995, was elected Chief Financial Officer in May 1996
and  was  elected  Executive  Vice  President  in  March  1998.  Mr.  Roy was an
accountant  with the firm of Ernst & Young LLP for the 11 years prior to joining
the Company. Mr. Roy is a Certified Public Accountant and received a B.S. degree
in Business Administration from the University of Alabama.

     Mr. Todd was elected Senior Vice  President,  Secretary and General Counsel
in December 1994. For more than the previous five years, he had been an attorney
practicing  tax and corporate law in Dothan,  Alabama.  Mr. Todd received a B.S.
degree in Business  Administration from the University of Alabama, his J.D. from
the  University of Alabama  School of Law and his LL.M.  (in Taxation)  from New
York University School of Law.

     Mr. Cousins joined the Company in August 1998 and served as Senior Director
of  Development,  Planning  and  Analysis  until  March 1999 when he was elected
Senior Vice President - Real  Estate/Development.  Prior to joining the Company,
Mr.  Cousins  acquired  four  years of  management  consulting  experience  with
Computer Sciences Corporation as Program Control Manager;  Management Consulting
and Research, Inc. as Cost Analyst; and Tecolote Research, Inc. as Advanced Cost
Estimator.  He has seven years of real estate and property management experience
as Senior  Director of Development  for KinderCare  Learning  Centers,  Inc. and
Senior Accountant with Aronov Realty Management Co., Inc. Mr. Cousins received a
B.S. degree in Business Administration from Auburn University at Montgomery.

     Mr. Guerrette joined the Company in April 1997, serving as Vice President -
Retail Sales, was elected Senior Vice President - Sales in December 1997 and was
elected  Senior Vice  President - E-Commerce  in June 1999.  Mr.  Guerrette  was
President   of  Sounds   Easy  Video  when  it  was   acquired  by  Home  Vision
Entertainment,  Inc.  ("Home  Vision") in September 1994 and served as Executive
Vice President and Chief Operating  Officer of Home Vision until it was acquired
by  the   Company  in  July  1996.   He  was  elected  to  the  Maine  House  of
Representatives,  where he served  from  November  1994 to 1996.  Mr.  Guerrette
attended Brigham Young University and majored in Accounting.

                                       14
<PAGE>

     Mr. Hamil was elected  Vice  President  and  Controller  in June 1996,  was
elected Chief Accounting Officer in October 1996, Senior Vice President in March
1998 and Senior Vice President - Finance in October 1999. From July 1994,  after
receiving  a Masters in Business  Administration  from Duke  University's  Fuqua
School of  Business,  until he joined the Company,  Mr. Hamil was an  Investment
Banking Associate with NationsBanc Capital Markets, Inc. He has also served as a
Staff Auditor with Ernst & Young LLP. Mr. Hamil is a Certified Public Accountant
and received a B.S.  degree in Business  Administration  from the  University of
Alabama.

     Mr.  Innes  joined the  Company  in May 1999 and was  elected  Senior  Vice
President - Sales and Marketing in June 1999.  From October 1997 until he joined
the Company,  Mr. Innes was a marketing  consultant with Neighborhood  Marketing
Institute,   a  neighborhood  marketing  and  consulting  firm  specializing  in
multi-unit  restaurants and retailers,  most recently  serving as Executive Vice
President and Chief Operating Officer. From November 1989 to September 1997, Mr.
Innes was employed with Blockbuster Entertainment, most recently serving as Vice
President  -  Marketing.  Prior to  joining  Blockbuster  Entertainment,  he was
employed with Long John Silver's Seafood Shoppe for fifteen years, most recently
serving  as  Controller  of Retail  Operations  and  Marketing.  Mr.  Innes is a
Certified Public Accountant and a Certified Management Accountant and received a
B.S. degree in Business Administration from the University of Kentucky.

     Mr.  Langford  joined the Company in August 1995 as Vice  President and was
elected Senior Vice President - Management  Information Systems in October 1996.
From August 1993 until he joined the Company,  Mr.  Langford served as a Manager
for Payroll,  Fixed Assets and Accounts  Payable for Rocky Mountain  Healthcare.
From February 1990 to August 1993, he was Director of Support  Operations for U.
I. Video Stores,  Inc. ("UIV") of Denver,  Colorado.  UIV was one of the largest
Blockbuster franchisees,  operating 110 stores in seven states in July 1993 when
UIV was  acquired  by  Blockbuster.  Mr.  Langford  received  a B.A.  degree  in
Communications from Brigham Young University.

     Mr.  Loyd  joined the  Company in August  1986 and has served as the retail
store coordinator as well as Vice President - Purchasing and Product Management.
In October 1996, he was elected  Senior Vice  President - Purchasing and Product
Management.  Mr. Loyd attended  Southeast  Missouri State  University,  where he
majored in Business Administration.

     Mr. Stubbs was elected Senior Vice President - Store Operations in November
1997. He joined the Company in November 1995 as a District Manager and served as
a Regional Manager prior to his current position.  Mr. Stubbs attended Texas A &
M University and Southwest Texas State University,  where he received his B.B.A.
degree in Business Administration and Marketing.

     Mr.  Sigoloff  became a director of the Company in  September  1994.  Since
1989, Mr. Sigoloff has been Chairman of the Board, President and Chief Executive
Officer of Sigoloff &  Associates,  Inc., a management  consulting  company.  In
August 1989, LJ Hooker  Corporation,  a client of Sigoloff &  Associates,  Inc.,
appointed  Mr.  Sigoloff  to act as  its  Chief  Executive  Officer  during  its
reorganization under Chapter 11 of the United States Bankruptcy Code. From March
1982 until 1988,  Mr.  Sigoloff was Chairman of the Board,  President  and Chief
Executive Officer of Wickes Companies, Inc., one of the largest retailers in the
United States. Mr. Sigoloff is a director of Kaufman and Broad Home Corporation,
a publicly held company. In addition,  Mr. Sigoloff is an adjunct full professor
at the John E.  Anderson  Graduate  School of  Management  at the  University of
California at Los Angeles.

                                       15
<PAGE>

     Mr. Smith became a director of the Company in  September  1994.  Since June
1998,  Mr. Smith has served as Vice Chairman of the Board of Laird & Co., LLC, a
merchant  bank.  In addition,  from 1991 until August 1998,  Mr. Smith served as
Vice  Chairman  of the  Board  of  Spencer  Trask  Securities  Incorporated,  an
investment  banking firm.  Mr. Smith is a founding  General  Partner of Lawrence
Venture Associates,  a venture capital limited partnership  headquartered in New
York City.  From 1981 to 1984, he served as Executive  Vice  President and Group
Executive of the worldwide  corporations group at Irving Trust Company. Prior to
joining Irving Trust Company,  he was at Citibank for 15 years, where he founded
Citicorp Venture Capital as President and Chief Executive Officer. Since 1988 he
has also been the managing general partner of Private Equity  Partnership,  L.P.
Mr.  Smith  is  a  director  of  the  following  publicly  held  companies:  KLS
EnviroResources,  Inc., Digital Video Systems, Inc. and Careside, Inc. Mr. Smith
is an adjunct professor at Columbia University Graduate School of Business.

     Mr. Troy became a director of the Company in  September  1994.  Mr. Troy is
the founder  and has been a member of the law firm of Troy & Gould  Professional
Corporation  since May 1970. Mr. Troy is also a director of Argoquest,  Inc., an
Internet holding company.

     Directors   are  elected  to  serve  until  the  next  annual   meeting  of
stockholders of the Company or until their successors are elected and qualified.
Officers  serve at the  discretion  of the Board of  Directors,  subject  to any
contracts  of  employment.  Non-employee  directors  receive  an  annual  fee of
$16,000,  a fee of $1,000 for each Board meeting  attended and a fee of $500 for
each  committee  meeting  attended.  The Company has granted  vested  options to
purchase  110,000 shares of Common Stock to each of Messrs.  Sigoloff and Smith,
vested  options to purchase  135,000  shares to Mr.  Troy and vested  options to
purchase  145,000  shares to Mr. Snow,  in each case at or above the fair market
value of the Common Stock on the date of grant.

ITEM 2.  PROPERTIES

     At March 10, 2000,  all but one of the Company's 954 stores were located on
premises  leased from  unaffiliated  persons  pursuant to leases with  remaining
terms which generally vary from one month to six years. The Company is generally
responsible for taxes,  insurance and utilities  under its leases.  Rental rates
often  increase  upon  exercise  of any  renewal  option,  and some  leases have
percentage rental arrangements pursuant to which the Company is obligated to pay
a base rent plus a  percentage  of the  store's  revenues  in excess of a stated
minimum.  In  general,  the  stated  minimums  are set at such a high  level  of
revenues  that the Company does not pay  additional  rents based on reaching the
required revenue levels and does not anticipate  paying such additional rents in
the future.  The Company  anticipates that future stores will also be located in
leased premises.  The Company owns a family  entertainment  center,  including a
video specialty store, in Meridian, Mississippi.

     The Company's  support  center offices are located in four buildings at 739
W. Main Street,  Dothan,  Alabama,  consisting of an aggregate of  approximately
13,000 square feet of space, and a portion of an office building located at 2323
W. Main Street, Dothan, Alabama,  consisting of approximately 10,000 square feet
of space. Two of these buildings with an aggregate of approximately 6,500 square
feet of space are owned by the Company.  Two of these  buildings  which are used
primarily  for  executive  and general  corporate  offices  have an aggregate of
approximately 6,500 square feet of space and are leased from Messrs. Malugen and
Parrish.  In Fiscal 1999, lease payments to Messrs.  Malugen and Parrish totaled
$43,800.  The  remaining  office  building  space is used for general  corporate
offices and is leased from an unaffiliated  third party for a one-year term with
multiple one-year renewal options.  The Company also leases a 60,000 square foot
videocassette  processing,   distribution  and  warehouse  facility  in  Dothan,
Alabama,  from an unaffiliated  third party pursuant to a three-year  lease with
three,  three-year  renewal  options.  In  March  2000,  the  Company  purchased
approximately  90,000  square  feet  of  space  where  the  Company  expects  to
consolidate all of its office and  distribution  personnel  during the summer of
2000.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is  occasionally  involved in litigation in the ordinary course
of its business, none of which, individually or in the aggregate, is material to
the Company's business or results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.



