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 6, 2002

                                       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.)

900 West Main Street, Dothan, Alabama                               36301
(Address of principal executive offices)                         (Zip Code)

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

        Securities registered pursuant to Section 12(b) of the Act: 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 _____ NO X

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. [ ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of March 11, 2002, was approximately  $225,856,654.  The number of
shares of Common Stock outstanding on March 11, 2002, was 27,365,464 shares.

Documents incorporated by reference:

  1.  Notice of 2002 Annual Meeting and Proxy Statement (Part III of Form 10-K).

              The exhibit index to this report appears at page 29.

<PAGE>

ITEM 1.  BUSINESS

Our Company

     We are the leading  home video  specialty  retailer in rural and  secondary
markets.  We own and operate 1,436 retail stores,  located in 41 states and five
Canadian  provinces,  that rent and sell videocassettes  ("VHS"),  DVD and video
games.  Our target  markets  are small towns and  suburban  areas of cities with
populations generally between 3,000 and 20,000 where our primary competitors are
independently owned stores and small regional chains.

     We believe we are the lowest cost operator among the leading  national home
video specialty retail chains.  We have developed and implemented a flexible and
disciplined business strategy that centers on driving revenue growth, maximizing
store level  productivity and profitability  and minimizing  operating costs. By
focusing  on rural and  secondary  markets we are able to reduce  our  operating
costs through lower rents, flexible leases, reduced labor costs and economies of
scale  while  simultaneously  offering a large  product  assortment.  We compete
directly with our two larger competitors in approximately one third of our store
locations.

     As a  result  of  our  competitive  strengths,  our  operating  and  growth
strategies and our management team, we have achieved substantial growth over the
past six fiscal years. Since our initial public offering in August 1994, we have
grown  from  97  stores  to  our  present  size  through  acquisitions  and  the
development  of new stores.  Our compound  annual  growth rates for revenues and
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization,
non-cash   compensation  and  nonrecurring   items,  less  purchases  of  rental
inventory,  exclusive of new store opening inventory) from fiscal 1995 to fiscal
2001 were 16.3% and 38.4%, respectively.

     Movie Gallery,  Inc. was  incorporated in Delaware in June 1994. From March
1985 until the  present  time,  substantially  all of our  operations  have been
conducted  through our  wholly-owned  subsidiary,  M.G.A.,  Inc.  Our  executive
offices are located at 900 West Main  Street,  Dothan,  Alabama  36301,  and our
telephone number is (334) 677-2108.

Industry Overview

Home Video Industry

     Size and Growth.  According to Adams Media Research ("Adams"), the domestic
home video  specialty  retail  industry grew from an estimated  $15.3 billion in
revenue in 1996 to $20.6 billion in 2001,  representing  a 6.1% compound  annual
growth rate,  outpacing the 2.5% growth rate of the Consumer  Price Index during
the same period.  Adams  predicts that this industry will reach $31.2 billion in
revenue by 2010, with growth driven  primarily by the growth of DVD penetration.
Currently, 90% of all television households own a videocassette recorder ("VCR")
or DVD player. Additionally,  households owning DVD players reached 24.8 million
at the end of 2001 and are projected to grow to 90.4 million households by 2010,
according to Adams.

     Trends.  The home video specialty retail industry is highly  fragmented and
continues to  experience  consolidation,  particularly  in the smaller and rural
markets  in  which  we  operate.   According  to  the  Video  Software   Dealers
Association, there are over 27,000 domestic stores in our industry. Further, the
three largest video store chains account for approximately  8,600 stores, or 32%
of total domestic  stores,  while capturing an estimated 49% of the total rental
market share.  The  remaining  68% of total stores are comprised of  independent
operators, small chains and other rental outlets. We believe that the home 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 the last three  years,  industry  sources  speculated  that many  independent
operators  struggled to maintain market share.  Over the past several years, the
combination  of  increased  product  offerings,  economies  of scale,  access to
capital and improved  marketing  efforts have  solidified  the  positions of the
largest  retail  chains  versus  independent   operators  and   undercapitalized
second-tier regional chains.

     Interdependence  of Movie  Studios  and  Home  Video  Specialty  Retailers.
Historically,  new technologies,  including the development of the VCR and, more
recently,  DVD, have led to the creation of additional distribution channels for


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<PAGE>

movie studios beyond the traditional movie theatre arena.  Movie studios seek to
maximize  their  revenue  from  distribution  channels  by  releasing  movies in
sequential  release date "windows" to the various movie  distribution  channels.
The order of distribution of movies is currently: (1) movie theaters; (2) hotels
and airlines;  (3) home video  retailers;  (4)  pay-per-view;  and (5) all other
sources,  including cable and syndicated television.  Most movie studios release
hit movie  titles to the home video  market from 30 days to 60 days prior to the
pay-per-view release date. We believe that this window of release from the movie
studios is indicative of the  importance of the home video retail channel to the
overall  profitability of movie studios and other  independent  movie suppliers.
According to industry sources, home video is currently the largest single source
of domestic revenue for the movie studios,  accounting for  approximately 56% of
the  estimated  $19.7  billion of studio  revenue in 2001.  We also believe that
because the  sequential  release  method has allowed  movie  studios to increase
their overall  revenues,  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 consumers. We expect that VOD will most
likely be released in the traditional pay-per-view window.

     Product Pricing. The home video retail channel is comprised of both rentals
and sales of VHS and DVD. Movie studios attempt to maximize  revenues  primarily
through three  standard  pricing  strategies  designed to influence the relative
levels of movie rentals versus sales:

     o Rental Priced Movies. Under this pricing strategy, movie studios sell VHS
       to video specialty  stores at relatively high prices,  typically  between
       $35 and $75 per copy.  In  certain  circumstances,  these  prices  can be
       reduced  through volume  discounts  offered by the movie  studios.  These
       movies are promoted primarily as rental titles. DVD is not generally sold
       under this pricing strategy.

     o Sell-Through Movies. Under this pricing strategy,  movie studios sell VHS
       at relatively low prices,  typically  between $5 and $25 per copy.  These
       movies are generally  promoted both for rental and sale. DVD is generally
       sold under sell-through pricing.

     o Revenue Sharing.  Revenue sharing between retailers and movie studios was
       embraced by the industry in 1998.  Under revenue  sharing,  retailers and
       movie studios share the risks  associated with the rental  performance of
       individual titles. Generally, retailers pay a small up-front fee for each
       copy  obtained  (typically  $0 to $8), or an agreed upon minimum cost per
       unit (typically less than $30) that is  substantially  offset against the
       studio's  revenue  share.  The movie  studios  receive a fee,  based on a
       predetermined  percentage  (typically  not more than 50%) of the  revenue
       generated  from the rental of these titles.  After a specified  period of
       time,  generally six months to a year, these titles are no longer subject
       to revenue  sharing and are either  purchased  by the  retailer  from the
       movie studio for a nominal  amount,  returned to the studio or destroyed.
       Studios  are  using a  revenue  sharing  structure  with DVD on a limited
       basis.

     We believe  that revenue  sharing  agreements  for VHS provide  significant
advantages to retailers, including:

     o substantial  increases in both quantity and  selection of  newly-released
       video titles;

     o potential increases in revenues as a result of higher transaction volume;
       and

     o further interdependence of movie studios and video retailers.


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<PAGE>


Video Game Industry

     2001  was a  transitional  year  for the  video  game  industry  with  Sony
PlayStation 2 gaining  market share as hardware and software  became  available.
Additionally,  the game market was soft  throughout the year in  anticipation of
the release of both the  Nintendo  GameCube and the  Microsoft  Xbox in November
2001. Early performance and consumer acceptance of these new platforms have been
strong while the established  32-bit and 64-bit platforms (Sony  PlayStation and
Nintendo 64) continue to maintain a solid market share.  These factors  combined
to give us the first positive quarter of game rental  performance in over a year
during the fourth quarter of 2001.

     According to indudstry  estimates,  domestic  sales of video game  software
approached  $4.6  billion in 2001,  an increase  from just over $4.1  billion in
2000.  Growth  in  domestic  sales of video  game  hardware  units has also been
reported in 2001,  estimated at $3.7 billion versus $1.6 billion in 2000.  These
increases were primarily  attributable  to sales of Sony  PlayStation 2 hardware
and  software,  which was released in the fourth  quarter of 2000.  Increases in
sales were also driven by the  introduction  of two new video game  platforms in
the fourth quarter of 2001: Microsoft Xbox and Nintendo GameCube.

     Growth in this  industry is driven by  increases in the  installed  base of
video game hardware  systems,  the  introduction  of new hardware  platforms and
continued  improvement in systems  technology  leading to the development of new
game  titles.  At the end of 2001,  the  installed  base of video game  hardware
systems in the United States has been  estimated at  approximately  29.5 million
Sony PlayStation units, 16.5 million Nintendo 64 units, 8.2 million  PlayStation
2 units,  1.4 million  Microsoft  Xbox units and 1.2 million  Nintendo  GameCube
units.  We expect the video game  industry  to  continue  to grow as a result of
significant technological advancements in the last few years. These advancements
allow for more  flexibility and creativity in software  development,  as well as
the  introduction  of hardware with the potential to offer  capabilities  beyond
gaming,  such as DVD and compact  disc play and backward  compatibility  of game
software.

Competitive Strengths

     Concentration in Rural and Secondary Markets.  We aim to locate newly built
stores in small towns or suburban  areas of cities  with  populations  typically
between  3,000 and  20,000,  where we can be the market  leader.  We believe our
focus on  smaller  markets  allows  us to  achieve a higher  return on  invested
capital  than we would  obtain in larger  urban  markets  because of the reduced
level of  competition,  lower  operating costs and our expertise in operating in
rural and secondary  markets.  We target  markets  within states that are either
contiguous to states in which we already  operate stores or states that have not
yet reached full market  penetration.  We believe our rural and secondary market
focus reduces  competition  from larger chains.  Our principal  competitors  are
single store and small chain  operators  who have smaller  advertising  budgets,
limited  inventory breadth and depth and less access to capital than we do. As a
result, we believe we are the leader in the majority of our markets.

     We  believe  our market  focus also  delays  competition  arising  from new
technologies  such as VOD.  We expect  that the rural and  secondary  markets in
which we operate will be the last markets able to support VOD. The typical plant
upgrades required to deliver VOD are costly, and as a result,  cable and digital
subscriber  line ("DSL")  operators  have pursued  development in higher density
areas where they can achieve better returns on invested capital.

     Low Cost  Operator.  We believe that we are a low cost  operator in each of
our markets.  We have developed a strategy to minimize  operating  expenses that
includes:

     o lower initial investment costs;

     o negotiating favorable lease terms in our markets;

     o centralized purchasing;

     o reduced labor costs;

     o stringent expense controls; and

     o sophisticated information systems.

     Additionally,  by  concentrating  our new store  development  in and around
existing  markets,  we are able to  achieve  operating  efficiencies,  primarily
consisting  of  cost  savings  relating  to  advertising,   training  and  store
supervision.

                                       4
<PAGE>

     Flexible and Disciplined Business Model. We have a flexible and disciplined
business  model  designed to maximize  our  revenues  and reduce our costs.  The
components of our business model include:

     o flexible store formats,  which allow us to tailor the size, inventory and
       look of each  store to fit its  locale;  our  stores  range in size  from
       approximately  2,000 to 9,000 square feet,  average  approximately  4,600
       square feet, and have  inventories  ranging from  approximately  4,000 to
       15,000 movies and 200 to 1,000 video games for rental;

     o short  lease  terms  that  allow  us  to  respond   quickly  to  changing
       demographics,  competition  and  other  market  conditions  and to  close
       "non-performing"  stores  promptly;  our remaining  lease terms currently
       average three years with  approximately 300 leases considered for renewal
       each year;

     o inventory management;

     o pricing  management,  including  store  specific  pricing of  promotional
       programs that are managed and modified  based upon  competitive  factors,
       demographic issues and various operating considerations; and

     o minimal marketing expenditures.

     Proven Acquisition  Strategy.  From 1994 to 1996, we grew from 97 stores to
over 860 stores,  primarily as a result of an aggressive  acquisition  strategy.
Beginning in 1999, we reinitiated our disciplined and opportunistic  acquisition
strategy.  From 1999  through  March 11,  2002,  we  acquired  519  stores in 25
separate   transactions.   Acquired  stores  are  rapidly  integrated  into  our
operations with minimal disruption.  Typically,  we are able to increase revenue
and cash flow in our acquired stores due to our product purchasing practices and
economies of scale.  The average  cost of  converting  an acquired  store to the
Movie Gallery format is minimal and consists  primarily of expenditures  related
to new signage,  implementing our point of sale system and minor remodeling.  We
believe  there are  opportunities  to  continue  to  improve  results in certain
recently acquired locations.

     Proprietary  Technology  Systems to Drive  Revenue  and  Profitability.  We
compete with other home video specialty  retailers to provide our customers with
a broad  selection of movies and video games for rental at the lowest price.  To
help us manage our inventory in the most  profitable  manner,  we have developed
proprietary  management  information  systems and a point of sale system for our
stores  designed to enable us to optimize  inventory  levels,  monitor  customer
purchase  patterns and  selection  preferences,  as well as provide  comparative
revenue and profitability  data on a daily basis. We believe these  capabilities
enable us to  efficiently  aggregate  and  manage  our  existing  and new rental
inventory as well as reallocate  rental  inventory and adjust our  merchandising
selection to meet the specific  product  selection  requirements  of  individual
stores or markets.

     Focus  on  Customer  Service.  We  view  the  personal  interaction  of our
employees with our customers as an integral part of our  organizational  culture
and point of differentiation from our competitors.  We believe that our culture,
together with our established training programs for our hourly employees,  store
managers and field  management,  results in a superior  customer  experience and
higher visit frequency. As part of our customer service initiatives, we maintain
a database  of  approximately  4.0 million  customers  that  captures  pertinent
customer  preferences and purchase history,  and enables our store associates to
provide our customers with useful product rental  guidance and offer  suggestive
selling  reminders.  We believe  providing  prompt,  friendly and  knowledgeable
service  helps us ensure  higher  levels of customer  satisfaction  and customer
loyalty.

Growth Strategy

     The key objective of our growth strategy is to increase market share in our
existing and new markets. The key elements of our growth strategy are:

     Driving Same Store Revenues and Operating  Margins.  We focus on continuous
improvement of same store revenues and profit growth through:

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<PAGE>

     o capitalizing  on the continued  strong  industry growth (driven by strong
       DVD and video game trends);

     o adopting merchandising and pricing initiatives; and

     o achieving targeted cost savings.

     Developing  New  Stores  in  Attractive   Markets.   We  believe  that  the
transferability  of our  standardized  retailing  format,  which can be  adapted
easily for a variety of locations, and our record of successfully opening stores
provide  us with a strong  foundation  for  rapid  expansion  through  new store
development.  Although developed stores generally require approximately one year
for  revenues  to reach  the  level of  mature  stores,  they  typically  become
profitable  within the first six months of  operations  and  produce  returns on
investment within 24 to 30 months. We believe there are several thousand markets
available for further potential development that fit our typical market profile.
We  currently  expect to open at least 125 new stores in 2002 and  annually  for
several years thereafter.

     Pursuing  Opportunistic  Acquisitions.   We  believe  that  growth  through
acquisitions is attractive because:

     o acquired stores provide an installed base of revenue and cash flow;

     o we are able to grow more rapidly  thus  providing  increased  benefits of
       scale; and

     o entry into new markets is facilitated.

     In evaluating  potential  acquisition  candidates,  we consider a number of
factors, including:

     o strategic fit and desirability of location;

     o price;

     o ability to improve productivity and profitability; and

     o assurances that the anticipated  returns on investment  approximate those
       generated by newly developed stores.

     We  believe  that  there is  significant  opportunity  for  growth  through
acquisitions given the high degree of industry  fragmentation and because we are
currently the only active acquirer in a majority of our target markets.

     The  following  table  is a  historical  summary  showing  store  openings,
acquisitions and store closings since January 1, 1996:

<TABLE>
<CAPTION>
                                                    Fiscal Year Ended
                        ------------------------------------------------------------------------- January 7 to
                        January 5,   January 4,    January 3, January 2, December 31,  January 6,   March 11,
                           1997         1998          1999       2000         2000          2002       2002
                        ----------  -----------   ----------  ---------  -----------   ---------  ------------
<S>                         <C>         <C>           <C>        <C>         <C>           <C>        <C>
New store openings.          75          50            18         53           110            77         12
Stores acquired....         174           2             4        131            16           355         16
Stores closed......          48          59            41         58            69            37          7
                            ---         ---           ---        ---         -----         -----      -----
Total stores at end of
  period...........         863         856           837        963         1,020         1,415      1,436
                            ===         ===           ===        ===         =====         =====      =====
</TABLE>

     Effective  December 21, 2001,  we acquired  100% of the newly issued common
stock of the  reorganized  Video Update,  Inc. under its plan of  reorganization
which was confirmed by the United States  Bankruptcy Court on December 20, 2001.
Video Update had been operating under Chapter 11 of the United States Bankruptcy
Code since its voluntary  filing on September 18, 2000.  The  acquisition of the
newly issued  common stock of Video  Update was in  satisfaction  of all amounts
owed  by  Video  Update  under  a $6.5  million  debtor-in-possession  financing
agreement  between  Video Update and Movie  Gallery.  In addition,  we purchased
certain senior secured debt of Video Update for $8.5 million, funded amounts due
to secured and unsecured  creditors in accordance with  confirmation of the plan
of  reorganization  totaling  approximately  $6.3  million,  and  assumed  other
post-bankruptcy  filing liabilities of Video Update.  Video Update operates over


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<PAGE>

320 video specialty  stores in the United States and Canada.  Our acquisition of
Video  Update was made as a  strategic  expansion  of the  Company's  geographic
markets in accordance  with the Company's  growth plan. We believe it represents
the largest single domestic acquisition in the history of the industry.

Products

     We offer a wide  selection of movies and video games for rent and sale. Our
goal is to stock each store with a product assortment tailored to that store. In
fiscal 2001, our revenues by product category were as follows:

     o Movie rentals: 75% (VHS 65%; DVD 10%);

     o Video game rentals: 9%;

     o Previously viewed product sales (VHS, DVD and video games): 9%;

     o Concessions, accessories and other: 5%; and

     o New movie sales (VHS and DVD): 2%.

     Depending upon  location,  our stores offer from 4,000 to 15,000 movies and
from 200 to 1,000  video  games  for use with most  video  game  platforms.  New
release  movies are  displayed  alphabetically  and older  titles are  displayed
alphabetically by category, such as "Action," "Comedy," "Drama" and "Children."

     In 2000 and 2001, we significantly  increased our DVD inventory of both new
and older  releases.  Because of the ease of use and  durability  of DVD,  it is
anticipated  that eventually DVD will replace VHS. The acquisition  costs of DVD
hardware have reached levels  competitive  with the VCR and it is estimated that
23% of domestic television  households currently have DVD hardware.  In the near
term,  we believe we will be able to  continue  to expand our DVD  offerings  at
attractive  pricing levels  comparable to  sell-through  movies.  For the fourth
quarter of 2001, DVD rental revenue  represented  approximately 18% of our total
movie rental revenue.

     In 2001,  we have  significantly  increased  our  offering  of  video  game
inventory. We have expanded the selection of available titles for the 32-bit and
64-bit  platforms (Sony  PlayStation and Nintendo 64) to carry a broader base of
the most popular  items.  We have also  increased  the  inventory of  previously
played video games for sale. We offer basic video game hardware  accessories  in
all stores and we rent and sell video game  hardware in a select base of stores.
We will monitor the  acceptance  and  performance  of the new 128-bit  platforms
(Sony  PlayStation 2,  Microsoft Xbox and Nintendo  GameCube) and make inventory
investments appropriately in order to maximize video game revenue.

     We review our store inventory on an ongoing basis for movies and games that
have not rented for a period of time and offer these previously  viewed products
for sale.

Marketing and Advertising

     We use market development funds,  cooperative allowances from our suppliers
and movie  studios,  and  internal  funds to  purchase  radio,  direct  mail and
newspaper advertising, in-store visual merchandising and in-store media. Through
the use of market  development  funds,  our trade name is promoted  along with a
video or game title.  Creative  copy is prepared by us in  conjunction  with the
movie  studios and is placed by our  in-house  media  buyers in the  appropriate
medium.  We  also  prepare  a  monthly  consumer  magazine,  Video  Buzz,  and a
customized  video program,  MGTV, both of which feature Movie Gallery  programs,
promotions and new releases.  Along with these traditional forms of advertising,
we have developed and implemented a customer loyalty program,  Reel Players. The
program is based on a point system that provides  customers the  opportunity  to
earn free  rentals  and other  incentives.  From time to time we conduct  trivia
games  designed  to drive  customer  visits  and to  increase  awareness  of our
website.  To date, our  expenditures for advertising in excess of the allowances
from our suppliers and movie studios have been minimal.


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<PAGE>

General Economic Trends, Quarterly Results of Operations and Seasonality

     Our  business  is subject to  fluctuations  in  operating  results due to a
number of factors, many of which are outside of our control.  These fluctuations
may be caused by, among other things:

     o the number, timing and performance of new or acquired stores;

     o public acceptance and interest in newly released movies;

     o our mix of products rented and sold;

     o marketing programs and new release acquisition costs;

     o seasonality (Compared to other months during the year, we experience peak
       revenues  during the months of November,  December and January due to the
       holidays  in  these  months  as well  as  inclement  weather  conditions.
       Additionally,  revenues  generally  rise in the months of June,  July and
       August  when most  schools  are out of  session,  providing  people  with
       additional  discretionary  time to spend on entertainment.  Over the last
       four years,  the  seasonality of our per store average revenue during the
       first, second, third and fourth quarters has been 26.5%, 24.2%, 23.6% and
       25.7%, respectively); and

     o special  events,  such as the  Olympics  or ongoing  major news events of
       significant public interest.

Store Operations

     As of March 11, 2002, we operated a total of 1,436 retail stores located in
41 states and five Canadian provinces.

     We maintain a flexible store format, tailoring the size, inventory and look
of each of our stores to local demographics. Our stores range from approximately
2,000 to 9,000 square feet  (averaging  approximately  4,600 square feet),  with
inventories  ranging from approximately  4,000 to 15,000 movies and 200 to 1,000
video games for rental.

     Store  interiors  are  designed  to create a  visually  appealing,  up-beat
ambiance using bright  lighting,  vibrant  graphics and carpet and  coordinating
signage.  The inviting  atmosphere  is augmented by a background  of  television
monitors  displaying  MGTV,  which plays 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.  Our  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.  Each of our stores typically employs
five to fourteen hourly,  part-time  associates and one full-time store manager.
Store Managers report to District  Managers,  who supervise the operations of 10
to 15 stores.  The District Managers report to one of twelve Regional  Managers,
who report directly to our Executive Vice President of Store Operations. We have
increased  the number of District  Managers and Regional  Managers  over time as
necessary to support our growth.  The support center staff has regular  meetings
with  the  Regional  Managers  and  District  Managers  to  review   operations.
Compliance  with our  policies,  procedures  and  regulations  is monitored on a
store-by-store  basis through  exception-based  reporting  systems and quarterly
quality  assurance  audits  performed  by District  Managers  and members of our
training  department.  The  performance  and accuracy of the quarterly  District
Manager audits is monitored by our quality assurance function.

Site Selection

     We  continuously  search for  appropriate  markets in which to develop  new
stores. In selecting sites for new stores, we use an evaluation process designed
to enhance our return on  investment  by focusing on lease terms,  demographics,
population density, traffic volume, store-front visibility and presence, ease of
access and economic  development in the market area. We also review the location
of competitive stores and customer activity at those stores.

                                       8
<PAGE>

     We develop both  freestanding  stores and stores  located in strip  centers
anchored by major grocery or discount drug store chains.  We view lease terms as
a  critical  element  in  our  site  selection  process.  In  negotiating  lease
agreements  and lease  renewals,  we attempt  to obtain  short  lease  terms and
favorable  options  to  extend  terms.  As a  result,  we have  the  flexibility
necessary  to react to  changing  demographics,  competition  and  other  market
conditions.  To date, we have not experienced  difficulty in obtaining favorable
leases or renewals at market rates in suitable  locations.  The current  average
remaining life of our leases is approximately three years with approximately 300
leases considered for renewal each year.

     We actively pursue relocation opportunities to adapt to changes in customer
shopping   patterns  and  retail  market   shifts.   We  regularly   review  the
profitability  and  prospects  of each of our stores and  evaluate  whether  any
underperforming   stores  should  be  closed  or  relocated  to  more  desirable
locations. The cost of closing a unit is minimal and usable inventory,  signage,
fixtures and equipment is transferred to existing or new locations.

E-Commerce Initiative

     We have developed a consumer-oriented web site, www.moviegallery.com,  that
sells new and used movies and used video games. We have designed our web site to
serve our customers and complement our store  operations by providing movie news
and reviews and  information  on upcoming new rental  releases.  Our  e-commerce
channel provides us with the opportunity to broaden our reach with minimal sales
costs and to strengthen  existing  relationships  with our customers.  We do not
intend to invest large amounts of capital in our e-commerce business. Our online
business lost  approximately  $400,000 in fiscal 2001 and, we anticipate that it
will break even in fiscal 2002.

Inventory Suppliers

     We  negotiate  the  majority  of our movie  purchases  directly  with movie
studios  through revenue  sharing and other direct  purchase  arrangements.  The
movies are delivered directly to our stores by third-party  distributors.  These
distributors  function largely as fulfillment agents. We pay distributors a flat
fulfillment fee for packing and shipping product directly to our stores. Because
of our direct  relationships  with the  studios,  we believe  that if one of our
distributors  were unable or  unwilling  to satisfy  their  commitment  to us, a
viable  alternative,  such as  self-distribution,  could be implemented  without
materially adversely impacting our business.