                                       16
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's  Common Stock began trading on the Nasdaq  National Market on
August 2, 1994 under the symbol  "MOVI." The following  table sets forth for the
periods  indicated  the high and low last sale  prices of the  Company's  Common
Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>

                                                       High              Low
                                                     -------            ------
<S>                                                  <C>                <C>
2000
First Quarter  (through March 10, 2000)              $  4.38            $ 2.88

1999
First Quarter                                           7.50              3.88
Second Quarter                                          6.38              4.69
Third Quarter                                           6.19              5.19
Fourth Quarter                                          5.44              3.75


1998
First Quarter                                           8.13              2.88
Second Quarter                                          8.06              5.50
Third Quarter                                           7.63              3.63
Fourth Quarter                                          8.00              2.81
</TABLE>

     The last sale price of the  Company's  Common Stock on March 10,  2000,  as
reported  on the Nasdaq  National  Market  was $3.75 per share.  As of March 10,
2000,  there were  approximately  2,500 holders of the  Company's  Common Stock,
including 125 stockholders of record.

     The payment of dividends is within the discretion of the Company's Board of
Directors and will depend on the earnings, capital requirements, restrictions in
future  credit  agreements  and the  operating  and  financial  condition of the
Company,  among  other  factors.  The  Company  presently  expects to retain its
earnings to finance the expansion and further development of its business. There
can be no assurance that the Company will ever pay a dividend in the future.


                                       17
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                                         Fiscal Year Ended                      Year Ended
                                                      ---------------------------------------------------------------------
                                                      January 2,    January 3,    January 4,    January 5,      December 31,
                                                         2000          1999          1998       1997(3)(4)          1995
                                                      ---------------------------------------------------------------------
                                                                 (dollars in thousands, except per share data)

Statement of Income Data (1):
<S>                                                   <C>           <C>             <C>           <C>             <C>
Revenues:
   Rentals                                            $ 235,452     $ 222,784       $ 220,787     $ 219,002       $ 130,353
   Product sales                                         41,493        44,849          39,569        35,393          18,848
                                                      ---------     ---------       ---------     ---------       ---------
                                                        276,945       267,633         260,356       254,395         149,201
Cost of sales:
   Cost of rental revenues                               69,716       113,192(2)       72,806        66,412(5)       29,815
   Cost of product sales                                 25,884        29,744          24,597        21,143          12,600
                                                      ---------     ---------       ---------     ---------       ---------
Gross margin                                            181,345       124,697         162,953       166,840         106,786

Operating costs and expenses:
   Store operating expenses                             137,128       130,473         130,512       121,588          67,045
   Amortization of intangibles                            8,452         7,068           7,206         7,160           3,380
   General and administrative                            21,403        17,996          17,006        20,266          13,525
   Restructuring and other charges                         --            --              --           9,595            --
                                                      ---------     ---------       ---------     ---------       ---------
Operating income (loss)                                  14,362       (30,840)          8,229         8,231          22,836

Interest expense, net                                    (3,349)       (5,325)         (6,326)       (5,619)         (1,528)
                                                      ---------     ---------       ---------     ---------       ---------
Income (loss) before income taxes, extraordinary
   item and cumulative effect of accounting change       11,013       (36,165)          1,903         2,612          21,308
Income taxes(6)                                           4,615       (13,089)            998         1,006           7,871
                                                      ---------     ---------       ---------     ---------       ---------
Income (loss) before extraordinary item and
   cumulative effect of accounting change                 6,398       (23,076)            905         1,606          13,437
Extraordinary loss on early extinguishment of debt,
   net of tax                                              (682)         --              --            --              --
Cumulative effect of accounting change, net of tax         (699)         --              --            --              --
                                                      ---------     ---------       ---------     ---------       ---------
Net income (loss)                                     $   5,017     $ (23,076)      $     905     $   1,606       $  13,437
                                                      =========     =========       =========     =========       =========
Basic earnings (loss) per share                       $    0.38     $   (1.72)      $    0.07     $    0.12       $    1.14
                                                      =========     =========       =========     =========       =========
Diluted earnings (loss) per share                     $    0.38     $   (1.72)      $    0.07     $    0.12       $    1.11
                                                      =========     =========       =========     =========       =========

Shares used in computing earnings (loss) per share:
   Basic                                                 13,115        13,388          13,420        13,241          11,795
                                                      =========     =========       =========     =========       =========
   Diluted                                               13,370        13,388          13,421        13,368          12,153
                                                      =========     =========       =========     =========       =========

Operating Data:
Number of stores at end of period (1)                       963           837             856           863             750
Adjusted EBITDA (7)                                   $  35,494     $  37,378       $  26,898     $  26,232       $   8,766
Cash earnings per diluted share (8)                   $    1.11     $    0.87       $    0.60     $    1.01       $    1.38
Increase (decrease) in same-store revenues (9)              0.4%          3.9%            1.1%         (1.0)%           0.0%


                                                      January 2,    January 3,    January 4,    January 5,    December 31,
                                                         2000          1999          1998          1997           1995
                                                      ---------------------------------------------------------------------
Balance Sheet Data (1):
Cash and cash equivalents                             $  6,970      $  6,983        $  4,459      $  3,982        $  6,255
Rental inventory, net                                   52,357        44,998          92,183        89,929          72,979
Total assets                                           209,527       202,369         259,133       261,577         233,479
Long-term debt, less current maturities                 44,377        46,212          63,479        67,883          19,622
Total liabilities                                       84,106        78,254         111,504       114,853          97,340
Stockholders' equity                                   125,421       124,115         147,629       146,724         136,139

                                       18
<PAGE>


<FN>
---------------
(1)  Statement  of income data for all periods  presented  has been  restated to
     include the results of Home Vision Entertainment,  Inc. ("Home Vision") and
     Hollywood  Video,  Inc.  ("Hollywood  Video"),  which were  acquired in two
     separate  pooling-of-interests  transactions  on July 1, 1996.  Home Vision
     reported on a fiscal year ending  September 30 and Hollywood Video reported
     on a calendar year basis.  The Company's  results for the fiscal year ended
     January 5, 1997 are  combined  with  results of Home  Vision and  Hollywood
     Video for the period January 1, 1996 to the date of the  acquisitions.  The
     results of the Company and Hollywood Video for the year ending December 31,
     1995 are combined with Home Vision's  results for the year ending September
     30, 1995.  Balance  sheet data has also been restated  consistent  with the
     statement of income data except the  December  31, 1995 balance  sheet data
     includes  that of Home Vision at December 31, 1995 instead of September 30,
     1995.  In order to conform  with the fiscal year end of the  Company,  Home
     Vision's net loss of $2,082,000  for the quarter ended December 31, 1995 is
     not  reflected  in  the  statement  of  income  data  but is  reflected  in
     stockholders'  equity at December 31, 1995. The ending number of stores for
     each period presented has been restated to include the store counts of Home
     Vision and Hollywood Video.
(2)  Effective July 6, 1998, the Company changed its method of amortizing rental
     inventory  resulting  in  a  non-recurring,  non-cash,  pre-tax  charge  of
     approximately $43.6 million.
(3)  On July 1, 1996,  the  Company  adopted a fiscal  year  ending on the first
     Sunday following December 30, which  periodically  results in a fiscal year
     of 53 weeks.  The 1996 fiscal  year,  ended on January 5, 1997,  reflects a
     53-week year.
(4)  Includes a non-recurring  charge of  approximately  $10.4 million for store
     closures, corporate restructuring and merger-related expenses.
(5)  Effective  April 1, 1996,  the  Company  changed  its method of  amortizing
     rental  inventory  resulting  in a  one-time,  non-cash,  pre-tax charge of
     approximately $7.7 million.
(6)  Includes pro forma  adjustments  to reflect  income tax expense which would
     have been  recognized if Hollywood  Video had been taxed as a C corporation
     for all periods presented.  Historical operating results of Hollywood Video
     do not include any  provision for income taxes prior to July 1, 1996 due to
     their S corporation status prior to that date.
(7)  Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
     and  amortization,  excluding  non-recurring  charges,  less the  Company's
     purchase of videocassette  rental inventory which excludes rental inventory
     purchases   specifically  for  new  store  openings.  New  store  inventory
     purchases  were $3.2 million,  $1.2 million,  $1.3 million and $5.7 million
     for the fiscal  years ended  January 2, 2000,  January 3, 1999,  January 4,
     1998 and January 5, 1997, respectively.  For the fiscal year ended December
     31, 1995, new store inventory purchases are not separately  identified and,
     thus, have not been excluded from Adjusted  EBITDA.  Adjusted EBITDA should
     be considered  in addition to, but not as a substitute  for or superior to,
     operating  income,  net income,  cash flow and other  measures of financial
     performance  prepared in  accordance  with  generally  accepted  accounting
     principles.
(8)  Cash  earnings  is  defined  as  net  income  before  extraordinary  items,
     cumulative effect accounting  changes,  non-recurring  non-cash charges and
     amortization of intangibles. Cash earnings should be considered in addition
     to, but not as a  substitute  for or superior  to,  operating  income,  net
     income, cash flow and other measures of financial  performance  prepared in
     accordance with generally accepted accounting principles.
(9)  Same-store  revenue  is  defined  as the  aggregate  revenues  from  stores
     operated by the Company for at least 13 months. Same-store revenues for the
     Company have not been restated to include the  same-store  revenues of Home
     Vision and Hollywood Video.
</FN>
</TABLE>

                                       19
<PAGE>


ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Results of Operations

The following table sets forth, for the periods  indicated,  statement of income
data,  expressed as a percentage of total revenue, and the number of stores open
at the end of each period.
<TABLE>
Statement of Operations Data:

<CAPTION>
                                                                      Fifty-Two Weeks Ended
                                                             -------------------------------------
                                                              January 2,   January 3,    January 4,
                                                                2000         1999          1998
                                                             -------------------------------------
<S>                                                          <C>           <C>           <C>
Revenues:
   Rentals                                                        85.0%         83.2%         84.8%
   Product sales                                                  15.0          16.8          15.2
                                                             ---------      --------      --------
                                                                 100.0         100.0         100.0
Cost of sales:
   Cost of rental revenues
     Recurring                                                    25.2          26.0          28.0
     Policy change                                                  --          16.3            --
   Cost of product sales                                           9.3          11.1           9.4
                                                             ---------      --------      --------
Gross margin                                                      65.5          46.6          62.6

Operating costs and expenses:
   Store operating expenses                                       49.5          48.7          50.1
   Amortization of intangibles                                     3.1           2.7           2.8
   General and administrative                                      7.7           6.7           6.5
                                                             ---------      --------      --------
Operating income (loss)                                            5.2         (11.5)          3.2