     Several companies  acquired by us prior to 1997 had pre-existing  long-term
contracts  with Rentrak  Corporation  whereby  product  would be provided  under
pay-per-transaction   revenue  sharing   arrangements.   During  late  1996,  we
consolidated existing contracts with Rentrak into one national agreement.  Under
this agreement,  which expires in September 2006, we have a minimum gross annual
purchase  commitment in revenue sharing,  handling fees,  sell-through  fees and
end-of-term buyouts equal to less than 5% of our annual product requirements. We
utilize  Rentrak  on a  selective  title-by-title  basis and have  exceeded  the
minimum purchase requirements in each year since 1996.

     We currently source our video game inventory from third-party distributors.

Inventory Management and Distribution

     Inventory  Management.  We are committed to offering as many copies and the
widest  variety of new  releases  as is  necessary  to be  competitive  within a
market, while at the same time keeping our costs as low as possible. New VHS and
DVD  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.  VHS, DVD and video games  utilized as
initial  inventory in our newly  developed  stores  consist of excess  copies of
older  titles and new  release  titles from  existing  stores,  supplemented  as
necessary by purchases directly from suppliers.

     New release  movie and game  products are  allocated to  individual  stores
through a system that  considers  the revenue  levels and  customer  demographic
profiles  of each store.  Rental  history on movie  titles is captured  for each
store and used as a comparison point for future titles of a similar genre.

                                       9
<PAGE>

     Distribution Facility.  Inventory for newly developed stores is assimilated
at our processing and distribution facility located in Dothan,  Alabama.  Excess
inventory  in  existing  stores is  gathered  and  supplemented  as needed  with
purchases, and the inventory is then shipped to our new store ready for use. Our
distribution facility is also used to ship store supplies, computer supplies and
marketing materials to our stores, process returns to our suppliers and to stock
balance inventory within our chain of stores.

Management Information Systems

     Our stores  utilize 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 our  support  center on a daily  basis.  The POS  system is
installed  in all  developed  stores  prior to opening  and in  acquired  stores
shortly after the closing of an acquisition.

     Our POS  system  records  all  rental and sale  information  upon  customer
checkout using scanned bar code information and updates the information when the
movies and video games are  returned.  This POS system is linked to a management
information system ("MIS") at our support center. The POS system transmits store
data nightly into the MIS where all data is  processed.  The MIS then  generates
reports that allow  management  to  effectively  monitor  store  operations  and
inventory,  to review  rental  history  by title and  location  and to assist in
making purchasing decisions with respect to new releases. The POS system enables
us to perform our monthly  physical  inventory  using bar code  recognition,  to
process human resource information and to provide system-based training modules.

     We also  maintain a  financial  reporting  system,  relating to the general
ledger, human resources/payroll, revenue and accounts payable functions, capable
of handling our current needs and  anticipated  growth.  Additional  proprietary
systems  which  have  been  internally   developed  and  implemented  include  a
collections  system, a  processing/distribution  center system and various other
database systems and auditing systems.

Competition

     The home video specialty retail industry is highly competitive.  We compete
with other home video specialty  stores,  including  stores operated by regional
chains and national chains such as Blockbuster and Hollywood  Entertainment.  We
also compete  with other  businesses  offering  VHS, DVD and video games such as
mass merchants,  supermarkets,  pharmacies, convenience stores, bookstores, mail
order  operations  and other  retailers.  We believe the  principal  competitive
factors in the home video  specialty  retail  industry  are store  location  and
visibility,  title availability and selection,  customer service and pricing. In
addition to competing with other home video specialty retailers, we compete 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.

     We also compete with  pay-per-view in which cable or satellite  subscribers
pay a fee to view a movie. New and recently introduced technologies, such as VOD
and NVOD,  enable  cable  companies  and other  telecommunication  companies  to
broadcast  a  large  assortment  of  movies  to  homes  at  scheduled  intervals
throughout the day.  Currently,  NVOD does not offer full  interactivity  or VCR
functionality;  however,  further  improvements in this and other  technologies,
including VOD, could lead to the  availability of a broad selection of movies on
demand at a price that is  competitive  with the price of movie rentals and with
the functionality of VCRs.

     Studios are experimenting with limited play DVDs that would enable users to
view a movie from a DVD any number of times within a certain time frame, such as
one week,  before  automatically  erasing its contents.  These DVDs have not yet
been fully developed or embraced by any movie studios.

     We believe  movie  studios have a  significant  interest in  maintaining  a
viable movie rental  business  because the sale of movies to video retail stores
and other home video outlets currently represents the studios' largest source of
domestic  revenue.  In  addition,  we believe  NVOD and VOD do not  represent  a
near-term threat to our business because:

                                       10
<PAGE>

     o the  technology  and  infrastructure  to  compress  and  deliver VOD in a
       convenient, scalable, cost-effective manner has not yet been developed;

     o piracy and other electronic  security issues have not yet been adequately
       addressed;

     o studios have not yet determined how VOD can enhance  revenues  instead of
       merely  cannibalizing  highly  lucrative  VHS and  DVD  rental  and  sale
       revenues; and

     o NVOD and VOD do not  allow  for the  impulse  rental  opportunities  from
       browsing through lesser-known titles that video specialty stores offer.

Employees

     As of March 11, 2002, we employed approximately 13,200 persons, referred to
by us as "associates,"  including  approximately 12,700 in retail stores and the
remainder  in our  support  center,  field  management  staff  and  distribution
facility.  Of our retail  associates,  approximately  2,200 were  full-time  and
10,500 were  part-time.  None of our associates are represented by a labor union
and we believe that our relations with our associates are good.

     Throughout the last year, we have developed  internal hiring,  training and
retention programs designed to enhance consistent and thorough  communication of
our operating  policies and  procedures as well as increase the rate of internal
promotions.

     We have an incentive  and  discretionary  bonus  program under which retail
management  associates  receive  quarterly  bonuses  when  stores meet or exceed
criteria established under the program. Additionally, we have periodic sales and
marketing   programs  which  provide  our  associates   opportunities   to  earn
incremental bonus compensation based on relative  performance to pre-established
goals  and to actual  performance  of other  associates.  We  believe  our bonus
programs  reward  excellence  in  management,  gives  associates an incentive to
improve  operations,  and  results  in an  overall  reduction  in  the  cost  of
operations.  In addition,  certain  associates are eligible to receive  bonuses,
based on individual  and overall  company  performance,  and options to purchase
shares of our common stock  (generally  exercisable  at the fair market value on
the date of grant), subject to service requirements.

Cautionary Statements

     We make  forward-looking  statements in this Form 10-K which  represent our
expectations   or  beliefs  about  future  events  and  financial   performance.
Forward-looking   statements  are  identifiable  by  words  such  as  "believe,"
"anticipate,"  "expect,"  "intend,"  "plan,"  "will,"  "may" and  other  similar
expressions. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements.  Forward-looking  statements  are subject to known and unknown risks
and  uncertainties,  including those  described  below. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this Form
10-K might not occur. In addition,  actual results could differ  materially from
those suggested by the forward-looking  statements, and therefore you should not
place undue reliance on the forward-looking  statements,  which speak only as of
the date on which they are made. We undertake no  obligation to publicly  update
or  revise  any  forward-looking   statements,   whether  as  a  result  of  new
information,  future  events or  otherwise.  We desire to take  advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
and in that regard we caution  the readers of this Form 10-K that the  following
important factors,  among others,  could affect our actual results of operations
and may cause  changes in our strategy with the result that our  operations  and
results  may differ  materially  from  those  expressed  in any  forward-looking
statements made by us, or on our behalf.

We may be unable to successfully implement our growth strategy

     Our  long-term   strategy  is  to  grow  through  new  store  openings  and
acquisitions of existing stores.  Successful  implementation of this strategy is
contingent upon numerous conditions,  and we cannot assure you that our business
plan will be successfully  executed.  We require  significant capital to acquire
existing  stores and to open new stores.  To date, our growth  strategy has been
funded primarily  through  proceeds from public offerings of common stock,  bank
borrowings,  internally  generated  cash  flow,  use  of  our  common  stock  as


                                       11
<PAGE>

acquisition  consideration  and  seller  financing.  These and other  sources of
capital, including public or private sales of debt or equity securities, may not
be available to us in the future on terms satisfactory to us or at all.

     New Store Openings. We intend to open at least 125 new stores per year over
the next three years. Our ability to open new stores as planned may be adversely
affected by a number of factors, including:

     o the availability of capital;

     o our ability to identify and secure new sites;

     o our ability to negotiate  acceptable leases and implement  cost-effective
       development plans for new stores; and

     o our ability to hire,  train and  assimilate  new store managers and other
       personnel.

     If we do not grow as planned, our earnings could be negatively impacted.

     Acquisitions. Our ability to acquire stores and operate them at the desired
levels of sales and profitability may be adversely affected by:

     o our inability to consummate  identified  acquisitions due to, among other
       things, a lack of available capital;

     o the reduction in the size of the pool of available sellers;

     o our inability to identify  acquisition  candidates  that fit our criteria
       (including,  among others, size, location and profitability) and that are
       willing to sell at prices we consider reasonable;

     o more intensive  competition to acquire the same video specialty stores we
       seek to acquire;

     o misrepresentations and breaches of contracts by sellers;

     o our limited knowledge of the operating history of the acquired stores;

     o the integration of the acquired stores' operating and information systems
       into our systems and procedures; and

     o our ability to retain and motivate employees of the acquired stores.

Our business may be negatively impacted by our failure to successfully integrate
Video Update

     Our business may be adversely affected if we cannot successfully:

     o increase revenues in the acquired stores;

     o achieve lower operating costs including occupancy,  labor,  supplies, and
       other store level expenses;

     o retain and properly motivate store level operating staff and managers;

     o compete effectively in new markets; or

     o identify and close underperforming stores.

Our business could be negatively  impacted if movie studios  significantly alter
the movie distribution windows

     Studios  distribute  movies in a  specific  sequence  in order to  maximize
studio revenues on each title they release.  The order of distribution of movies
is  currently:  (1) movie  theaters;  (2)  hotels and  airlines;  (3) home video
specialty  retailers;  (4)  pay-per-view;  and (5) all other sources,  including
cable and  syndicated  television.  Our industry has an early  "window"  that is


                                       12
<PAGE>

exclusive  of most other forms of  non-theatrical  movie  distribution  as noted
above.  The length of the movie  rental  window  varies,  but  typically  ranges
between 30 and 60 days.  We cannot be certain that movie  studios will  maintain
this window in the future.  We could be adversely  affected if the movie studios
shorten or eliminate  these  exclusive  windows,  because newly released  movies
would be made  available  earlier  through other forms of  non-theatrical  movie
distribution.  As a result,  consumers  would no longer need to wait until after
the  video  store  distribution  window  to  view  these  movies  through  other
distribution channels.

     For  example,  the  Walt  Disney  Company  and  News  Corporation  recently
announced  a joint  venture  to offer  video-on-demand  ("VOD")  movie  services
through high-speed  internet  connections and cable television by mid-year 2002.
The  planned  release  window is 45 to 60 days  after a film's  release in video
stores  (although that time period could be further reduced) and before the film
is available on pay-per-view. We cannot assure you that this release window will
not be shortened in a manner that would  negatively  impact our rental revenues.
Five  other  studios  (Sony,  AOL Time  Warner,  Universal,  Paramount  and MGM)
recently  formed a joint venture named  "Moviefly" to pursue the same  strategy,
offering downloadable movies in the traditional pay-per-view window.

Our business may be negatively impacted by new and existing technologies

     New  Technologies.  New  technologies,  including VOD and single-play  DVD,
represent a material  risk to our company  and the home video  specialty  retail
industry.  A single play DVD is  programmed  to go black after a limited time of
use,  such as one week,  during  which time the movie can be viewed an unlimited
number of times.  Although this technology is still being developed,  it has not
been  adopted by any studios and is as yet  unproven,  at least two studios have
announced  that they are  exploring the use of this  technology.  We could see a
significant  negative  impact to the  financial  position  and  survival  of our
company  if these  technologies  can be  developed  and are widely  accepted  by
consumers.

     Existing Technologies. Cable, satellite and pay-per-view television systems
(near-video-on-demand  or "NVOD")  continue to increase and expand  offerings to
consumers.  The  additional  channels on satellite and digital cable systems may
reduce demand for rentals from home video specialty retailers. If consumers more
widely accept direct broadcast  satellite and digital cable, they may rent fewer
movies  from us in  favor  of the  expanded  number  of  channels  and  expanded
programming offered through these existing technologies.

Our  business  could  be  adversely   affected  if  studios  initially  price  a
significant number of new movie releases as sell-through  products and consumers
decide to purchase rather than rent movies

     Generally,  studios price the majority of movies they distribute  under the
VHS format at "rental" pricing,  which is typically too high a price to generate
significant  consumer demand to purchase these movies. The studios,  however, at
times  determine  that  consumers  "want to own" certain  titles  within the VHS
format,  and therefore price these titles at a lower price.  This pricing method
is known as  sell-through  pricing.  Additionally,  almost all titles  currently
released on DVD are priced at sell-through prices. These movies are purchased to
rent by home video specialty  retailers and to sell by both home video specialty
retailers  and mass  merchants,  among others.  Our business  could be adversely
affected if:

     o studios  decide to release  more  movies at  sell-through  versus  rental
       pricing, which could increase the satisfaction of consumer demand through
       product sales that carry lower profit margins than rental revenues; and

     o more consumers  decide that they would rather purchase movies released at
       sell-through prices than rent those movies.

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

     Prior to studio revenue  sharing  programs,  we would typically pay between
$60 and $75 per  videocassette  for  major  theatrical  releases.  Under  studio
revenue  sharing  programs  we are  able to pay a  minimal  up  front  cost  per
videocassette  and thereafter pay a percentage of each revenue dollar earned for
a specified  period of time to the studios.  These  programs  have enabled us to
significantly  increase  the number of copies  carried for each  title,  thereby
enabling us to better meet consumer demand. After a specified period of time, we


                                       13
<PAGE>

offer them for sale to our  customers  as  "previously  viewed  movies" at lower
prices  than new copies of the movie.  We could be  adversely  affected if these
programs  are  changed to give the movie  studios a greater  percentage  of each
revenue dollar or if they are discontinued.

Our business could be adversely affected by increased competition

     We cannot  assure you that the two larger  chains in our industry  will not
focus  more on the  small and  rural  communities  we  predominantly  serve.  In
addition, there is no guarantee that smaller regional chains will not develop an
increased  market share of the video rental industry in the markets we serve. If
any  of  our  competitors,   including  large  and  regional  chains,   were  to
substantially  increase  their  presence in the markets we serve,  the continued
success of our business would be challenged.

We are a defendant in various lawsuits that could adversely affect us

     We are a defendant in two putative class action lawsuits in Alabama, one in
Texas and one in Tennessee  regarding  the extended  viewing fees that we charge
our customers in those states.  Each of these lawsuits alleges that the extended
viewing fees we charge for keeping our rental products beyond the initial rental
period  are  penalties  in  violation  of  certain   common  law  and  equitable
principles. The dollar amounts that the plaintiffs seek in each of the foregoing
four putative class action lawsuits is not set forth in the complaints.

     We believe  that our extended  viewing  fees do not violate any laws.  As a
result,  we intend to  vigorously  defend  these  lawsuits.  However,  we cannot
provide  any  assurance  as to the outcome of these  proceedings  or provide any
assurance that other similar lawsuits  regarding our extended viewing fee policy
will not be filed in any of the other states in which we operate.  The amount of
extended  viewing  fees that we have  collected  to date in  Alabama,  Texas and
Tennessee  is  significant.  Accordingly,  an  adverse  outcome  in any of these
lawsuits  could have a material  adverse  effect  upon our  business,  financial
condition  or results of  operations.  Furthermore,  even if we prevail in these
lawsuits,  the legal fees paid by us to defend these lawsuits,  and diversion of
management's  attention  resulting  from the  lawsuits  may also have an adverse
effect on our operations.

Our business  could be adversely  affected if we lost our  executive  management
team

     We are highly  dependent on the efforts and  performance  of our  executive
officers.  If we  were to lose a  significant  number  of  these  officers,  our
business  could be adversely  affected.  You should read the  information  under
"Management" for a detailed description of our management team.

The market price for our common stock may fluctuate substantially

     Future developments  concerning our business or our competitors,  including
operating results,  changes in financial  estimates by financial analysts or our
failure to meet these  estimates  and other  factors,  could have a  significant
impact on the market price of our common stock. In addition, in recent years the
stock market has  experienced a high level of price and volume  volatility,  and
market  prices  for the stock of many  companies  have  experienced  wide  price
fluctuations that have not necessarily been related to the operating performance
of these  companies.  These  broad  market  fluctuations  could  have a material
adverse  effect on the market price of our common  stock,  business,  results of
operations or financial condition.

                                       14
<PAGE>

Directors and Executive Officers

     The following  table sets forth the name,  age and position held by each of
our executive officers and directors, as of March 11, 2002:

<TABLE>
<CAPTION>
             Name                        Age   Position(s) Held
<S>                                      <C>   <C>
   Joe Thomas Malugen(1)(2)........      50    Chairman of the Board, President and Chief Executive Officer
   William B. Snow(1)(3)(4)........      70    Vice Chairman of the Board
   J. Steven Roy...................      41    Executive Vice President and Chief Financial Officer
   Jeffrey S. Stubbs...............      39    Executive Vice President - Operations
   S. Page Todd....................      40    Senior Vice President, Secretary and General Counsel
   Keith A. Cousins................      33    Senior Vice President - Real Estate/Development
   Theodore L. Innes...............      52    Senior Vice President - Sales and Marketing
   Richard R. Langford.............      45    Senior Vice President - Management Information
                                               Systems and Chief Information Officer
   Mark S. Loyd....................      46    Senior Vice President - Purchasing and Product Management
   Kenneth C. Motzenbecker.........      48    Senior Vice President - Support Operations
   H. Harrison Parrish(1)(2).......      54    Senior Vice President and Director
   Sanford C. Sigoloff(3)(4).......      71    Director
   Philip B. Smith(3)(4)...........      66    Director
-------------
<FN>
(1)   Member of our Executive Committee.
(2)   Mr. Parrish resigned as President effective January 4, 2002, but will remain a director and an officer.
      Mr. Malugen was appointed President following Mr. Parrish's resignation.
(3)   Member of our Compensation Committee.
(4)   Member of our Audit Committee.
</FN>
</TABLE>

     Mr. Malugen  co-founded  Movie Gallery in 1985 and has been its Chairman of
the Board and Chief Executive Officer since that time. Mr. Malugen was appointed
President  effective  January 4, 2002.  Prior to our initial public  offering in
August 1994, Mr. Malugen had been a practicing attorney in the States of Alabama
and  Missouri  since  1978,  but  spent a  majority  of his  time  managing  the
operations of Movie Gallery beginning in early 1992. Mr. Malugen received a B.S.
degree in Business Administration from the University of Missouri-Columbia,  his
J.D.  from  Cumberland  School of Law,  Samford  University  and his  LL.M.  (in
Taxation) from New York University School of Law.

     Mr. 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 Movie Gallery. 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
Movie  Gallery.  Mr. Roy is a Certified  Public  Accountant  and received a B.S.
degree in Business Administration from the University of Alabama.

     Mr. Stubbs was elected  Executive Vice President - Operations in April 2001
after  serving as Senior Vice  President - Operations  since  November  1997. He
joined Movie Gallery in November 1995 and served as Regional Manager over Texas,
Louisiana and Mississippi.  Prior to joining Movie Gallery, Mr. Stubbs served as
Vice President and General Manager of A.W.C. Corporation,  a video specialty and
restaurant retailer in East Texas, from 1987 to 1995. He has an additional eight
years  experience  in grocery  and  convenience  store  management.  Mr.  Stubbs
attended  Texas A & M  University  and  graduated  from  Southwest  Texas  State
University,  where he received a B.B.A.  degree in Business  Administration  and
Marketing.

                                       15
<PAGE>

     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 was elected Senior Vice President - Real  Estate/Development in
March  1999.  He joined  Movie  Gallery  in August  1998 as Senior  Director  of
Development,  Planning and Analysis. Prior to joining Movie Gallery, 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
an additional 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.  Innes  joined  Movie  Gallery in May 1999 and was elected  Senior Vice
President - Sales and Marketing in June 1999.  From October 1997 until he joined
Movie Gallery, 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,  most recently serving as Vice President -
Marketing. Prior to joining Blockbuster, 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 Movie Gallery in August 1995 as Vice President and was
elected Senior Vice President - Management  Information Systems in October 1996,
and Chief  Information  Officer in April 2001.  From August 1993 until he joined
Movie Gallery,  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  Movie  Gallery 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.  Motzenbecker was elected Senior Vice President - Support Operations in
June 2001. He joined Movie Gallery in November 1995, serving as Regional Manager
over Florida and  Georgia,  subsequently  moving to Dothan,  Alabama to serve as
Divisional  Vice  President  in May  1996  and  then  Vice  President  -  Retail
Coordinator  in  November  1997.  Mr.  Motzenbecker  attended  Catawba  College,
receiving a B.S. degree in Education.

     Mr. Parrish  co-founded  Movie Gallery in 1985 and has served as a Director
since that time.  Mr.  Parrish  served as President  of Movie  Gallery from 1985
until his  resignation on January 4, 2002, at which time Mr. Parrish assumed the
position of Senior Vice  President.  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. Sigoloff  became a director of Movie Gallery 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.



                                       16
<PAGE>

     Mr. Smith became a director of Movie Gallery in September  1994.  Mr. Smith
is serving as Vice  Chairman of the Board of Laird & Co.,  LLC and IQ  Ventures,
Inc., merchant banks. 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 several private companies.

     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 shares of common stock to each of the non-employee  directors,  in each
case at or above the fair market value of the common stock on the date of grant.

ITEM 2.  PROPERTIES

     Stores.  All but five of our retail stores are leased. Our new store leases
typically  provide for an initial  lease term of three to seven  years,  with at
least one renewal  option for an  additional  one to three years.  The following
table  provides  information  regarding the number of stores we operated in each
state or province as of March 11, 2002:



       United States:                   New Hampshire ............17
Alabama ................158             Michigan .................15
Florida ................123             Connecticut ..............13
Georgia .................97             Nebraska...................5
Texas ...................97             New York ..................5
Virginia ................78             South Dakota...............4
Ohio ....................76             Alaska.....................3
Tennessee ...............63             Arizona....................3
Missouri ................51             Colorado.................. 3
Indiana .................49             New Mexico ................3
S. Carolina............. 48             W. Virginia ...............3
Maine ...................47             Vermont ...................2
Mississippi .............43             Nevada.....................1
N. Carolina .............43             New Jersey.................1
Minnesota................37             Oregon.....................1
Kentucky ................34             Utah.......................1
Oklahoma ................31                                    -----
Wisconsin................30               Total United States  1,336
Illinois ................24
Pennsylvania.............21                       Canada:
Massachusetts............19             British Columbia..........49
Washington... ...........19             Alberta...................46
Arkansas ................17             Manitoba...................3
Iowa.....................17             Ontario....................1
Kansas...................17             Yukon......................1
Louisiana ...............17                                    -----
                                          Total Canada           100
                                                               -----
                                                   TOTAL       1,436
                                                               =====

     Headquarters  and  Distribution  Facility.  Our corporate  headquarters and
distribution  facility  are  located  in an  approximately  90,000  square  foot
building in Dothan, Alabama which we own.

                                       17
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

     We are a defendant in two putative class action  lawsuits in Alabama (Sable
Denise Mack, et al. v. M.G.A.,  Inc., in the Circuit Court of Tuscaloosa County,
Alabama,  and Laura F. Hicks,  et al. v. M.G.A.,  Inc.,  in the Circuit Court of
Mobile  County,  Alabama)  filed by customers on December 8, 2000 and August 21,
2001,  respectively;  one putative class action lawsuit filed on August 17, 2001
in the 71st Judicial District Court,  Harrison County,  Texas (Shannon Thompson,
et al. v. M.G.A., Inc.); and one putative class action lawsuit filed on December
3, 2001, in the Chancery Court of Fayette County,  Tennessee  (Michael McCullar,
et al. v. Movie Gallery,  Inc., et al.). Each of these lawsuits alleges that the
extended  viewing fees we charge our customers  for keeping our rental  products
beyond the initial  rental period are  penalties in violation of certain  common
law and equitable claims.  The dollar amounts that plaintiffs seek as damages to
themselves  and those  similarly  situated are not set forth in the  complaints.
Similar class action lawsuits have been filed against our two major competitors.
Without  admitting any fault,  one of our  competitors  recently  settled all of
these class  action  lawsuits  pending  against it.  Under the  settlement,  our
competitor  will make  certificates  available to class  members for rentals and
cash discounts and will pay attorney's  fees in connection  with the settlement.
Our competitor  was not required to make any change to its extended  viewing fee
policy.  We believe that our extended  viewing fees do not violate any laws, and
we intend to vigorously defend these lawsuits.

     Although  we  believe  that  all of the  foregoing  claims  against  us are
unwarranted and without merit, we cannot provide any assurance as to the outcome
of these proceedings. We cannot estimate the possible loss or range of loss that
may result from any of these claims and therefore  have not recorded any related
accruals,  other than accruals for legal fees expected to be incurred in defense
of these claims.

     In addition,  we are involved in litigation  in the ordinary  course of our
business,  none of which,  if decided  adversely to us,  individually  or in the
aggregate, is material to our business or results of operations.

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

    None.

                                     PART II

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

     Our common stock is listed on the Nasdaq  National  Market under the symbol
"MOVI."  The  prices  shown  below are the high and low  closing  prices for the
common stock as reported on the Nasdaq  National  Market for the fiscal  periods
indicated.

     Our Board of Directors approved two three-for-two stock splits,  which were
effected on August 31, 2001 and January 3, 2002 in the form of stock  dividends.
The stock splits increased the number of shares of common stock outstanding by a
total of 14,894,399  shares. All prior periods have been restated to reflect the
stock splits.