Interest expense, net                                             (1.2)         (2.0)         (2.5)
                                                             ---------      --------      --------
Income (loss) before income taxes, extraordinary item
   and cumulative effect of accounting change                      4.0         (13.5)          0.7
Income taxes                                                       1.7          (4.9)          0.4
                                                             ---------      --------      --------
Income (loss) before extraordinary item and
   cumulative effect of accounting change                          2.3          (8.6)          0.3
Extraordinary loss on early extinguishment
   of debt, net of tax                                            (0.2)           --            --
Cumulative effect of accounting change, net of tax                (0.3)           --            --
                                                             ---------      --------      --------
Net income (loss)                                                  1.8%         (8.6)%         0.3%
                                                             =========      ========      ========
Adjusted EBITDA (in thousands)                               $  35,494      $ 37,378      $ 26,898
                                                             =========      ========      ========
Number of stores open at end of period                             963           837           856
                                                             =========      ========      ========
</TABLE>

                                       20
<PAGE>

Fiscal year ended  January 2, 2000 ("Fiscal  1999")  compared to the fiscal year
ended January 3, 1999 ("Fiscal 1998")

Revenue.  Total revenue  increased  3.5% to $276.9  million for Fiscal 1999 from
$267.6 million for Fiscal 1998. The increase was due primarily to an increase in
same-store  revenues of 0.4%, as well as  approximately  40 more average  stores
open during Fiscal 1999 versus Fiscal 1998. The increase in same-store  revenues
was  primarily  the  result of (i) an  increase  in the  number of copies of new
release  videocassettes  available  to  customers  as  a  result  of  copy-depth
initiatives, including revenue sharing programs and other depth of copy programs
available from movie studios;  (ii) an increase in the sale of previously viewed
movies, which is the direct result of more product available to consumers due to
the copy-depth initiatives and revenue sharing programs discussed above; (iii) a
double-digit increase in the video game rental business due to increasing growth
in the penetration of the Nintendo 64 and Sony Playstation  game platforms,  the
introduction  of the Sega  Dreamcast  game  platform  in late Fiscal 1999 and an
increase in the number of game titles  available for these  platforms;  and (iv)
successful,  chain-wide  internal  marketing  programs designed to generate more
consumer excitement and traffic in the Company's base of stores.  These positive
aspects  of revenue  growth  were  offset,  in part,  by (i) a greater  than 40%
decrease in new tape sales during  Fiscal 1999 as a result of fewer titles being
released at sell-through price points;  (ii) the negative  comparative impact of
the hit title  "Titanic," which was released in the third quarter of Fiscal 1998
and was the highest  grossing box office hit of all time;  (iii) the combination
of the new  millenium  celebration  and the  Christmas  and New Year's  holidays
falling  within weekend days during Fiscal 1999 versus week days in Fiscal 1998;
and (iv) overall  unfavorable weather in Fiscal 1999 as compared to Fiscal 1998.
Product sales  decreased as a percentage  of total  revenues to 15.0% for Fiscal
1999 from 16.8% for Fiscal  1998,  primarily  as a result of the decrease in new
tape sales,  offset in part by the  increase in the sales of  previously  viewed
rental inventory.

Cost of Sales.  Net of the  impact of a rental  inventory  policy  change in the
third  quarter of Fiscal  1998,  the cost of rental  inventory,  which  includes
amortization of rental  inventory and revenue sharing  expenses,  decreased as a
percentage  of total  revenue from 26.0% in Fiscal 1998 to 25.2% in Fiscal 1999.
As a percentage of rental revenue,  the cost of rental  inventory in Fiscal 1999
was 29.6% versus 31.2% in Fiscal 1998. The decrease in rental inventory costs as
a percentage  of both total  revenue and rental  revenue is primarily due to the
Company's change in amortization policy during the third quarter of Fiscal 1998,
the Company's reduced per unit costs of acquiring rental product through various
copy-depth  programs available from movie studios, as well as the more efficient
allocation of product to the store base.

Effective July 6, 1998, the Company changed its  amortization  policy for rental
inventory.  The change resulted in a nonrecurring,  non-cash,  pre-tax charge of
approximately  $43.6  million  in the third  quarter of Fiscal  1998.  The major
impetus  for the  change in  amortization  policy  was the  changing  purchasing
economics within the industry,  which have resulted in a significant increase in
new release  videos  available for rental.  While revenue  sharing  programs and
other  copy-depth  initiatives have increased  customer  satisfaction and driven
increased  rental revenue,  the overall demand for each new release is satisfied
sooner.  In order to match more  accurately the valuation of tape inventory with
accelerated  consumer demand,  the Company changed its  amortization  policy for
rental inventory as described in Note 1 of the "Notes to Consolidated  Financial
Statements."

Cost of product sales  includes the costs of new  videocassettes,  confectionery
items and other goods,  as well as the  unamortized  value of previously  viewed
rental  inventory  sold. The gross margin on product sales increased to 37.6% in
Fiscal 1999 from 33.7% in Fiscal 1998. The increase in  profitability of product
sales is primarily  the result of an increase in  previously  viewed movie sales
and a decrease in new movie sales throughout the year.  Previously viewed movies
carry gross margins that are substantially higher than the average gross margins
for new movie sales. In addition,  the movie "Titanic" was released in the third
quarter  of  Fiscal  1998 and was sold by the  Company  at low  profit  margins,
although  it was the  largest  new movie  sales  campaign  in the history of the
Company.

                                       21
<PAGE>



Gross Margins.  As a result of the improved  margins on both rental revenues and
product  sales,  total gross margins  improved from 62.9% in Fiscal 1998, net of
the impact of the change in rental inventory  amortization  policy,  to 65.5% in
Fiscal 1999.

Operating  Costs  and  Expenses.   Store  operating   expenses,   which  include
store-level  expenses such as lease payments and in-store payroll,  increased to
49.5% of total revenue for Fiscal 1999 from 48.7% for Fiscal 1998.  The increase
in store  operating  expenses as a percentage  of revenues was  primarily due to
same-store   revenues  of  0.4%  for  Fiscal  1999  falling   short  of  Company
expectations and the impact of the Blowout stores on operating  expenses.  These
stores-within-a-store  operate with a higher percentage of salaries and wages to
total revenue than the Company's  other stores and generate less average revenue
than the Company's  overall  average revenue level.  Also, the Company  incurred
some incremental  training and other operational expenses during the integration
of the 88-store  Blowout  acquisition and the ramp up of new store growth in the
latter half of 1999.

General and  administrative  expenses increased as a percentage of revenues from
6.7% for Fiscal 1998 to 7.7% for Fiscal 1999.  The increase is primarily  due to
increased staffing and travel costs associated with the Company's ramp up in new
store  development,   expense  increases  resulting  from  the  acquisition  and
integration  of the  Blowout  acquisition  and  incremental  expenses  from  the
launching of the Company's e-commerce effort at www.moviegallery.com.

Amortization  of  intangibles  increased as a percentage  of revenues to 3.1% in
Fiscal 1999 versus 2.7% in Fiscal  1998.  This  increase  relates  solely to the
inclusion  of  $1.6  million  in  goodwill  write-offs  during  Fiscal  1999  in
conjunction  with ongoing asset  impairment  analysis  performed by the Company,
which is required by Financial  Accounting  Standards  Board  Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of."

As a result of the  above  factors,  excluding  the  impact of the  amortization
policy change in relation to Fiscal 1998, operating income increased by 12.5% to
$14.4 million in Fiscal 1999 from $12.8 million in Fiscal 1998.

Net  interest  expense as a percentage  of revenues  decreased to 1.2% in Fiscal
1999 versus 2.0% in Fiscal 1998.  This  decrease was primarily due to reductions
in average debt outstanding during Fiscal 1999 versus Fiscal 1998.

For Fiscal 1999 the Company's  effective  income tax rate was 41.9%, as compared
to a 36.2%  effective  rate for Fiscal 1998. The increase in the income tax rate
in  Fiscal  1999 is  primarily  due to a  shortfall  in  pre-tax  income  versus
expectations,   which  causes  the   non-tax-deductible   goodwill  amortization
associated  with stock  acquisitions  made in  previous  years to  increase  the
effective tax rate of the Company.  The Company currently has a net deferred tax
asset of $441,000.  The Company  anticipates the generation of sufficient future
taxable income,  based on its current operations,  to utilize these deferred tax
assets.

During the first quarter of Fiscal 1999, the Company  incurred an  extraordinary
loss on the early  extinguishment  of debt of $682,000  (net of income  taxes of
$359,000),  or $0.05 per diluted  share.  The  extraordinary  loss was comprised
primarily  of the  write-off  of both the  unamortized  debt issue costs and the
negative  value of an  interest  rate swap  agreement  in  association  with the
restructuring  of the Company's debt  obligations  discussed below in "Liquidity
and Capital Resources."


                                       22
<PAGE>

Effective  January 4, 1999,  the Company  adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position 98-5, "Reporting
the Costs of Start-Up  Activities." As a result,  the Company  recorded a charge
for the  cumulative  effect of an  accounting  change of $699,000 (net of income
taxes of  $368,000),  or $0.05 per diluted  share,  to expense  the  unamortized
portion of certain start-up costs that had been capitalized  prior to January 4,
1999,  discussed  fully  in  Note  1 of the  "Notes  to  Consolidated  Financial
Statements."

Fiscal year ended  January 3, 1999  compared to the fiscal year ended January 4,
1998 ("Fiscal 1997")

Revenue.  Total revenue  increased  2.8% to $267.6  million for Fiscal 1998 from
$260.4 million for Fiscal 1997. The increase was due primarily to an increase in
same-store  revenues of 3.9%,  offset in part due to fewer  average  stores open
during Fiscal 1998 versus Fiscal 1997.  The increase in same-store  revenues was
primarily  the result of (i) an  increase in the number of copies of new release
videocassettes  available to customers  as a result of  copy-depth  initiatives,
including  revenue sharing  programs and other depth of copy programs  available
from movie  studios;  (ii) an increase in the video game rental  business due to
both increasing consumer acceptance of the Nintendo 64 and Sony Playstation game
platforms  and an  increase  in the number of game  titles  available  for these
platforms; and (iii) successful, chain-wide internal marketing programs designed
to  generate  more  consumer  excitement  and traffic in the  Company's  base of
stores.  Product sales  increased as a percentage of total revenues to 16.8% for
Fiscal 1998 from 15.2% for Fiscal 1997,  primarily as a result of an increase in
the sales of previously viewed rental inventory.