                                                      High            Low
 2002:                                              -------         -------

   First Quarter (through March 11, 2002).......    $ 16.75         $ 10.07

 2001:
   Fourth Quarter...............................      18.93           14.07
   Third Quarter................................      14.82            7.65
   Second Quarter...............................       8.04            3.02
   First Quarter................................       3.26            1.36

 2000:
   Fourth Quarter...............................       1.67            1.33
   Third Quarter................................       2.00            1.56
   Second Quarter...............................       1.97            1.44
   First Quarter................................       1.95            1.28


     On March 11,  2002,  the last sale price of our common stock as reported on
the Nasdaq  National  Market was $14.52 per share.  As of March 11, 2002, we had
approximately 4,300 stockholders, including 65 stockholders of record.

     We do not  expect  to pay any cash  dividends  on our  common  stock in the
foreseeable future and plan to retain our earnings to finance operations, future
growth and acquisitions. The payment of dividends on our common stock will be at
the discretion of our board of directors and must comply with applicable law. In
addition,  the terms of our  senior  credit  facility  prohibit  us from  paying
dividends without the prior written consent of our bank lender. Any decisions to

                                       18
<PAGE>

pay  dividends in the future will depend on a number of factors,  including  our
financial condition, capital requirements,  future business prospects, the terms
of any documents  governing our indebtedness and other factors that our board of
directors deems relevant.

<TABLE>

ITEM 6.  SELECTED FINANCIAL DATA
<CAPTION>
                                                                          Fiscal Year Ended (1)
                                                     --------------------------------------------------------------
                                                     January 4,   January 3,   January 2,   December 31, January 6,
                                                        1998         1999         2000          2000        2002
                                                     --------------------------------------------------------------
                                                            (in thousands, except per share and store data)
Statement of Operations Data:
<S>                                                  <C>          <C>          <C>          <C>          <C>
Revenues:
  Rentals                                            $ 220,787    $ 222,784    $ 235,452    $ 271,457    $ 313,852
  Product sales                                         39,569       44,849       41,493       47,479       55,279
                                                     ---------    ---------    ---------    ---------    ---------
Total revenues                                         260,356      267,633      276,945      318,936      369,131

Cost of sales:
  Cost of rental revenues                               72,806      113,192(2)    69,716       81,958       91,445
  Cost of product sales                                 24,597       29,744       25,884       31,213       35,002
                                                     ---------    ---------    ---------    ---------    ---------
Gross margin                                           162,953      124,697      181,345      205,765      242,684

Operating costs and expenses:
  Store operating expenses                             130,512      130,473      137,128      153,665      171,409
  General and administrative                            17,006       17,996       21,403       24,945       29,288(3)
  Amortization of intangibles                            7,206        7,068        8,452        7,465        6,656
  Stock option compensation (4)                             --           --           --           --        8,161
                                                     ---------    ---------    ---------    ---------    ---------
Operating income (loss)                                  8,229      (30,840)      14,362       19,690       27,170

Interest expense, net                                   (6,326)      (5,325)      (3,349)      (3,779)      (2,736)
                                                     ---------    ---------    ---------    ---------    ---------

Income (loss) before income taxes, extraordinary
  item and cumulative effect of accounting change        1,903      (36,165)      11,013       15,911       24,434
Income taxes                                               998      (13,089)       4,615        6,425        9,901
                                                     ---------    ---------    ---------    ---------    ---------
Income (loss) before extraordinary item and
  cumulative effect of accounting change                   905      (23,076)       6,398        9,486       14,533
Extraordinary loss on early extinguishment of debt          --           --         (682)          --         (177)
Cumulative effect of accounting change                      --           --         (699)          --           --
                                                     ---------    ---------    ---------    ---------    ---------

Net income (loss)                                    $     905    $ (23,076)   $   5,017    $   9,486    $  14,356
                                                     =========    =========    =========    =========    =========
Basic earnings (loss) per share (5):
Income (loss) before extraordinary item and
  cumulative effect of accounting change             $    0.03    $   (0.77)   $    0.21    $    0.37    $    0.56
Extraordinary loss on early extinguishment of debt          --           --        (0.02)          --           --
Cumulative effect of accounting change                      --           --        (0.02)          --           --
                                                     ---------    ---------    ---------    ---------    ---------
Net income (loss) per share - basic                  $    0.03    $   (0.77)   $    0.17    $    0.37    $    0.56
                                                     =========    =========    =========    =========    =========
Diluted earnings (loss) per share (5):
Income (loss) before extraordinary item and
  cumulative effect of accounting change             $    0.03    $   (0.77)   $    0.21    $    0.37    $    0.53
Extraordinary loss on early extinguishment of debt          --           --        (0.02)          --           --
Cumulative effect of accounting change                      --           --        (0.02)          --           --
                                                     ---------    ---------    ---------    ---------    ---------
Net income (loss) per share - diluted                $    0.03    $   (0.77)   $    0.17    $    0.37    $    0.53
                                                     =========    =========    =========    =========    =========
Weighted average shares outstanding (5):
  Basic                                                 30,195       30,123       29,509       25,801       25,837
                                                     =========    =========    =========    =========    =========
  Diluted                                               30,197       30,123       30,083       25,868       27,220
                                                     =========    =========    =========    =========    =========
</TABLE>

                                       19
<PAGE>

Item 6. SELECTED FINANCIAL DATA (continued)
<TABLE>
<CAPTION>

                                                                          Fiscal Year Ended (1)
                                                     --------------------------------------------------------------
                                                     January 4,   January 3,   January 2,   December 31, January 6,
                                                        1998         1999         2000          2000        2002
                                                     --------------------------------------------------------------
                                                             (in thousands, except per share and store data)

Balance Sheet Data (at end of period):
<S>                                                  <C>          <C>          <C>          <C>          <C>
Cash and cash equivalents                            $   4,459    $   6,983    $   6,970    $   7,029    $  16,349
Total assets                                           259,133      202,369      209,527      217,536      270,132
Long-term debt, less current maturities                 63,479       46,212       44,377       40,600       26,000
Total liabilities                                      111,504       78,254       84,106       88,327      107,950
Stockholders' equity                                   147,629      124,115      125,421      129,209      162,182

Other Data:
Number of stores at end of period                          856          837          963        1,020        1,415
Average revenues per store (6)                       $     303    $     317    $     313    $     328    $     342
Adjusted EBITDA (7)                                  $  26,898    $  37,378    $  35,494    $  39,744    $  61,581
Increase in same store revenues (8)                        1.1%         3.9%         0.4%         3.8%         2.7%
---------------------
<FN>
(1)  Results for the fiscal year ended  January 6, 2002 reflect a 53-week  year.
     All other fiscal years presented reflect 52-week years.
(2)  Effective  July 6,  1998,  we  changed  our  method  of  amortizing  rental
     inventory  resulting in a non-cash,  pre-tax charge of approximately  $43.6
     million.
(3)  Includes a $1.6 million nonrecurring charge related to the amendment of our
     supply agreement with Rentrak Corporation.
(4)  Represents the non-cash  compensation expense associated with certain stock
     options that were repriced in March 2001 and are  subsequently  required to
     be accounted for as variable stock options (see Note 6 to the  Consolidated
     Financial Statements).
(5)  Earnings  per share  and  weighted  average  shares  outstanding  have been
     restated  to reflect  two  three-for-two  stock  splits  effected  as stock
     dividends paid on August 31, 2001 and January 3, 2002.
(6)  Calculated  as total  revenue  divided by the  weighted  average  number of
     stores open in each  period.  Results for the fiscal year ended  January 6,
     2002  include   approximately   $9,000  per  store  related  to  the  extra
     fifty-third week.
(7)  Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
     and   amortization,    non-cash   compensation   and   nonrecurring   items
     (extraordinary  loss and  cumulative  effect  account change in fiscal year
     ended  January  2,  2000;  extraordinary  loss and  change to amend  supply
     agreement in fiscal year ended January 6, 2002),  less  purchases of rental
     inventory  exclusive of rental  inventory  purchases  specifically  for new
     store openings.  Adjusted EBITDA is presented not as an alternative measure
     of  operating  results  or cash  flow from  operations  (as  determined  in
     accordance  with  accounting  principles  generally  accepted in the United
     States),  but because it is a widely accepted financial  indicator,  in the
     home video specialty  retail  industry,  of a company's  ability to service
     debt.
(8)  Same store  revenues are  calculated  based on the aggregate  revenues from
     stores we have operated for at least thirteen months.
</FN>
</TABLE>

                                       20
<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
operations data expressed as a percentage of total revenue,  Adjusted EBITDA and
the number of stores open at the end of each period. Results for the fiscal year
ended January 6, 2002 reflect a 53-week year.

<TABLE>
Statement of Operations Data:
<CAPTION>
                                                                   Fiscal Year Ended
                                                        --------------------------------------
                                                        January 2,   December 31,   January 6,
                                                           2000          2000          2002
                                                        --------------------------------------
<S>                                                     <C>           <C>           <C>
Revenues:
  Rentals                                                    85.0%         85.1%         85.0%
  Product sales                                              15.0          14.9          15.0
                                                        ---------     ---------     ---------
Total revenues                                              100.0         100.0         100.0

Cost of sales:
  Cost of rental revenues                                    25.2          25.7          24.8
  Cost of product sales                                       9.3           9.8           9.5
                                                        ---------     ---------     ---------
Gross margin                                                 65.5          64.5          65.7

Operating costs and expenses:
  Store operating expenses                                   49.5          48.2          46.4
  General and administrative                                  7.7           7.8           7.9
  Amortization of intangibles                                 3.1           2.3           1.8
  Stock option compensation                                    --            --           2.2
                                                        ---------     ---------     ---------
Operating income                                              5.2           6.2           7.4

Interest expense, net                                        (1.2)         (1.2)         (0.8)
                                                        ---------     ---------     ---------
Income before income taxes, extraordinary item
  and cumulative effect of accounting change                  4.0           5.0           6.6
Income taxes                                                  1.7           2.0           2.7
                                                        ---------     ---------     ---------
Income before extraordinary item and
  cumulative effect of accounting change                      2.3           3.0           3.9
Extraordinary loss on early extinguishment of debt           (0.2)           --            --
Cumulative effect of accounting change                       (0.3)           --            --
                                                        ---------     ---------     ---------
Net income                                                    1.8%          3.0%          3.9%
                                                        =========     =========     =========
Adjusted EBITDA (in thousands)                          $  35,494     $  39,744     $  61,581
                                                        =========     =========     =========
Number of stores at end of period                             963         1,020         1,415
                                                        =========     =========     =========
</TABLE>

                                       21
<PAGE>

Fiscal year ended January 6, 2002 (a 53-week  year)  compared to the fiscal year
ended December 31, 2000 (a 52-week year)

     Revenue.  For fiscal 2001, total revenues increased 15.7% to $369.1 million
from $318.9  million in fiscal 2000. The increase for the year was due primarily
to a 2.7% increase in same store  revenues and an 11.5%  increase in the average
number of stores open during  fiscal 2001 versus  fiscal  2000.  The increase in
same store revenues was the result of: (i)  significant  increases in DVD rental
revenue;  (ii)  an  increase  in the  sales  of  previously  viewed  movies  and
previously  played  games;  (iii)  successful,   chain-wide  internal  marketing
programs  designed to generate more consumer  excitement and traffic in our base
of stores;  (iv) a favorable new release  schedule in the last half of the year;
(v) an extra week of revenues (totaling  approximately  $10.0 million) in fiscal
2001; and (vi) additional  revenues from the Video Update acquisition  (totaling
approximately  $4.9 million) in fiscal 2001. The revenue  increase was partially
offset by (i) soft game rentals  through the third quarter of fiscal 2001 due to
consumer  anticipation of new game platforms being introduced late in the fourth
quarter of fiscal 2001; and (ii) a decline in new movie sales as a result of the
liquidation  of older  sell-through  titles in certain stores during fiscal 2000
and into the first quarter of fiscal 2001.

     Cost of Sales.  The gross  margin on rental  revenue  for  fiscal  2001 was
70.9%,  versus 69.8% in fiscal 2000. The cost of rental  revenues  includes both
the amortization of rental inventory and revenue sharing expenses incurred.  The
improvement  in the  gross  margin  on  rental  revenue  is a result of the 2.7%
increase  in same store  revenues  and the  benefit of  stronger  margins on DVD
rentals versus VHS rentals due to the difference in purchasing  models for these
two  formats.  The increase  was  achieved  inclusive of a $2.1 million  reserve
against  previously  viewed VHS  inventory in the fourth  quarter of fiscal 2001
(see Note 1 to the Consolidated Financial Statements).

     Cost of product sales includes the unamortized  value of previously  viewed
rental  inventory  sold during the  period,  as well as the costs of new VHS and
DVD,  confectionery  items and other goods.  The gross  margin on product  sales
increased  to 36.7% for fiscal 2001 from 34.3% in fiscal  2000.  The increase in
profitability  of product sales reflects the impact of the continuing  promotion
and  availability  of previously  viewed movies with only limited  levels of new
sell-through  titles  in  inventory.   The  increase  was  offset  partially  by
significant  discounting  associated  with the  continued  liquidation  of older
sell-through  titles and other slow moving  inventory in certain stores early in
the year.

     Operating  Costs and  Expenses.  Store  operating  expenses,  which include
store-level  expenses such as lease payments and in-store payroll,  decreased to
46.4% of total  revenue for fiscal 2001 from 48.2% in fiscal 2000.  The decrease
in store  operating  expenses as a percentage of total revenue was primarily due
to: (i) the same store revenues  increase of 2.7% in fiscal 2001; (ii) continued
initiatives to reduce operating costs;  (iii) strong  performance of new stores;
(iv) continued  closure of  under-performing  units;  and (v) the benefits of an
extra week of revenues in fiscal 2001.

     General and administrative expenses, which include a nonrecurring charge of
$1.6  million  related to an  amendment  of our supply  agreement  with  Rentrak
Corporation  in  fiscal  2001  (see  Note  7  to  the   Consolidated   Financial
Statements),  represent  7.9% of total  revenue in fiscal 2001.  Excluding  this
nonrecurring  charge,  general and  administrative  expenses as a percentage  of
revenue decreased to 7.5% for fiscal 2001 from 7.8% in fiscal 2000. The decrease
was primarily due to increased revenue levels,  benefiting from an extra week of
revenues in fiscal 2001, with only minimal increases to administrative  staffing
levels.

     Amortization  of  intangibles  as a percentage  of total revenue for fiscal
2001 was 1.8%, a decrease  from 2.3% in fiscal 2000.  This decrease is primarily
due to the  increase  in revenue and the  expiration  of  significant  levels of
five-year  non-compete  agreements  throughout  fiscal  2000 as  well  as  lower
impairment charges in fiscal 2001 versus fiscal 2000.  Effective in fiscal 2002,
amortization of intangibles will be significantly reduced due to the adoption of
Financial  Accounting  Standards Board ("FASB") Statement No. 142. (See Recently
Issued Accounting Pronouncements).

     Stock option compensation expense represents the non-cash charge associated
with certain stock options that were repriced during the first quarter of fiscal
2001 and are  subsequently  accounted  for as variable  stock options under FASB
Interpretation  No. 44,  "Accounting  for Certain  Transactions  involving Stock
Compensation,  an  interpretation  of APB  Opinion  No.  25" (see  Note 6 to the
Consolidated Financial Statements).

                                       22
<PAGE>

     As a result of the impact of the above  factors on revenues  and  expenses,
operating income  increased by 38.0% in fiscal 2001 to $27.1 million.  Excluding
the  nonrecurring   charge  to  amend  a  supply  contract  and  non-cash  stock
compensation  expense,  operating  income  increased by 87.6% for fiscal 2001 to
$36.9 million.

     Pending the  completion of final  closing tax returns for Video Update,  we
had net operating loss carryforwards at January 6, 2002 resulting from the Video
Update  acquisition  (see Note 2 to the  Consolidated  Financial  Statements) of
approximately  $67.0  million for income taxes that expire in years 2007 through
2021. We have recorded a valuation allowance of $18.4 million related to our net
deferred tax assets as we are uncertain as to whether  sufficient taxable income
will be generated to allow the net deferred tax assets to be realized.

     Extraordinary  Loss.  During the second quarter of fiscal 2001, we incurred
an extraordinary  loss on the early  extinguishment  of debt of $177,000 (net of
taxes of $113,000), or less than $0.01 per diluted share. The extraordinary loss
consisted of unamortized  debt issue costs  associated  with the previous credit
facility and unamortized amounts associated with the termination of the interest
rate swap agreement (see Note 4 to the Consolidated Financial Statements).

Fiscal year ended December 31, 2000 compared to the fiscal year ended January 2,
2000

     Revenue.  Total revenue  increased  15.2% to $318.9 million for fiscal 2000
from $276.9  million for fiscal  1999.  The  increase  was due  primarily  to an
increase  in same store  revenues  of 3.8%,  as well as a 9.7%  increase  in the
average  number of stores  open  during  fiscal 2000  versus  fiscal  1999.  The
increase  in same store  revenues  was  primarily  the result of: (i)  increased
product availability for the customer; (ii) a strong slate of new title releases
versus  the prior  year,  especially  in the  fourth  quarter  where box  office
revenues on the titles  released were  approximately  40% higher than the fourth
quarter  of 1999;  (iii)  successful,  chain-wide  internal  marketing  programs
designed to generate more consumer excitement and traffic in our base of stores;
(iv) an increase in the sale of previously  viewed movies and previously  played
games;  (v) the return of the  Christmas  and New Year's  holidays  to a weekday
instead of a weekend  day,  as well as the  absence of the  "millennium  effect"
experienced in 1999; and (vi) increases in other  ancillary  sales.  The revenue
increase  was  partially  offset by a decline in new movie  sales as a result of
fewer titles being  released at  sell-through  price points and a de-emphasis on
the sale of older sell-through titles in certain stores.

     Cost of Sales.  The gross  margin on rental  revenue  for  fiscal  2000 was
69.8%,  a slight  decrease  from  70.4% in  fiscal  1999,  primarily  due to the
significant  concentration of product  purchases in the fourth quarter of fiscal
2000.  The cost of rental  revenues  includes  both the  amortization  of rental
inventory and revenue sharing expenses incurred.

     Cost of product sales includes the costs of new VHS and DVD,  confectionery
items and other goods,  as well as the  unamortized  value of previously  viewed
rental  inventory  sold. The gross margin on product sales decreased to 34.3% in
fiscal 2000 from 37.6% in fiscal 1999. The decrease in  profitability of product
sales is primarily the result of  significant  discounting in the fourth quarter
for the holiday season and continued liquidation of older sell-through titles in
certain stores.

     Gross  Margins.  As a result  of  slightly  lower  margins  on both  rental
revenues and product  sales,  total gross margins  declined from 65.5% in fiscal
1999 to 64.5% in fiscal 2000.

     Operating  Costs and  Expenses.  Store  operating  expenses,  which include
store-level  expenses such as lease payments and in-store payroll,  decreased to
48.2% of total revenue for fiscal 2000 from 49.5% for fiscal 1999.  The decrease
in store  operating  expenses as a percentage of revenue is primarily due to the
same store revenues  increase in fiscal 2000, as well as the  centralization  of
certain functions at the general and  administrative  level, which have resulted
in  store  level  expense  savings,  and  the  continued  focus  on  closure  of
underperforming stores.

                                       23
<PAGE>

     Amortization  of intangibles  decreased as a percentage of revenues to 2.3%
in fiscal 2000 versus 3.1% in fiscal 1999. This decrease is primarily due to the
increase  in same store  revenues  in fiscal  2000 and a  reduction  in goodwill
impairment  write-offs  during fiscal 2000  required by FASB  Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of."

     General and  administrative  expenses as a percentage  of revenues was 7.8%
for fiscal  2000  compared  to 7.7% for fiscal  1999.  Increases  in general and
administrative  expenses due to increased  staffing and travel costs  associated
with our new store  development  which began to  intensify in the latter half of
1999,  as well as  incremental  expenses  from the  operation of our  e-commerce
effort which was launched in September 1999, were offset by revenue increases in
fiscal 2000.

     As a result of the impact of the above  factors on revenues  and  expenses,
operating  income  increased by 37.1% to $19.7 million in fiscal 2000 from $14.4
million in fiscal 1999.

     For fiscal 2000 our effective  income tax rate was 40.4%,  as compared to a
41.9%  effective  rate for fiscal  1999.  The decrease in the income tax rate in
fiscal 2000 is primarily due to higher  pre-tax income which  leverages  certain
permanently non-deductible items, therefore reducing the effective tax rate.

Liquidity and Capital Resources

     Our primary  capital needs are for opening and acquiring new stores and for
purchasing inventory.  Other capital needs include refurbishing,  remodeling and
relocating  existing  stores.  We  fund  inventory  purchases,   remodeling  and
relocation  programs,  new store opening costs and  acquisitions  primarily from
cash flow from operations and loans under revolving credit facilities.

     During  fiscal 2001 we generated  approximately  $61.6  million in Adjusted
EBITDA,  a 54.9%  increase  over the prior year.  For fiscal 2000,  our Adjusted
EBITDA increased to $39.7 million, a 12.0% increase over $35.5 million in fiscal
1999.  These  increases were primarily  driven by the revenue  increases  during
those periods while leveraging  expenses as discussed above.  Adjusted EBITDA is
defined as earnings  before  interest,  taxes,  depreciation  and  amortization,
non-cash  compensation  and  nonrecurring  items,  less our  purchases of rental
inventory which excludes rental inventory  purchases  specifically for new store
openings.  Adjusted  EBITDA  is  presented  not  as an  alternative  measure  of
operating results or cash flow from operations (as determined in accordance with
accounting  principles generally accepted in the United States), but because, in
the home video specialty  retail  industry,  it is a widely  accepted  financial
indicator of a company's ability to service debt.

     We fund short-term working capital needs,  including the purchase of rental
inventory,  primarily  through cash flow from  operations.  Net cash provided by
operating  activities  was $126.9  million,  $99.2 million and $84.4 million for
fiscal 2001,  fiscal 2000 and fiscal 1999,  respectively.  Net cash  provided by
operating  activities  continues  to be  sufficient  to cover  rental  inventory
replenishment, capital resource and debt service needs.

     On June 27, 2001,  we entered into a credit  agreement  with a syndicate of
banks,  led by SouthTrust  Bank, with respect to a new revolving credit facility
(the  "Facility").  This Facility  replaces a similar  revolving credit facility
with First Union  National  Bank of North  Carolina,  which was due to expire on
January 7, 2002. The new Facility is unsecured and provides for borrowings of up
to $65 million  through July 6, 2002,  $55 million  through July 5, 2003 and $45
million  until final  maturity  on July 4, 2004.  The  interest  rate on the new
Facility is based on LIBOR plus an applicable margin  percentage,  which depends
on cash  flow  generation  and  borrowings  outstanding.  The  terms  of the new
Facility also required that we enter into a new interest rate swap agreement. In
December 2001, the Company  entered into a new interest rate swap agreement with
SouthTrust Bank in order to hedge exposure to interest rate  fluctuations on $10
million of  outstanding  debt at a fixed rate of 3.5% plus an applicable  margin
percentage.

     We grow our store base through internally developed and acquired stores. We
opened 77 internally developed stores during fiscal 2001 and remain on target to
open  approximately  125 new  stores  in 2002.  This  follows  a  record  of 110
internally  developed  stores  during  fiscal  2000.  In  addition  to new store
development,  we acquired  355 stores  during  fiscal  2001,  including  what we
believe to be the largest single domestic  acquisition in the industry's history
as discussed below. To the extent


                                       24
<PAGE>

available,  new stores and future  acquisitions  may be  completed  using  funds
available  under the new Facility,  financing  provided by sellers,  alternative
financing  arrangements such as funds raised in public or private debt or equity
offerings or shares of our stock issued to sellers.  However,  we cannot  assure
you that financing will be available to us on terms which will be acceptable, if
at all.

     Effective  December 21, 2001,  we acquired  100% of the newly issued common
stock of the  reorganized  Video Update,  Inc. under its plan of  reorganization
which was confirmed by the United States  Bankruptcy Court on December 20, 2001.
Video Update had been operating under Chapter 11 of the United States Bankruptcy
Code since its voluntary  filing on September 18, 2000.  The  acquisition of the
newly issued  common stock of Video  Update was in  satisfaction  of all amounts
owed  by  Video  Update  under  a $6.5  million  debtor-in-possession  financing
agreement  between  Video Update and Movie  Gallery.  In addition,  we purchased
certain senior secured debt of Video Update in May 2001 for $8.5 million, funded
amounts  due  to  secured  and  unsecured   creditors  in  accordance  with  the
confirmation of the plan of reorganization  totaling approximately $6.3 million,
and assumed other  post-bankruptcy  filing  liabilities  of Video Update.  Video
Update operates over 320 video specialty stores in the United States and Canada,
bringing our consolidated store count to over 1,400 stores in 41 states and five
Canadian  provinces.  We believe our acquisition of Video Update  represents the
largest single domestic acquisition in the history of the industry.  (See Note 2
to the Consolidated Financial Statements)

     During the first  quarter of fiscal 2000, we completed the $5 million stock
repurchase  plan  announced and begun in fiscal 1998,  and announced a second $5
million stock  repurchase  plan which was  completed in May 2000.  During fiscal
1999 and fiscal 2000, we  repurchased  and retired a total of 4.9 million shares
for  approximately  $9.5  million,  funded  primarily  through  cash  flow  from
operations.

     At January 6, 2002, we had a working capital deficit of $48.8 million,  due
to the accounting treatment of rental inventory.  Rental inventory is treated as
a noncurrent asset under accounting  principles generally accepted in the United
States  because  it is a  depreciable  asset and a portion  of this asset is not
reasonably  expected  to be  completely  realized  in cash or sold in the normal
business  cycle.  Although  the  rental of this  inventory  generates  the major
portion of our revenue,  the  classification of this asset as 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,  we believe  that
working capital is not an appropriate measure of our liquidity and we anticipate
that we will continue to operate with a working capital deficit.