Cost of Sales.  Net of the impact of the rental  inventory  policy change in the
third  quarter  of Fiscal  1998,  the cost of rental  revenues,  which  includes
amortization of rental  inventory and revenue sharing  expenses,  decreased as a
percentage  of total  revenue from 28.0% in Fiscal 1997 to 26.0% in Fiscal 1998.
As a percentage of rental  revenue,  the cost of rental  revenues in Fiscal 1998
was 31.2%  versus  33.0% in Fiscal 1997.  Significantly  reduced  tape  purchase
dollars in Fiscal 1998 versus Fiscal 1997, an increased use of revenue  sharing,
as well as the same-store revenue increases in Fiscal 1998, are the main reasons
that the cost of rental  revenues  as a  percentage  of both total  revenue  and
rental revenue in Fiscal 1998 has declined versus Fiscal 1997.

Cost of product sales  includes the costs of new  videocassettes,  confectionery
items and other goods,  as well as the  unamortized  value of previously  viewed
rental inventory sold in the Company's stores. The gross margin on product sales
decreased  from 37.8% in Fiscal 1997 to 33.7% in Fiscal  1998.  The  decrease in
product  sales  gross  margins is  primarily  the result of: (i) a  concentrated
effort by the Company to reduce inventory  levels through  discounts on selected
inventory during the first half of 1998; and (ii) the impact of "Titanic," which
the Company sold at a below average profit margin and for which the Company sold
more units than any sell-through priced title in its history.

Gross  Margins.  Although  the Company  experienced  improved  margins on rental
revenues,  the positive impact of rental gross margins were offset by a decrease
in product sales margins.  As a result,  total gross margins  improved  slightly
from  62.6% in Fiscal  1997 to 62.9% in Fiscal  1998,  net of the  impact of the
change in rental inventory amortization policy.

Operating  Costs  and  Expenses.   Store  operating   expenses,   which  include
store-level  expenses such as lease payments and in-store payroll,  decreased to
48.7% of total revenue for Fiscal 1998 from 50.1% for Fiscal 1997.  The decrease
in store  operating  expenses as a percentage  of revenues was  primarily due to
same-store revenue increases during Fiscal 1998.

General and  administrative  expenses increased as a percentage of revenues from
6.5% for Fiscal 1997 to 6.7% for Fiscal 1998.  The increase is primarily  due to
Fiscal 1998 increases in fixed asset depreciation,  marketing expenses, salaries
and wages and other  personnel  costs,  in part  associated with the increase in
personnel in the Company's real estate department in anticipation of its planned
new store development during Fiscal 1999.

                                       23
<PAGE>

As a result of the  above  factors,  excluding  the  impact of the  amortization
policy change,  operating  income  increased by 55.4% to $12.8 million in Fiscal
1998 from $8.2 million in Fiscal 1997.

Liquidity and Capital Resources

Historically,  the  Company's  primary  capital  needs have been for opening and
acquiring  new stores and for the  purchase of  videocassette  inventory.  Other
capital needs include the  refurbishment,  remodeling and relocation of existing
stores,  as well as for common  stock  repurchases  within  the past  year.  The
Company has funded inventory purchases,  remodeling and relocation programs, new
store opening costs, acquisitions and stock repurchases primarily from cash flow
from  operations,  the  proceeds  of two public  equity  offerings,  loans under
revolving credit facilities and seller financing.

During  Fiscal 1999,  the Company  generated  $35.5  million in Adjusted  EBITDA
versus  $37.4  million for Fiscal  1998.  The  decrease  in  Adjusted  EBITDA is
attributable primarily to expense increases associated with acquisitions and new
store development,  as well as same-store  revenues that, though increasing 0.4%
for Fiscal 1999, fell short of the Company's  goals.  Adjusted EBITDA is defined
as earnings before  interest,  taxes,  depreciation and  amortization,  less the
Company's purchase of rental inventory which excludes rental inventory purchases
specifically  for new store  openings.  Adjusted  EBITDA should be considered in
addition to, but not as a substitute for or superior to, operating  income,  net
income,  cash flow and other  measures  of  financial  performance  prepared  in
accordance with generally accepted accounting principles.

Cash earnings for Fiscal 1999 increased to $14.9  million,  or $1.11 per diluted
share,  from $11.7  million,  or $0.87 per diluted  share for Fiscal 1998.  On a
diluted per share basis,  cash earnings  increased  27.6%  year-over-year.  Cash
earnings is defined as net income before extraordinary items,  cumulative effect
accounting   changes,   non-recurring   non-cash  charges  and  amortization  of
intangibles.  Cash  earnings  should be  considered in addition to, but not as a
substitute for or superior to, operating income, net income, cash flow and other
measures of financial performance prepared in accordance with generally accepted
accounting principles.

Net cash provided by operating  activities  was $84.4 million for Fiscal 1999 as
compared to $90.9 million for Fiscal 1998.  Net income was higher in Fiscal 1999
versus Fiscal 1998 because of the impact of the change in  amortization  policy.
However,  cash provided by operating  activities  decreased  primarily due to an
increase in merchandise  inventory and an increase in deposits and other assets,
as well as lower depreciation and amortization,  net of the impact of the change
in videocassette  amortization  policy, in Fiscal 1999 versus Fiscal 1998. These
items were  offset,  in part,  by an increase  in  accounts  payable and accrued
liabilities in Fiscal 1999 versus Fiscal 1998.

Net cash used in  investing  activities  was $78.7  million  for Fiscal  1999 as
compared  to $66.3  million  for Fiscal  1998.  This  increase in funds used for
investing  activities is primarily the result of an increase in the expenditures
of capital for both acquisitions and property,  furnishings and equipment during
Fiscal 1999 versus  Fiscal  1998.  This  increase was offset,  in part,  by less
capital used in the net purchases of rental inventory.

Net cash used by  financing  activities  was $5.7  million  for  Fiscal  1999 as
compared  to $22.0  million  for Fiscal  1998.  This  decrease in funds used for
financing  activities is a direct result of more store openings and acquisitions
during  Fiscal 1999,  which  resulted in less debt  paydowns  during Fiscal 1999
versus  Fiscal  1998. A partial  offset to the decrease in debt  paydowns was an
increase in funds used to repurchase  the  Company's  common stock during Fiscal
1999 versus Fiscal 1998.

                                       24
<PAGE>


On January 7, 1999, the Company entered into a Credit Agreement with First Union
National Bank of North Carolina with respect to a revolving credit facility (the
"Facility").  The Facility  provides  for  borrowings  of up to $65 million,  is
unsecured  and will mature in its  entirety on January 7, 2002.  The Company may
increase  the amount of the Facility to $85 million if existing  banks  increase
their commitments or if any new banks enter the Credit  Agreement.  The interest
rate of the  Facility is based on LIBOR plus an  applicable  margin  percentage,
which depends on the Company's cash flow generation and borrowings  outstanding.
The  Company  may repay  the  Facility  at any time  without  penalty.  The more
restrictive  covenants of the Facility restrict  borrowings based upon cash flow
levels.  At January 2, 2000,  $44.4 million was outstanding,  approximately  $20
million  was  available  for  borrowing  and the  effective  interest  rate  was
approximately 7.1%.

The Company  grows its store base  through  internally  developed  and  acquired
stores and may require  capital in excess of internally  generated  cash flow to
achieve its desired growth.  The Company opened 53  internally-developed  stores
and acquired 131 stores  during Fiscal 1999.  During the year 2000,  the Company
intends  to open  approximately  100 new  stores  and will  entertain  potential
acquisition  transactions;  however,  the number of  acquired  stores in 2000 is
anticipated to be less than the number of internally  developed  stores.  To the
extent  available,  new stores and future  acquisitions  may be completed  using
funds available under the Facility,  financing provided by sellers,  alternative
financing  arrangements such as funds raised in public or private debt or equity
offerings or shares of the Company's stock issued to sellers. However, there can
be no assurance  that  financing will be available to the Company on terms which
will be acceptable, if at all.

During Fiscal 1999, the Company repurchased $3.8 million of its common stock. In
early 2000,  the Company  completed  its  previously  announced $5 million stock
repurchase plan and announced  another $5 million stock  repurchase  plan. It is
anticipated that the majority of the $5 million under the second repurchase plan
will be utilized during the fiscal year 2000.

At January 2, 2000, the Company had a working  capital deficit of $12.9 million,
due to the accounting  treatment of its rental  inventory.  Rental  inventory is
treated as a noncurrent  asset under generally  accepted  accounting  principles
because  it is a  depreciable  asset  and is not an asset  which  is  reasonably
expected to be completely realized in cash or sold in the normal business cycle.
Although  the  rental  of this  inventory  generates  the major  portion  of the
Company's revenue, the classification of this asset as noncurrent results in its
exclusion from working capital. The aggregate amount payable for this inventory,
however,  is reported as a current  liability  until paid and,  accordingly,  is
included in working  capital.  Consequently,  the Company  believes that working
capital is not an appropriate  measure of its liquidity and it anticipates  that
it will continue to operate with a working capital deficit.

The Company believes its projected cash flow from operations, borrowing capacity
with the  Facility,  cash on hand and trade  credit will  provide the  necessary
capital  to fund its  current  plan of  operations  for the  fiscal  year  2000,
including its  anticipated new store openings,  a modest  potential  acquisition
program and stock repurchases.  However, to fund a major acquisition program, or
to provide funds in the event that the Company's  need for funds is greater than
expected,  or if  certain  of the  financing  sources  identified  above are not
available to the extent anticipated or if the Company increases its growth plan,
the Company will need to seek  additional or  alternative  sources of financing.
This  financing  may not be  available  on terms  satisfactory  to the  Company.
Failure to obtain  financing to fund the Company's  expansion plans or for other
purposes could have a material adverse effect on the Company.


                                       25
<PAGE>


Other Matters

Impact of Year 2000

In prior years,  the Company  discussed  the nature and progress of its plans to
become Year 2000 compliant related to its operating  systems.  In late 1999, the
Company completed its review,  remediation and testing of systems to ensure Year
2000 readiness.  The Company  experienced no significant  disruptions in mission
critical  information  technology  and  non-information  technology  systems and
believes those systems successfully  responded to the Year 2000 date change. The
costs  associated with the  remediation of the Company's  systems in preparation
for the Year 2000 were not  material.  The Company is not aware of any  material
problems resulting from Year 2000 issues, either with its products, its internal
systems or the products and services of third parties. The Company will continue
to monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.