     The following table  discloses our  contractual  obligations and commercial
commitments  as of  January  2,  2002  (see  Notes  4 and 7 to the  Consolidated
Financial Statements).
<TABLE>
<CAPTION>

                                                                          Payments Due by Period
                                                                              (in thousands)
                                                     ----------------------------------------------------------------
                                                                    Less than        1-3          4-5       After 5
Contractual Obligations                                 Total         1 year        Years        Years       Years
-----------------------                              ----------------------------------------------------------------
<S>                                                  <C>           <C>           <C>            <C>         <C>
Credit facility - outstanding(1)                     $   26,000    $        -    $   26,000     $       -   $       -
Operating leases                                        177,143         6,839       122,625        30,240      17,439
Unconditional purchase obligations                       18,838         4,000        12,000         2,838           -
                                                     ----------    ----------    ----------     ---------   ---------
Total contractual cash obligations                   $  221,981    $   10,839    $  160,625     $  33,078   $  17,439
                                                     ==========    ==========    ==========     =========   =========
------------------
<FN>
(1)  The total  commercial  commitment under the credit facility is $65 million,
     with  expiration as follows:  $10 million in 2002,  $10 million in 2003 and
     $45 million in 2004. As of January 6, 2002,  there were standby  letters of
     credit outstanding under the credit facility of $.5 million which expire in
     2002.
</FN>
</TABLE>

     We believe our  projected  cash flow from  operations,  borrowing  capacity
under the  Facility,  cash on hand and trade credit will  provide the  necessary
capital to fund our current plan of operations,  including our  anticipated  new
store openings and acquisition  program,  through at least fiscal 2002. However,
to fund a major acquisition,  or to provide funds in the event that our 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 we increase
our  growth  plan,  we may need to seek  additional  or  alternative  sources of
financing. This financing may not be available on satisfactory terms. Failure to
obtain  financing to fund our expansion plans or for other purposes could have a
material adverse effect on our operating results.

                                       25
<PAGE>

     Our ability to fund our current  plan of  operations,  our growth plans and
our debt service requirements will depend upon our future performance,  which is
subject to general economic,  financial,  competitive and other factors that are
beyond our control. There can be no assurance that our business will continue to
generate sufficient cash flow from operations in the future to service our debt,
fund  capital  resource  needs and  cover the  ongoing  costs of  operating  the
business.  If we are unable to satisfy  these  requirements  with cash flow from
operations,  we may be required to  refinance  all or a portion of our  existing
debt,  to  sell  assets  or to  obtain  additional  financing.  There  can be no
assurance that any such refinancing would be available or that any such sales of
assets or additional financing could be obtained.

Critical Accounting Policies

     Our  significant  accounting  policies  are  described  in  Note  1 to  the
Consolidated  Financial  Statements.  Our  discussion  and analysis of financial
condition and results of operations  are based upon our  consolidated  financial
statements,  which have been prepared in accordance with  accounting  principles
generally  accepted  in the United  States.  The  preparation  of the  financial
statements  requires us to make estimates and judgments that affect the reported
amounts of assets,  liabilities,  revenues,  expenses, and related disclosure of
contingent  assets and  liabilities.  On an  on-going  basis,  we  evaluate  the
estimates that we have made.  These  estimates  have been based upon  historical
experience  and on various  other  assumptions  that we believe to be reasonable
under the  circumstances.  Actual results may differ from these  estimates under
different  conditions  or  using  different  assumptions.  We  believe  our most
critical   accounting   policies  include  our  policies  with  respect  to  the
recognition  of extended  viewing fee revenue,  rental  inventory  amortization,
impairment  of  long-lived   assets,   purchase  price  allocation  of  acquired
businesses and deferred income taxes.

     We  recognize  revenue  from  extended  viewing  fees  that we  charge  our
customers for keeping our rental  products beyond the initial rental period on a
cash basis when the extended viewing fees are collected from the customer. If we
recognized  extended  viewing  fee  revenue  on an  accrual  basis,  results  of
operations  would  reflect  increased  income for  extended  viewing fee revenue
offset by an accrual to reserve for uncollectible accounts.

     Rental  inventory  is  amortized  to an  estimated  salvage  value  over an
estimated useful life of three years. Excess copies of rental inventory are sold
as  previously  viewed  product and the  unamortized  cost is charged to cost of
sales.  We amortize the cost of rental  inventory  using an  accelerated  method
designed to  approximate  the rate of revenue  recognition.  We believe that the
amortization  rates,  salvage  values and useful  lives are  appropriate  in our
existing operating  environment.  If revenue trends or other industry conditions
change,  we may make  changes to the  existing  amortization  policy  that could
result in a charge to  write-down  the net book  value of rental  inventory.  We
currently  maintain a reserve  against rental  inventory to reduce the amortized
cost of previously  viewed VHS inventory to the estimated net realizable  value.
We may adjust this reserve in future  periods  based on conditions in the market
for previously viewed VHS inventory.

     We assess  the fair  value and  recoverability  of our  long-lived  assets,
including  goodwill,  whenever  events and  circumstances  indicate the carrying
value of an asset  may not be  recoverable  from  estimated  future  cash  flows
expected to result from its use and eventual  disposition.  In doing so, we make
assumptions and estimates  regarding future cash flows and other factors to make
our  determination.  The fair value of our  long-lived  assets and  goodwill  is
dependent upon the forecasted performance of our business,  changes in the video
retail  industry,  the  market  valuation  of our common  stock and the  overall
economic  environment.  When  we  determine  that  the  carrying  value  of  our
long-lived assets and goodwill may not be recoverable, we measure any impairment
based upon the excess of the  carrying  value that  exceeds the  estimated  fair
value of the assets. As a result of this review,  we recorded  impairment losses
of $1 million and $.7 million in fiscal  2000 and 2001,  respectively.  If we do
not meet our  operating  forecasts or if the market value of our stock  declines
significantly,   we  may  have  to  record  additional  impairment  charges  not
previously recognized.

     We estimate the fair value of assets and liabilities of acquired businesses
based on historical  experience  and available  information  at the  acquisition
date. We engage independent valuation  specialists to assist when necessary.  If
information  becomes  available  subsequent to the  acquisition  date that would


                                       26
<PAGE>

materially  impact the valuation of assets  acquired or  liabilities  assumed in
business  combinations,  we  may  be  required  to  adjust  the  purchase  price
allocation.

     We recognize  deferred tax assets and liabilities  based on the differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities.  We regularly review our deferred tax assets for recoverability and
establish a valuation  allowance based upon historical losses,  projected future
taxable  income and the expected  timing of the reversals of existing  temporary
differences.   As  a  result  of  this  review  and  the  related  Video  Update
acquisition,  we have established a valuation allowance against our deferred tax
assets related to the estimated utilization of the net operating losses.

Recently Issued Accounting Pronouncements

     In June 2001, the FASB issued Statement No. 141,  "Business  Combinations,"
and Statement No. 142,  "Goodwill and Other  Intangible  Assets."  Statement 141
requires that all business combinations be accounted for by the purchase method,
and all intangible assets acquired in a business combination to be recognized as
assets apart from goodwill if they meet certain  contractual-legal  criterion or
separability  criterion.  The  provisions of Statement 141 apply to all business
combinations  with an  acquisition  date  subsequent  to June  30,  2001.  Under
Statement 142,  goodwill and indefinite  lived  intangible  assets are no longer
amortized  but are reviewed  for  impairment  annually,  or more  frequently  if
impairment indicators arise.  Separable intangible assets that are not deemed to
have an indefinite  life will continue to be amortized  over their useful lives.
Statement  142 is effective  for us as of January 7, 2002.  We do not expect the
adoption of Statement 142 to have any material impact on the  classification  of
intangible assets.  Application of the  nonamortization  provisions of Statement
142 will result in an increase in net income of  approximately  $3.5 million per
year. We do not anticipate  completion of the  transitional  impairment tests to
result in any impairment charge.

     In October 2001,  the FASB issued  Statement No. 144,  "Accounting  for the
Impairment  or  Disposal  of  Long-Lived   Assets,"  which  addresses  financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes  Statement 121,  "Accounting for the Impairment of Long-Lived  Assets
and for  Long-Lived  Assets to be Disposed Of," and the accounting and reporting
provisions  of APB Opinion No. 30,  "Reporting  the  Results of  Operations  for
Disposal  of a  Segment  of a  Business."  Statement  144  is  effective  for us
beginning January 7, 2002 and is not expected to have an impact on our financial
position or results of operations.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The market  risk  inherent  in our  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, we entered
into an interest rate swap  agreement that  effectively  fixes our interest rate
exposure on $10  million of the amount  outstanding  under the  Facility at 3.5%
plus an applicable margin percentage. Assuming a hypothetical 10% adverse change
in the LIBOR interest rate and assuming debt levels outstanding as of January 6,
2002, we 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 our cost
of borrowing.  The analysis does not consider the potential  negative  impact on
overall  economic  activity that could exist in such an environment.  We believe
that our exposure to adverse  interest  rate changes and the impact on our total
cost of borrowing  capital has been largely  mitigated by the interest rate swap
agreement that is in place.

     We are  exposed to foreign  exchange  risks  associated  with our  Canadian
operations  acquired in fiscal 2001.  Historically,  the Canadian exchange rates
have been  stable and we  believe  the impact of  fluctuations  in the  currency
exchange  rates will be  immaterial  to our  financial  position  and results of
operations.

                                       27
<PAGE>

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.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item (other than the information regarding
directors  and  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 2002  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 2002 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 2002 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 2002 Annual Meeting of  Stockholders,  and is
incorporated herein by reference.

                                     PART IV

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 December 31, 2000 January 6, 2002.

          Consolidated  Statements  of Income for the Fiscal Years Ended January
          2, 2000, December 31, 2000 and January 6, 2002.

          Consolidated  Statements of Stockholders'  Equity for the Fiscal Years
          Ended January 2, 2000, December 31, 2000 and January 6, 2002.

          Consolidated  Statements  of Cash  Flows for the  Fiscal  Years  Ended
          January 2, 2000, December 31, 2000 and January 6, 2002.

          Notes to Consolidated Financial Statements.

   (a)(2) Schedules:

          Schedule II. Valuation and Qualifying Accounts

                                       28
<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  - Employment Agreement between M.G.A., Inc. and J. Steven Roy. (4)
 10.6  - Employment Agreement between M.G.A., Inc. and S. Page Todd. (4)
 10.7  - Employment Agreement between M.G.A., Inc. and Jeffrey S. Stubbs. (5)
 10.8  - Assignment Agreement between BNP Paribas and Movie Gallery, Inc. dated
         May 2, 2001. (6)
 10.9  - Chapter 11 Financing  Agreement  between Video Update,  Inc. and Movie
         Gallery, Inc. dated May 16, 2001. (6)
 10.10 - Credit Agreement between Movie Gallery, Inc. and SouthTrust Bank dated
         June 27, 2001. (6)
 10.11 - Plan of  Reorganization  of Video Update,  Inc., et al., as amended on
         December 18, 2001. (7)
 21    - List of Subsidiaries. (filed herewith)
 23    - Consent of Ernst & Young LLP, Independent  Auditors.  (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 6,
     1998,  as an exhibit to the  Company's  Form 10-K for the fiscal year ended
     January 4, 1998.
(5)  Previously  filed with the Securities  and Exchange  Commission on April 2,
     2001,  as an exhibit to the  Company's  Form 10-K for the fiscal year ended
     December 31, 2000.
(6)  Previously filed with the Securities and Exchange  Commission on August 15,
     2001, as an exhibit to the  Company's  Form 10-Q for the quarter ended July
     1, 2001.
(7)  Previously filed with the Securities and Exchange  Commission on January 7,
     2002, as an exhibit to the Company's Form 8-K/A dated December 21, 2001.

                                       29
<PAGE>

     (b) Reports on Form 8-K:

     The Company filed Form 8-K  reporting  on Items 2 and 7 on January 4, 2002.
     This filing was amended with a Form 8-K/A on January 7, 2002.

     (c) Exhibits:

     See (a)(3) above.



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, President
                                          and Chief Executive Officer

Date:  April 2, 2002

     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, President   April 2, 2002
-----------------------       and Chief Executive Officer
Joe Thomas Malugen

 /s/ WILLIAM B. SNOW          Vice Chairman of the Board         April 2, 2002
--------------------
William B. Snow

 /s/ H. HARRISON PARRISH      Director                           April 2, 2002
------------------------
H. Harrison Parrish

/s/ PHILIP B. SMITH           Director                           April 2, 2002
-------------------
Philip B. Smith

/s/ J. STEVEN ROY             Executive Vice President and       April 2, 2002
-----------------             Chief Financial Officer
J. Steven Roy

/s/ IVY M. JERNIGAN           Vice President - Controller        April 2, 2002
-------------------
Ivy M. Jernigan


                                       30
<PAGE>

                               Movie Gallery, Inc.