Market Risk Sensitive Instruments

The market risk inherent in the Company's financial  instruments  represents the
increased  interest  costs  arising  from  adverse  changes  in  interest  rates
(primarily  LIBOR and prime  bank  rates).  In order to manage  this  risk,  the
Company entered into an interest rate swap agreement that effectively  fixes the
Company's  interest rate exposure on $37 million of the amount outstanding under
the New  Facility  at 5.8% plus an  applicable  margin  percentage.  Assuming  a
hypothetical  10% adverse  change in the LIBOR  interest  rate and assuming debt
levels  outstanding as of January 2, 2000, the Company would incur an immaterial
amount  of  additional   annual  interest  expense  on  unhedged  variable  rate
borrowings.  These  amounts  are  determined  by  considering  the impact of the
hypothetical  change in interest rates on the Company's  cost of borrowing.  The
analysis does not consider the  potential  negative  impact on overall  economic
activity that could exist in such an environment.  The Company believes that its
exposure to adverse  interest  rate  changes and its impact on its total cost of
borrowing capital has been largely mitigated by the interest rate swap agreement
that is in place.

Forward Looking Statements

With  respect to  forward-looking  statements  contained  in this Item 7, please
review the disclosures set forth under "Cautionary Statements" in Item 1 above.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Reference is made to Part II, Item 7, "Market Risk  Sensitive  Instruments"
of this Form 10-K for the information required by Item 7A.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Reference is made to Part IV, Item 14 of this Form 10-K for the information
required by Item 8.

ITEM 9. CHANGES AND  DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE

     None.


                                       26
<PAGE>
                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item (other than the information regarding
executive  officers  set forth at the end of Item 1 of Part I of this Form 10-K)
will be contained  in the  Company's  definitive  Proxy  Statement  for its 2000
Annual Meeting of Stockholders, and is incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

     The  information  required by this Item will be contained in the  Company's
definitive Proxy Statement for its 2000 Annual Meeting of  Stockholders,  and is
incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  information  required by this Item will be contained in the  Company's
definitive Proxy Statement for its 2000 Annual Meeting of  Stockholders,  and is
incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The  information  required by this Item will be contained in the  Company's
definitive Proxy Statement for its 2000 Annual Meeting of  Stockholders,  and is
incorporated herein by reference.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

  (a)(1) Financial Statements:

         Report of Ernst & Young LLP, Independent Auditors.

         Consolidated Balance Sheets as of January 2, 2000 and January 3, 1999.

         Consolidated  Statements  of  Operations  for the  Fiscal  Years  Ended
         January 2, 2000, January 3, 1999, and January 4, 1998.

         Consolidated  Statements of  Stockholders'  Equity for the Fiscal Years
         Ended January 2, 2000, January 3, 1999, and January 4, 1998.

         Consolidated  Statements  of Cash  Flows  for the  Fiscal  Years  Ended
         January 2, 2000, January 3, 1999, and January 4, 1998.

         Notes to Consolidated Financial Statements.

  (a)(2) Schedules:

         None.


                                       27
<PAGE>



     (a)(3) Exhibits:

     The  following  exhibits,  which are  furnished  with this Annual Report or
incorporated herein by reference, are filed as part of this Annual Report:


Exhibit
  No.   Exhibit Description
------- -------------------
 3.1 -  Certificate of Incorporation of the Company.(1)
 3.2 -  Bylaws of the Company.(1)
 4.1 -  Specimen Common Stock Certificate.(2)
10.1 -  1994  Stock  Option  Plan,  as  amended  and  form  of  Stock  Option
        Agreement.(3)
10.2 -  Form of Indemnity Agreement.(1)
10.3 -  Employment Agreement between M.G.A., Inc. and Joe Thomas Malugen.(1)
10.4 -  Employment Agreement between M.G.A., Inc. and H. Harrison Parrish.(1)
10.5 -  Consulting  Agreement  between M.G.A.,  Inc. and William B. Snow dated
        December 21, 1998.(4)
10.6 -  Employment  Agreement between M.G.A., Inc. and J. Steven Roy.(5)
10.7 -  Employment Agreement between M.G.A., Inc. and S. Page Todd.(5)
10.8 -  Employment Agreement between M.G.A., Inc. and Steven M. Hamil. (5)
10.9 -  Employment  Agreement between M.G.A.,  Inc. and Robert L. Sirkis dated
        September 12, 1997.(4)
10.10-  Agreement dated August 15, 1997 between Major Video  Concepts,  Inc. and
        Movie Gallery, Inc.(6) (portions were omitted pursuant to a request for
        confidential treatment)
10.11-  Real estate lease dated June 1, 1994 between J. T. Malugen,  H. Harrison
        Parrish and M.G.A., Inc.(1)
10.12-  Real estate  lease dated June 1, 1994  between H.  Harrison  Parrish and
        M.G.A.,  Inc.(1)
10.13-  Credit Agreement between First Union National Bank of North Carolina and
        Movie Gallery, Inc. dated January 7, 1999.(4)
10.14-  Asset Purchase Agreement between Blowout Entertainment, Inc. and M.G.A.,
        Inc. dated March 22, 1999.(4)
18   -  Change in Accounting Principle.(7)
21   -  List of Subsidiaries.(filed herewith)
23   -  Consent of Ernst & Young LLP, Independent Auditors.(filed herewith)
27   -  Financial Data Schedule. (filed herewith)
---------------
(1)   Previously  filed with the Securities and Exchange  Commission on June 10,
      1994,  as exhibits to the  Company's  Registration  Statement  on Form S-1
      (File No. 33-80120).
(2)   Previously filed with the Securities and Exchange  Commission on August 1,
      1994,  as an  exhibit to  Amendment  No. 2 to the  Company's  Registration
      Statement on Form S-1.
(3)   Previously  filed with the Securities and Exchange  Commission on April 7,
      1997, as an exhibit to the  Company's  Form 10-K for the fiscal year ended
      January 5, 1997.
(4)   Previously  filed with the Securities and Exchange  Commission on April 5,
      1999, as an exhibit to the  Company's  Form 10-K for the fiscal year ended
      January 3, 1999.
(5)   Previously  filed with the Securities and Exchange  Commission on April 6,
      1998, as an exhibit to the  Company's  Form 10-K for the fiscal year ended
      January 4, 1998.
(6)   Previously  filed with the Securities and Exchange  Commission on November
      19, 1997 as an exhibit to the  Company's  Form 10-Q for the quarter  ended
      October 5, 1997.
(7)   Previously  filed with the Securities and Exchange  Commission on November
      18, 1998, as an exhibit to the  Company's  Form 10-Q for the quarter ended
      October 4, 1998.

     (b)  Reports on Form 8-K:

      The Company did not file any reports on Form 8-K during the quarter  ended
      January 2, 2000.

     (c)  Exhibits:

      See (a)(3) above.


                                       28
<PAGE>


SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934,  the Registrant has duly caused this annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

                               MOVIE GALLERY, INC.



                            By /s/ JOE THOMAS MALUGEN
                               -------------------------------
                                   Joe Thomas Malugen,
                                   Chairman of the Board
                                   and Chief Executive Officer

Date:  April 3, 2000


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
annual  report on Form 10-K has been signed  below by the  following  persons on
behalf of the Registrant and in the capacities and on the dates indicated.

     Signature                      Title                              Date
     ---------                      -----                              ----
/s/ JOE THOMAS MALUGEN      Chairman of the Board and              April 3, 2000
-----------------------     Chief Executive Officer
Joe Thomas Malugen

/s/ WILLIAM B. SNOW         Vice Chairman of the Board             April 3, 2000
-----------------------
William B. Snow

/s/ H. HARRISON PARRISH     Director and President                 April 3, 2000
-----------------------
H. Harrison Parrish

/s/ PHILIP B. SMITH         Director                               April 3, 2000
-----------------------
Philip B. Smith

/s/ J. STEVEN ROY           Executive Vice President and           April 3, 2000
-----------------------     Chief Financial Officer
J. Steven Roy

/s/ STEVEN M. HAMIL         Senior Vice President - Finance        April 3, 2000
-----------------------     and Chief Accounting Officer
Steven M. Hamil




                                       29
<PAGE>


                               Movie Gallery, Inc.

                        Consolidated Financial Statements


    Fiscal years ended January 2, 2000, January 3, 1999 and January 4, 1998


                                    Contents

Report of Ernst & Young LLP, Independent Auditors............................F-1

Audited Financial Statements

Consolidated Balance Sheets..................................................F-2
Consolidated Statements of Operations........................................F-3
Consolidated Statements of Stockholders' Equity..............................F-4
Consolidated Statements of Cash Flows........................................F-5
Notes to Consolidated Financial Statements...................................F-6





<PAGE>

                Report of Ernst & Young LLP, Independent Auditors




Board of Directors and Stockholders
Movie Gallery, Inc.

We have audited the accompanying  consolidated  balance sheets of Movie Gallery,
Inc.  as of January 2, 2000 and January 3, 1999,  and the  related  consolidated
statements of  operations,  stockholders'  equity and cash flows for each of the
three years in period ended January 2, 2000. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial  position of Movie Gallery,
Inc. at January 2, 2000 and January 3, 1999, and the consolidated results of its
operations  and its cash  flows  for each of the  three  years in  period  ended
January 2, 2000, in conformity with accounting  principles generally accepted in
the United States.

As discussed in Note 1 to the financial statements,  in 1999 the Company changed
its method of accounting  for the costs of start-up  activities  and in 1998 the
Company changed its method of accounting for amortization of rental inventory.


                                            /s/ Ernst & Young, LLP



Birmingham, Alabama
February 11, 2000

                                      F-1
<PAGE>

<TABLE>
                               Movie Gallery, Inc.

                           Consolidated Balance Sheets
                                 (in thousands)

<CAPTION>
                                                            January 2,   January 3,
                                                               2000         1999
                                                            ---------    ---------
<S>                                                         <C>          <C>
Assets
Current assets:
   Cash and cash equivalents                                $   6,970    $   6,983
   Merchandise inventory                                       15,148       11,824
   Prepaid expenses                                               814          779
   Store supplies and other                                     3,395        3,772
   Deferred income taxes                                          229          312
                                                            ---------    ---------
Total current assets                                           26,556       23,670

Rental inventory, net                                          52,357       44,998
Property, furnishing and equipment, net                        44,320       43,920
Goodwill and other intangibles, net                            83,539       85,743
Deposits and other assets                                       2,543        1,799
Deferred income taxes                                             212        2,239
                                                            ---------    ---------
Total assets                                                $ 209,527    $ 202,369
                                                            =========    =========
Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                                         $  26,243    $  23,396
   Accrued liabilities                                         12,989        7,426
   Current portion of long-term debt                              263          442
                                                            ---------    ---------
Total current liabilities                                      39,495       31,264

Long-term debt                                                 44,377       46,212
Other accrued liabilities                                         234          778

Stockholders' equity:
   Preferred stock, $.10 par value; 2,000,000 shares
      authorized, no shares issued or outstanding                --           --
   Common stock, $.001 par value; 35,000,000
      shares authorized, 12,549,667 and 13,315,915
      shares issued and outstanding                                13           13
   Additional paid-in capital                                 127,537      131,248
   Retained earnings (deficit)                                 (2,129)      (7,146)
                                                            ---------    ---------
Total stockholders' equity                                    125,421      124,115
                                                            ---------    ---------
Total liabilities and stockholders' equity                  $ 209,527    $ 202,369
                                                            =========    =========

See accompanying notes.
</TABLE>

                                      F-2
<PAGE>


<TABLE>
                               Movie Gallery, Inc.

                      Consolidated Statements of Operations
                      (in thousands, except per share data)

<CAPTION>
                                                                          Fiscal Year Ended
                                                                 -----------------------------------
                                                                 January 2,   January 3,   January 4,
                                                                    2000         1999         1998
                                                                 -----------------------------------

<S>                                                              <C>          <C>          <C>
Revenues:
   Rentals                                                       $ 235,452    $ 222,784    $ 220,787
   Product sales                                                    41,493       44,849       39,569
                                                                 ---------    ---------    ---------
                                                                   276,945      267,633      260,356
Cost of sales:
   Cost of rental revenues                                          69,716      113,192       72,806
   Cost of product sales                                            25,884       29,744       24,597
                                                                 ---------    ---------    ---------
Gross margin                                                       181,345      124,697      162,953
Operating costs and expenses:
   Store operating expenses                                        137,128      130,473      130,512
   Amortization of intangibles                                       8,452        7,068        7,206
   General and administrative                                       21,403       17,996       17,006
                                                                 ---------    ---------    ---------
Operating income (loss)                                             14,362      (30,840)       8,229

Interest income                                                         26           44           45
Interest expense                                                    (3,375)      (5,369)      (6,371)
                                                                 ---------    ---------    ---------
Income (loss) before income taxes, extraordinary item
   and cumulative effect of accounting change                       11,013      (36,165)       1,903
Income taxes                                                         4,615      (13,089)         998
                                                                 ---------    ---------    ---------
Income (loss) before extraordinary item and
   cumulative effect of accounting change                            6,398      (23,076)         905
Extraordinary loss on early extinguishment of debt,                   (682)        --           --
   net of income taxes of $359
Cumulative effect of accounting change, net of
   income taxes of $368                                               (699)        --           --
                                                                 ---------    ---------    ---------
Net income (loss)                                                $   5,017    $ (23,076)   $     905
                                                                 =========    =========    =========
Basic and diluted earnings (loss) per share:
Income (loss) before extraordinary item and
   cumulative effect of accounting change                        $    0.48    $   (1.72)   $    0.07
Extraordinary loss on early extinguishment of debt,                  (0.05)        --           --
   net of income taxes
Cumulative effect of accounting change, net of income taxes          (0.05)        --           --
                                                                 ---------    ---------    ---------
Net income (loss)                                                $    0.38    $   (1.72)   $    0.07
                                                                 =========    =========    =========
Weighted average shares outstanding:
   Basic                                                            13,115       13,388       13,420
   Diluted                                                          13,370       13,388       13,421

See accompanying notes.
</TABLE>
                                       F-3
<PAGE>

<TABLE>


                               Movie Gallery, Inc.

                 Consolidated Statements of Stockholders' Equity
                                 (in thousands)

<CAPTION>
                                                             Additional   Retained     Total
                                                 Common       Paid-in     Earnings  Stockholders'
                                                  Stock       Capital     (Deficit)   Equity
                                                 -----------------------------------------------


<S>                                              <C>         <C>          <C>          <C>
Balance at January 5, 1997                       $      13   $ 131,686    $  15,025    $ 146,724
   Net income                                         --          --            905          905
                                                 ---------   ---------    ---------    ---------
Balance at January 4, 1998                              13     131,686       15,930      147,629

   Net loss                                           --          --        (23,076)     (23,076)
   Exercise of stock options for 12,230 shares        --            48         --             48
   Tax benefit of stock options exercised             --             9         --              9
   Repurchase and retirement of 115,200 shares        --          (495)        --           (495)
                                                 ---------   ---------    ---------    ---------
Balance at January 3, 1999                              13     131,248       (7,146)     124,115

   Net income                                         --          --          5,017        5,017
   Exercise of stock options for 12,350 shares        --            48         --             48
   Tax benefit of stock options exercised             --             7         --              7
   Repurchase and retirement of 778,598 shares        --        (3,766)        --         (3,766)
                                                 ---------   ---------    ---------    ---------
Balance at January 2, 2000                       $      13   $ 127,537    $  (2,129)   $ 125,421
                                                 =========   =========    =========    =========

See accompanying notes.
</TABLE>
                                      F-4
<PAGE>

<TABLE>

                               Movie Gallery, Inc.

                      Consolidated Statements of Cash Flows
                                 (in thousands)
<CAPTION>
                                                                               Fiscal Year Ended
                                                                     -----------------------------------
                                                                     January 2,   January 3,   January 4,
                                                                        2000         1999         1998
                                                                     -----------------------------------
<S>                                                                  <C>          <C>          <C>
Operating activities
Net income (loss)                                                    $   5,017    $ (23,076)   $     905
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
  Extraordinary loss on early extinguishment of debt, net of taxes         682         --           --
  Cumulative effect of accounting change, net of taxes                     699         --           --
  Depreciation and amortization                                         72,205      126,257       88,140
  Deferred income taxes                                                  2,744      (14,855)         998
  Changes in operating assets and liabilities:
    Merchandise inventory                                               (2,788)       1,911       (3,493)
    Other current assets                                                   348         (649)         435
    Deposits and other assets                                           (1,104)         105          834
    Accounts payable                                                     2,847        1,879       (2,804)
    Accrued liabilities                                                  3,740         (709)      (1,134)
                                                                     ---------    ---------    ---------
Net cash provided by operating activities                               84,390       90,863       83,881

Investing activities
Business acquisitions                                                  (11,839)        (799)        (474)
Purchases of rental inventory, net                                     (54,259)     (59,266)     (70,801)
Purchases of property, furnishings and equipment                       (12,573)      (6,251)     (13,072)
Proceeds from disposal of equipment                                       --           --          1,170
                                                                     ---------    ---------    ---------
Net cash used in investing activities                                  (78,671)     (66,316)     (83,177)

Financing activities
Net proceeds from issuance of common stock                                  48           48         --
Purchases and retirement of common stock                                (3,766)        (495)        --
Payments on notes payable                                                 --           (200)        --
Principal payments on long-term debt                                    (2,014)     (21,376)        (227)
                                                                     ---------    ---------    ---------
Net cash used in financing activities                                   (5,732)     (22,023)        (227)
                                                                     ---------    ---------    ---------
Increase (decrease) in cash and cash equivalents                           (13)       2,524          477
Cash and cash equivalents at beginning of period                         6,983        4,459        3,982
                                                                     ---------    ---------    ---------
Cash and cash equivalents at end of period                           $   6,970    $   6,983    $   4,459
                                                                     =========    =========    =========
Supplemental disclosures of cash flow information
Cash paid during the period for interest                             $   3,076    $   5,066    $   5,777
Cash paid during the period for income taxes                             2,705          478         --
Noncash investing and financing information:
   Assets acquired by issuance of notes payable                           --           --            200
   Tax benefit of stock options exercised                                    7            9         --

See accompanying notes.

</TABLE>
                                      F-5

<PAGE>


                               Movie Gallery, Inc.

                   Notes to Consolidated Financial Statements

              January 2, 2000, January 3, 1999 and January 4, 1998


1.  Accounting Policies

The  accompanying   financial  statements  present  the  consolidated  financial
position,  results of  operations  and cash  flows of Movie  Gallery,  Inc.  and
subsidiaries   (the   "Company").   All  material   intercompany   accounts  and
transactions have been eliminated.

The Company owns and operates video specialty stores in 31 states.

Fiscal Year

The Company's fiscal year ends on the first Sunday following  December 30, which
periodically  results in a fiscal  year of 53 weeks.  Results  for fiscal  years
1999,  1998 and 1997 reflect 52-week years.  The Company's  fiscal year includes
revenues  and certain  operating  expenses,  such as  salaries,  wages and other
miscellaneous  expenses,  on  a  daily  basis.  All  other  expenses,  primarily
depreciation and amortization,  are calculated and recorded monthly, with twelve
months included in each fiscal year.

Reclassifications

Certain  reclassifications have been made to the prior year financial statements
to conform to the current  year  presentation.  These  reclassifications  had no
impact on stockholders'  equity or net income.  Amortization of rental inventory
and revenue  sharing  expenses  have been  combined and are presented as cost of
rental revenue on the statement of operations.

Cash Equivalents

The Company  considers  all highly liquid  investments  with a maturity of three
months or less when purchased to be cash equivalents.

Merchandise Inventory

Merchandise   inventory  consists   primarily  of  videocassette   tapes,  video
accessories  and  concessions  and is stated at the lower of cost, on a first-in
first-out basis, or market.

Impairment of Long-Lived Assets

The Company periodically assesses the impairment of long-lived assets, including
allocated  goodwill,  to be held for use in operations  based on expectations of
future   undiscounted  cash  flows  from  the  related   operations,   and  when
circumstances  dictate,  adjusts the assets to the extent carrying value exceeds
the fair value of the assets. These factors,  along with management's plans with
respect to the  operations,  are considered in assessing the  recoverability  of
goodwill,  other  purchased  intangibles,  rental  inventory  and  property  and
equipment.   For  the  fiscal  year  ended  January  2,  2000,  amortization  of
intangibles  includes an impairment loss of $1,600,000 to write-off the net book
value of goodwill in excess of its estimated fair market value.


                                   F-6
<PAGE>

                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)


1.  Accounting Policies (continued)

The Company  assesses  the  recoverability  of  enterprise  level  goodwill  and
intangible  assets  by  determining  whether  the  unamortized  balances  can be
recovered through undiscounted future cash flows.

Rental Inventory

Effective  July  6,  1998,   the  Company   changed  its  method  of  amortizing
videocassette  and video game rental inventory.  The new method  accelerates the
rate of  amortization  and was adopted as a result of an industry  trend towards
significant increases in copy-depth  availability from movie studios, which have
resulted in earlier satisfaction of consumer demand,  thereby,  accelerating the
rate of  revenue  recognition.  Under  this  method,  the  cost  of  base  stock
videocassettes,  consisting of two copies per title for each store, is amortized
on an  accelerated  basis to a net book  value of $8 over six months and to a $4
salvage  value  over  the  next  thirty  months.  The  cost  of  non-base  stock
videocassettes,  consisting of the third and succeeding copies of each title per
store, is amortized on an accelerated  basis over six months to a net book value
of $4 which is then amortized on a  straight-line  basis over the next 30 months
or until the  videocassette is sold, at which time the unamortized book value is
charged to cost of sales. Video games are amortized on a straight-line  basis to
a $10 salvage value over eighteen months.

The new method of  amortization  was  applied to all  inventory  held at July 6,
1998.  The adoption of the new method of  amortization  was  accounted  for as a
change in  accounting  estimate  effected  by a change in  accounting  principle
during the quarter ended October 4, 1998.  The  application of the new method of
amortizing  videocassette  and video  game  rental  inventory  decreased  rental
inventory and increased  depreciation  expense for the fiscal year ended January
3, 1999 by approximately  $43.6 million and reduced net income by $27.7 million,
or $2.06 per basic and diluted share.

Prior to July 6, 1998,  videocassettes  and video  games  considered  to be base
stock were amortized over  thirty-six  months on a  straight-line  basis to a $5
salvage  value.  New release  videocassettes  and video games were  amortized as
follows:  (i) the fourth and any succeeding  copies of each title per store were
amortized on a straight-line  basis over six months to an average net book value
of $5 which was then  amortized  on a  straight-line  basis over the next thirty
months or until the  videocassette  or video  game was sold,  at which  time the
unamortized  book value was charged to cost of sales and (ii) copies one through
three of each title per store were amortized as base stock.

Rental inventory consists of the following (in thousands):
<TABLE>
<CAPTION>

                                                January 2,   January 3,
                                                   2000         1999
                                                ---------    ---------

<S>                                             <C>          <C>
Rental inventory                                $  85,978    $ 180,858
Less accumulated amortization                     (33,621)    (135,860)
                                                ---------    ---------
                                                $  52,357    $  44,998
                                                =========    =========
</TABLE>


                                      F-7
<PAGE>

                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)


1.  Accounting Policies (continued)

Property, Furnishings and Equipment

Property,  furnishings  and  equipment  are  stated  at cost and  include  costs
incurred  in the  construction  of new  stores.  Depreciation  is  provided on a
straight-line  basis over the estimated lives of the related  assets,  generally
five to seven years.

Goodwill and Other Intangibles

Goodwill is being  amortized on a straight-line  basis over twenty years.  Other
intangibles  consist primarily of non-compete  agreements and are amortized on a
straight-line basis over the lives of the respective  agreements which generally
range from five to ten years.  Accumulated  amortization  of goodwill  and other
intangibles  at  January  2,  2000  and  January  3,  1999 was  $32,097,000  and
$25,245,000, respectively.

Income Taxes

The  Company  accounts  for  income  taxes  under the  provisions  of  Financial
Accounting  Standards Board ("FASB")  Statement No. 109,  "Accounting for Income
Taxes." Under Statement 109,  deferred tax assets and liabilities are determined
based upon differences  between financial  reporting and tax bases of assets and
liabilities  and are  measured at the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.

Rental Revenue

Rental revenue is recognized when the  videocassette  or video game is rented by
the customer. Extended viewing fees on rentals are recognized when received from
the customer.

Advertising Costs

Advertising costs,  exclusive of cooperative  reimbursements  from vendors,  are
expensed when incurred.

Store Opening and Start-up Costs

Store opening costs,  which consist  primarily of payroll and  advertising,  are
expensed as incurred.

In April 1998, the American  Institute of Certified  Public  Accountants  issued
Statement  of  Position   ("SOP")  98-5,   "Reporting   the  Costs  of  Start-up
Activities," which requires that certain costs related to start-up activities be
expensed as incurred.  Prior to January 4, 1999, the Company capitalized certain
costs incurred in connection  with site selection for new video  specialty store
locations.  The  Company  adopted  the  provisions  of the SOP in its  financial
statements  for the first quarter of fiscal 1999.  The effect of the adoption of
SOP 98-5 was to  record a charge  for the  cumulative  effect  of an  accounting
change of $699,000  (net of income taxes of  $368,000),  or $0.05 per share,  to
expense  the  unamortized  costs that had been  capitalized  prior to January 4,
1999. The impact of adoption on income from continuing operations for the fiscal
year ended January 2, 2000 was not material.

                                      F-8

<PAGE>

                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)


1.  Accounting Policies (continued)

Fair Value of Financial Instruments

At  January  2, 2000 and  January  3,  1999,  the  carrying  value of  financial
instruments such as cash and cash equivalents,  accounts payable,  notes payable
and long-term debt approximated  their fair values,  calculated using discounted
cash flow analysis at the Company's incremental borrowing rate.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  amounts  reported  in the  consolidated  financial  statements  and
accompanying notes. The most significant estimates and assumptions relate to the
amortization  methods and useful lives of rental  inventory,  goodwill and other
intangibles.  These  estimates and  assumptions  could change and actual results
could differ from these estimates.

Recently Issued Accounting Pronouncements

The FASB has issued  Statement No. 133,  "Accounting for Derivative  Instruments
and Hedging  Activities"  (as amended by  Statement  No.  137,  "Accounting  for
Derivative  Instruments and Hedging  Activities - Deferral of the Effective Date
of FASB  Statement No. 133"),  which is required to be adopted by the Company in
fiscal  year 2001.  Management  does not  anticipate  that the  adoption of this
Statement will have a significant  effect on earnings or the financial  position
of the Company.

Employee Benefits

The Company has a 401(k) savings plan available to all active  employees who are
over 21 years of age and have  completed one year of service.  The Company makes
discretionary and matching  contributions  based on employee  compensation.  The
matching  contribution for the fiscal years ended January 2, 2000 and January 3,
1999 was immaterial to the Company.

2.  Property, Furnishings and Equipment

Property, furnishings and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>

                                                January 2,   January 3,
                                                   2000         1999
                                                ----------------------

<S>                                             <C>          <C>
Land and buildings                              $  1,889     $  1,889
Furniture and fixtures                            33,383       29,688
Equipment                                         28,495       24,755
Leasehold improvements and signs                  27,931       24,661
                                                --------     --------
                                                  91,698       80,993
Accumulated depreciation                         (47,378)     (37,073)
                                                --------     --------
                                                $ 44,320     $ 43,920
                                                ========     ========
</TABLE>


                                      F-9

<PAGE>

                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)


3.  Long-Term Debt

On January 7, 1999, the Company entered into a Credit Agreement with First Union
National Bank of North Carolina with respect to a revolving credit facility (the
"Facility").  The Facility  provides  for  borrowings  of up to $65 million,  is
unsecured  and will mature in its  entirety on January 7, 2002.  The Company may
increase  the amount of the Facility to $85 million if existing  banks  increase
their commitments or if any new banks enter the Credit  Agreement.  The interest
rate of the  Facility is based on LIBOR plus an  applicable  margin  percentage,
which depends on the Company's cash flow generation and borrowings  outstanding.
The  Company  may repay  the  Facility  at any time  without  penalty.  The more
restrictive  covenants of the Facility restrict  borrowings based upon cash flow
levels.  At January 2, 2000,  $44.4 million was outstanding,  approximately  $20
million  was  available  for  borrowing  and the  effective  interest  rate  was
approximately 7.1%.

Concurrent  with the Facility,  the Company  amended its then existing  interest
rate swap to coincide  with the maturity of the Facility.  The amended  interest
rate swap agreement  effectively  fixes the Company's  interest rate exposure on
$37  million  of the  amount  outstanding  under  the  Facility  at 5.8% plus an
applicable  margin  percentage.  The  interest  rate  swap  reduces  the risk of
increases  in  interest  rates  during  the life of the  Facility.  The  Company
accounts  for its  interest  rate  swap as a hedge of its debt  obligation.  The
Company pays a fixed rate of interest and receives  payment  based on a variable
rate of interest. The difference in amounts paid and received under the contract
is accrued and  recognized  as an  adjustment  to interest  expense on the debt.
There  are no  termination  penalties  associated  with the  interest  rate swap
agreement;  however,  if the swap  agreement  was  terminated  at the  Company's
option,  the  Company  would  either pay or  receive  the  present  value of the
remaining hedge payments at the then  prevailing  interest rates for the time to
maturity of the swap agreement.  The interest rate swap agreement  terminates at
the time the Facility matures.

As a result of the Facility and the amended  interest rate swap  agreement,  the
Company  recognized  an  extraordinary  loss  on the  extinguishment  of debt of
approximately  $682,000  (net of income taxes of  $359,000),  or $.05 per share,
during the first quarter of fiscal 1999.  The  extraordinary  loss was comprised
primarily of unamortized debt issue costs associated with the Company's previous
credit  facility and the negative  value of the previous  interest  rate swap at
January 7, 1999.

Scheduled  maturities  of  long-term  debt are as  follows:$263,000  in 2000 and
$44,377,000 in 2002.


                                      F-10

<PAGE>

                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)


4.  Income Taxes

The following  reflects actual income tax expense (benefit) for the fiscal years
ended January 2, 2000, January 3, 1999 and January 4, 1998 (in thousands):
<TABLE>
<CAPTION>


                                                Fiscal Year Ended
                                       ---------------------------------
                                       January 2,  January 3,  January 4,
                                          2000        1999        1998
                                       ---------------------------------

<S>                                    <C>         <C>         <C>
Current payable:
   Federal                             $  1,673    $  1,275    $   --
   State                                    198         491        --
                                       --------    --------    --------
 Total current                            1,871       1,766        --

Deferred:
   Federal                                2,454     (13,423)        903
   State                                    290      (1,432)         95
                                       --------    --------    --------
 Total deferred                           2,744     (14,855)        998
                                       --------    --------    --------
                                       $  4,615    $(13,089)   $    998
                                       ========    ========    ========
</TABLE>

A reconciliation  of income tax expense (benefit) at the federal income tax rate
to the Company's effective income tax provision is as follows (in thousands):

<TABLE>
<CAPTION>
                                                Fiscal Year Ended
                                       ----------------------------------
                                       January 2,  January 3,   January 4,
                                          2000        1999         1998
                                       ----------------------------------

<S>                                    <C>         <C>         <C>
Income tax expense (benefit)
   at statutory rate                   $  3,855    $(12,658)   $    647
State income tax expense (benefit)
   net of federal income tax benefit        317        (612)         63
Other, net (primarily goodwill not
   deductible for tax purposes)             443         181         288
                                       --------    --------    --------
                                       $  4,615    $(13,089)   $    998
                                       ========    ========    ========
</TABLE>

At January  2,  2000,  the  Company  had net  operating  loss  carryforwards  of
approximately  $7.4  million for income  taxes that expire in years 2010 through
2012. The Company has not recorded a valuation allowance related to its deferred
tax assets as  management  considers it more likely than not that  available tax
strategies  and future  taxable  income will allow the deferred tax assets to be
realized.

                                      F-11

<PAGE>

                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)


4.  Income Taxes (continued)

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes  and the amounts used for income  taxes.  Components  of the  Company's
deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>

                                                      January 2,     January 3,
                                                         2000           1999
                                                      ------------------------

<S>                                                   <C>            <C>
Deferred tax liabilities:
   Furnishings and equipment                          $ 5,473        $ 5,740
   Rental inventory                                     3,818            788
   Goodwill                                             2,026          2,295
   Other                                                  461            997
                                                      -------        -------
     Total deferred tax liabilities                    11,778          9,820
Deferred tax assets:
   Non-compete agreements                               4,970          4,839
   Alternative minimum tax credit carryforward          2,827          1,460
   Net operating loss carryforwards                     2,802          4,806
   Accrued liabilities                                    777            828
   Other                                                  843            438
                                                      -------        -------
     Total deferred tax assets                         12,219         12,371
                                                      -------        -------
Net deferred tax assets                               $   441        $ 2,551
                                                      =======        =======
</TABLE>

5.  Stockholders' Equity

Common Stock

In 1995, the Company  registered shares of common stock with an aggregate public
offering  price of  $127,000,000.  This  common  stock may be  offered  directly
through  agents,  underwriters  or dealers or may be offered in connection  with
business  acquisitions.  As of January 2, 2000,  common  stock of  approximately
$83,000,000 was available to be issued from this registration.

Since  January 2, 2000,  the Company has  repurchased  200,000  shares of common
stock for retirement at an average purchase price of $3.63.

Earnings Per Share

Basic  earnings  per share and basic pro forma  earnings  per share are computed
based on the  weighted  average  number of shares  of common  stock  outstanding
during the periods  presented.  Diluted earnings per share and diluted pro forma
earnings per share are computed  based on the weighted  average number of shares
of common stock outstanding  during the periods  presented,  increased solely by
the effects of shares to be issued from the  exercise of dilutive  common  stock
options  (255,000,  none and 1,000 for the fiscal  years ended  January 2, 2000,
January 3, 1999 and January 4, 1998, respectively).  No adjustments were made to
net income in the computation of basic or diluted earnings per share.

                                      F-12

<PAGE>

                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)


5.  Stockholders Equity (continued)

Stock Option Plan

In July  1994,  the Board of  Directors  adopted,  and the  stockholders  of the
Company approved, the 1994 Stock Option Plan (the "Plan"). The Plan provides for
the award of incentive stock options,  stock appreciation  rights,  bonus rights
and  other   incentive   grants  to  employees,   independent   contractors  and
consultants.  Currently  2,600,000  shares are reserved  for issuance  under the
Plan. Options granted under the Plan have a 10-year term and generally vest over
3 to 5 years.

In October 1995, the FASB issued Statement No. 123,  "Accounting for Stock-Based
Compensation."  In accordance  with the provisions of Statement 123, the Company
applies Accounting  Principles Board Opinion No. 25 and related  Interpretations
in accounting  for its stock option plan and,  accordingly,  has not  recognized
compensation  cost in  connection  with the Plan.  If the Company had elected to
recognize  compensation  cost based on the fair value of the options  granted at
grant date as  prescribed  by  Statement  123, net income and earnings per share
would have been reduced to the pro forma  amounts  indicated in the table below.
The effect on net income and earnings per share is not expected to be indicative
of the effects on net income and earnings per share in future years.
<TABLE>
<CAPTION>

                                                  Fiscal Year Ended
                                       -----------------------------------
                                       January 2,  January 3,    January 4,
                                          2000        1999          1998
                                       -----------------------------------
                                      (in thousands, except per share data)

<S>                                    <C>         <C>           <C>
Pro forma net income (loss)            $   3,801   $  (24,324)   $  (890)
Pro forma earnings (loss) per share:
   Basic and diluted                        0.29        (1.82)     (0.07)
</TABLE>

The fair value of each option grant was estimated at the date of grant using the
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions:
<TABLE>
<CAPTION>
                                                   Fiscal Year Ended
                                         ---------------------------------
                                         January 2,  January 3,  January 4,
                                            2000        1999        1998
                                         ---------------------------------
<S>                                        <C>         <C>         <C>
Expected volatility                        0.720       0.733       0.649
Risk-free interest rate                    6.39%       4.70%       6.28%
Expected life of option in years           6.0         6.0         6.0
Expected dividend yield                    0.0%        0.0%        0.0%

</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

                                      F-13

<PAGE>

                           Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

5.  Stockholders' Equity (continued)

A summary of the  Company's  stock option  activity and related  information  is
detailed  below.  During 1997, the Company  modified  505,100 stock options with
exercise prices ranging from $6.00 to $42.63 by cancelling the stock options and
issuing  378,827  new  stock  options  at  an  exercise  price  of  $3.88.  This
modification excluded directors and certain senior management.

<TABLE>
<CAPTION>

                                                                 Fiscal Year Ended
                                 ------------------------------------------------------------------------------------
                                     January 2, 2000               January 3, 1999              January 4, 1998
                                 ------------------------------------------------------------------------------------
                                               Weighted-                    Weighted-                     Weighted-
                                                Average                      Average                       Average
                                  Options    Exercise Price    Options    Exercise Price    Options    Exercise Price
                                 ---------   --------------   ---------   --------------   ---------   --------------
<S>                              <C>         <C>              <C>         <C>              <C>           <C>
Outstanding-beginning
  of year                        2,188,899   $    9.73        1,895,537   $   10.62        1,318,650     $   21.98
Granted                            444,000        4.36          363,000        5.13        1,256,087          4.04
Exercised                           12,350        3.88           12,230        3.88             --             --
Forfeited                          343,562        4.17           57,408       11.32          679,200         20.50

Outstanding-end of year          2,276,987        9.56        2,188,899        9.73        1,895,537         10.62

Exercisable at end of year       1,440,871       12.03        1,206,397       12.68          916,908         14.43

Weighted-average fair value
   of options granted during
   the year                      $    3.05                    $    3.43                    $    2.62

</TABLE>

Options  outstanding  as of  January  2, 2000 had a  weighted-average  remaining
contractual  life of 7.6 years and exercise  prices ranging from $3.00 to $40.00
as follows:
<TABLE>
<CAPTION>

                                                                  Exercise price of
                                               ----------------------------------------------------------
                                               $3.00 to $6.00       $14.00 to $22.00     $24.00 to $40.00
                                               ----------------------------------------------------------

<S>                                               <C>                   <C>                  <C>
Options outstanding                               1,618,487               390,500              268,000
Weighted-average exercise price                       $4.29                $15.13               $33.22
Weighted-average remaining contractual life       8.5 years             5.4 years            5.4 years
Options exercisable                                 824,171               361,700              255,000
Weighted-average exercise price of
   exercisable options                                $4.16                $15.22               $32.93

</TABLE>

                                      F-14

<PAGE>

                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

6.  Commitments and Contingencies

Rent  expense for the fiscal  years ended  January 2, 2000,  January 3, 1999 and
January 4, 1998 totaled $41,683,000, $40,959,000 and $40,788,000,  respectively.
Future minimum  payments  under  noncancellable  operating  leases which contain
renewal  options and escalation  clauses with  remaining  terms in excess of one
year consisted of the following at January 2, 2000 (in thousands):

                   2000         $ 26,950
                   2001           21,678
                   2002           13,399
                   2003            8,032
                   2004            4,288
                   Thereafter      3,830
                                --------
                                $ 78,177
                                ========

The Company has an agreement with Rentrak Corporation which requires the Company
to order  videocassette  rental  inventory under lease  sufficient to require an
aggregate  minimum payment of $4,000,000 per year in revenue  sharing,  handling
fees,  sell through fees and end-of-term  buyout fees. The agreement  expires in
2006.

The Company is occasionally involved in litigation in the ordinary course of its
business,  none of which,  individually or in the aggregate,  is material to the
Company's business or results of operations.

                                      F-15

<PAGE>
                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)


7.  Summary of Quarterly Results of Operations (Unaudited)

The  following is a summary of unaudited  quarterly  results of  operations  (in
thousands, except per share data):
<TABLE>
<CAPTION>

                                                                      Thirteen Weeks Ended
                                                    -----------------------------------------------------
                                                    April 4,       July 4,       October 3,      January 2,
                                                      1999           1999          1999              2000
                                                    ------------------------------------------------------
<S>                                                 <C>            <C>            <C>            <C>
Revenue                                             $ 69,620       $ 65,510       $ 67,742       $ 74,073
Operating income                                       6,377          2,006          1,642          4,337
Income before extraordinary item
   and cumulative effect of
   accounting change                                   3,362            679            546          1,811
Extraordinary loss on early extinguishment
   of debt, net of income taxes of $359                 (682)          --             --               --
Cumulative effect of accounting change,
   net of income taxes of $368                          (699)          --             --               --
                                                    --------       --------       --------       ----------
Net income                                          $  1,981       $    679       $    546       $  1,811
                                                    ========       ========       ========       ==========
Basic and diluted earnings per share:
Income before extraordinary item
   and cumulative effect of
   accounting change                                $   0.25       $   0.05       $   0.04       $     0.14
Extraordinary loss on early extinguishment
   of debt, net of  tax                                (0.05)          --             --               --
Cumulative effect of accounting change,
   net of tax                                          (0.05)          --             --               --
                                                    --------       --------       --------       ----------
Net income                                          $   0.15       $   0.05       $   0.04       $     0.14
                                                    ========       ========       ========       ==========

                                                                         Thirteen Weeks Ended
                                                   --------------------------------------------------------
                                                    April 5,       July 5,        October 4,     January 3,
                                                      1998           1998            1998           1999
                                                   --------------------------------------------------------

Revenue                                             $ 70,491       $ 63,662       $ 64,397       $ 69,083
Operating income (loss)                                4,613            495        (42,969)         7,021
Net income (loss)                                      1,882           (555)       (28,046)         3,643
Basic and diluted earnings (loss)
   per share                                            0.14          (0.04)         (2.09)          0.27

</TABLE>


                                      F-16

<PAGE>


                               Index to Exhibits


Exhibit No.        Description


    21             List of Subsidiaries

    23             Consent of Ernst & Young LLP, Independent Auditors

    27             Financial Data Schedule