                       Consolidated Financial Statements

    Fiscal years ended January 2, 2000, December 31, 2000 and January 6, 2002


                                    Contents

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

Audited Financial Statements

Consolidated Balance Sheets................................................F - 2
Consolidated Statements of Income..........................................F - 3
Consolidated Statements of Stockholders' Equity............................F - 4
Consolidated Statements of Cash Flows......................................F - 5
Notes to Consolidated Financial Statements................................ F - 6
Financial Statement Schedule...............................................F -20





<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 December 31, 2000 and January 6, 2002,  and the related  consolidated
statements of income,  stockholders' equity and cash flows for each of the three
years in the period ended January 6, 2002. Our audits also include the financial
statement  schedule  listed  in  the  Index  at  Item  14(a)2.  These  financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule 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.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of Movie
Gallery,  Inc. at December  31, 2000 and January 6, 2002,  and the  consolidated
results of its  operations and its cash flows for each of the three years in the
period ended January 6, 2002, in conformity with accounting principles generally
accepted in the United  States.  Also,  in our  opinion,  the related  financial
statement  schedule,   when  considered  in  relation  to  the  basic  financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.

As discussed in Note 1 to the consolidated financial statements,  in fiscal 1999
the  Company  changed  its  method  of  accounting  for the  costs  of  start-up
activities.

                                            /s/ Ernst & Young, LLP



Birmingham, Alabama
February 14, 2002
                                      F-1
<PAGE>


                          Movie Gallery, Inc.
                      Consolidated Balance Sheets
                             (in thousands)
<TABLE>
<CAPTION>

                                                      December 31,  January 6,
                                                          2000         2002
                                                      -----------   ---------
<S>                                                   <C>         <C>
Assets
Current assets:
    Cash and cash equivalents                         $   7,029   $  16,349
    Merchandise inventory                                 9,264       6,739
    Prepaid expenses                                      1,000       2,085
    Store supplies and other                              3,852       5,582
    Deferred income taxes                                   502       1,159
                                                      ---------   ---------
Total current assets                                     21,647      31,914

Rental inventory, net                                    61,773      88,424
Property, furnishings and equipment, net                 53,124      71,739
Goodwill and other intangibles, net                      77,926      75,838
Deposits and other assets                                 3,066       2,217
                                                      ---------   ---------
Total assets                                          $ 217,536   $ 270,132
                                                      =========   =========

Liabilities and stockholders' equity
Current liabilities:
  Accounts payable                                    $  31,111   $  51,785
  Accrued liabilities                                    11,631      28,935
                                                      ---------   ---------
Total current liabilities                                42,742      80,720

Long-term debt                                           40,600      26,000
Other accrued liabilities                                   253         606
Deferred income taxes                                     4,732         624

Stockholders' equity:
  Preferred stock, $.10 par value; 2,000 shares
    authorized, no shares issued or outstanding              --          --
  Common stock, $.001 par value; 35,000
    shares authorized, 25,056 and 27,215
    shares issued and outstanding, respectively              25          27
  Additional paid-in capital                            121,827     140,475
  Retained earnings                                       7,357      21,713
  Accumulated other comprehensive loss                     --           (33)
                                                      ---------   ---------
Total stockholders' equity                              129,209     162,182
                                                      ---------   ---------
Total liabilities and stockholders' equity            $ 217,536   $ 270,132
                                                      =========   =========

See accompanying notes.
</TABLE>
                                      F-2
<PAGE>
<TABLE>

                              Movie Gallery, Inc.
                        Consolidated Statements of Income
                      (in thousands, except per share data)

<CAPTION>
                                                                Fiscal Year Ended
                                                     ------------------------------------
                                                     January 2,   December 31, January 6,
                                                        2000          2000        2002
                                                     ------------------------------------
<S>                                                  <C>          <C>          <C>
Revenues:
  Rentals                                            $ 235,452    $ 271,457    $ 313,852
  Product sales                                         41,493       47,479       55,279
                                                     ---------    ---------    ---------
Total revenues                                         276,945      318,936      369,131

Cost of sales:
  Cost of rental revenues                               69,716       81,958       91,445
  Cost of product sales                                 25,884       31,213       35,002
                                                     ---------    ---------    ---------
Gross margin                                           181,345      205,765      242,684

Operating costs and expenses:
  Store operating expenses                             137,128      153,665      171,409
  General and administrative                            21,403       24,945       29,288
  Amortization of intangibles                            8,452        7,465        6,656
  Stock option compensation                               --           --          8,161
                                                     ---------    ---------    ---------
Operating income                                        14,362       19,690       27,170

Interest expense, net                                   (3,349)      (3,779)      (2,736)
                                                     ---------    ---------    ---------
Income before income taxes, extraordinary item
  and cumulative effect of accounting change            11,013       15,911       24,434
Income taxes                                             4,615        6,425        9,901
                                                     ---------    ---------    ---------
Income before extraordinary item and
  cumulative effect of accounting change                 6,398        9,486       14,533
Extraordinary loss on early extinguishment of debt        (682)          --         (177)
Cumulative effect of accounting change                    (699)          --           --
                                                     ---------    ---------    ---------
Net income                                           $   5,017    $   9,486    $  14,356
                                                     =========    =========    =========
Basic earnings per share:
Income before extraordinary item and cumulative
   effect of accounting change                       $    0.21    $    0.37    $    0.56
Extraordinary loss on early extinguishment of debt       (0.02)          --           --
Cumulative effect of accounting change                   (0.02)          --           --
                                                     ---------    ---------    ---------
Net income per share - basic                         $    0.17    $    0.37    $    0.56
                                                     =========    =========    =========

Diluted earnings per share:
Income before extraordinary item and cumulative
   effect of accounting change                       $    0.21    $    0.37    $    0.53
Extraordinary loss on early extinguishment of debt       (0.02)          --           --
Cumulative effect of accounting change                   (0.02)          --           --
                                                     ---------    ---------    ---------
Net income per share - diluted                       $    0.17    $    0.37    $    0.53
                                                     =========    =========    =========
Weighted average shares outstanding:
   Basic                                                29,509       25,801       25,837
   Diluted                                              30,083       25,868       27,220

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

                              Movie Gallery, Inc.
                 Consolidated Statements of Stockholders' Equity
                                 (in thousands)

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

<S>                                                   <C>           <C>          <C>               <C>            <C>
Balance at January 3, 1999                            $      30     $ 131,231    $  (7,146)        $       -      $ 124,115
  Net income                                                  -             -        5,017                 -          5,017
  Exercise of stock options for 28 shares                     -            48            -                 -             48
  Tax benefit of stock options exercised                      -             7            -                 -              7
  Repurchase and retirement of 1,752 shares                  (2)       (3,764)           -                 -         (3,766)
                                                      ---------     ---------    ---------          --------      ---------
Balance at January 2, 2000                                   28       127,522       (2,129)                -        125,421
  Net income                                                  -             -        9,486                 -          9,486
  Repurchase and retirement of 3,180 shares                  (3)       (5,695)           -                 -         (5,698)
                                                      ---------     ---------    ---------          --------      ---------
Balance at December 31, 2000                                 25       121,827        7,357                 -        129,209
Comprehensive Income:
  Net income                                                                        14,356                 -         14,356
  Foreign currency translation                                                           -               (33)           (33)
                                                                                 ---------          --------      ---------
     Total comprehensive income                                                     14,356               (33)        14,323
  Exercise of stock options for 2,129 shares                  2         5,214            -                 -          5,216
  Tax benefit of stock options exercised                      -         5,273            -                 -          5,273
  Stock option compensation                                   -         8,161            -                 -          8,161
                                                      ---------     ---------    ---------          --------      ---------
Balance at January 6, 2002                            $      27     $ 140,475    $  21,713          $    (33)     $ 162,182
                                                      =========     =========    =========          ========      =========
See accompanying notes.
</TABLE>
                                      F-4
<PAGE>

<TABLE>
                               Movie Gallery, Inc.
                      Consolidated Statements of Cash Flows
                                 (in thousands)
<CAPTION>
                                                                        Fiscal Year Ended
                                                               --------------------------------------
                                                               January 2,   December 31,   January 6,
                                                                  2000          2000          2002
                                                               --------------------------------------
<S>                                                            <C>          <C>            <C>
Operating activities:
Net income                                                     $   5,017    $   9,486      $  14,356
Adjustments to reconcile net income  to net cash provided
by operating activities:
 Extraordinary loss on early extinguishment of debt                  682           --            177
 Cumulative effect of accounting change                              699           --             --
 Amortization of rental inventory                                 50,514       54,460         63,638
 Depreciation and intangibles amortization                        21,691       22,327         22,332
 Stock option compensation                                            --           --          8,161
 Tax benefit of stock options exercised                                7           --          5,273
 Deferred income taxes                                             2,737        4,671          3,816
 Changes in operating assets and liabilities:
    Merchandise inventory                                         (2,788)       5,884          3,436
    Other current assets                                             348         (643)        (2,731)
    Deposits and other assets                                     (1,104)        (518)           471
    Accounts payable                                               2,847        4,868          5,488
    Accrued liabilities                                            3,740       (1,356)         2,484
                                                               ---------    ---------      ---------
Net cash provided by operating activities                         84,390       99,179        126,901

Investing activities:
Business acquisitions                                            (11,839)      (3,085)       (20,047)
Purchases of rental inventory, net                               (54,259)     (63,211)       (66,775)
Purchases of property, furnishings and equipment                 (12,573)     (23,086)       (21,342)
                                                               ---------    ---------      ---------
Net cash used in investing activities                            (78,671)     (89,382)      (108,164)

Financing activities:
Net proceeds from issuance of common stock                            48           --             --
Purchases and retirement of common stock                          (3,766)      (5,698)            --
Proceeds from exercise of stock options                               --           --          5,216
Principal payments on long-term debt                              (2,014)      (4,040)       (14,600)
                                                               ---------    ---------      ---------
Net cash used in financing activities                             (5,732)      (9,738)        (9,384)

Effect of exchange rate changes on cash and cash equivalents          --           --            (33)
                                                               ---------    ---------      ---------

Increase (decrease) in cash and cash equivalents                     (13)          59          9,320
Cash and cash equivalents at beginning of fiscal year              6,983        6,970          7,029
                                                               ---------    ---------      ---------
Cash and cash equivalents at end of fiscal year                $   6,970    $   7,029      $  16,349
                                                               =========    =========      =========

Supplemental disclosures of cash flow information:
Cash paid during the period for interest                       $   3,076    $   3,817      $   3,434
Cash paid during the period for income taxes                       2,705        1,688          1,461

See accompanying notes.
</TABLE>
                                      F-5

<PAGE>

                               Movie Gallery, Inc.

                   Notes to Consolidated Financial Statements

             January 2, 2000, December 31, 2000 and January 6, 2002

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 located in 41 states and
five Canadian provinces.

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 the fiscal year
ended  January 2, 2000  ("Fiscal  1999") and December 31, 2000  ("Fiscal  2000")
reflect  52-week  years.  Results  for the  fiscal  year  ended  January 6, 2002
("Fiscal  2001")  reflect a 53-week  year.  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,  amortization,  rent and  utilities,  are  calculated and recorded
monthly, with twelve months included in each fiscal year.

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 new videocassette  tapes ("VHS"),
DVD, video games,  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  enterprise  level  assets  to the  extent
carrying  value exceeds the estimated  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.  Amortization  of  intangibles  for Fiscal
1999,  2000 and 2001 includes an impairment  loss of $1,600,000,  $1,000,000 and
$700,000, respectively, to write-off the net book value of goodwill in excess of
its estimated fair market value.

Rental Inventory

Rental  inventory is stated at cost and amortized over its economic useful life.
Under the Company's policy,  the cost of base stock movie inventory,  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 movie  inventory,  consisting of the
third  and  succeeding  copies of each  title  per  store,  is  amortized  on an



                                      F-6
<PAGE>

                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

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 movie 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 or until the game is sold, at which time the  unamortized  book
value is charged to cost of sales.

During the fourth quarter of Fiscal 2001, the Company established a $2.1 million
reserve  against  rental  inventory to reduce the  amortized  cost of previously
viewed VHS  inventory  to its  estimated  net  realizable  value.  This  reserve
represents the continuing  consumer transition to DVD from VHS and the resulting
impact on the sale prices of previously viewed VHS product.

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

                                            December 31,      January 6,
                                                2000             2002
                                            ------------      ----------

<S>                                         <C>               <C>
Rental inventory                            $    145,557      $  174,647
Accumulated amortization                         (83,784)        (86,223)
                                            ------------      ----------
                                            $     61,773      $   88,424
                                            ============      ==========
</TABLE>

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  December  31,  2000 and  January  6, 2002 was  $35,830,000  and
$41,314,000, 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.

Revenue Recognition

Rental  revenue  is  recognized  when the  movie or video  game is rented by the
customer. Extended viewing fees on rentals are recognized when received from the
customer. Product sales revenue is recognized at the time of sale.

                                      F-7
<PAGE>
                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

Advertising Costs

Advertising costs,  exclusive of cooperative  reimbursements  from vendors,  are
expensed  when  incurred.  Advertising  expense for Fiscal  1999,  2000 and 2001
totaled $728,000, $1,563,000 and $2,219,000, respectively.

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 SOP 98-5 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 $0.02 per share,  to
expense  the  unamortized  costs that had been  capitalized  prior to January 4,
1999.

Fair Value of Financial Instruments

At December  31,  2000 and  January 6, 2002,  the  carrying  value of  financial
instruments  such as cash and cash  equivalents,  accounts payable and long-term
debt  approximated  their fair values,  calculated  using  discounted  cash flow
analysis at the Company's incremental borrowing rate.

Foreign Currency Translation

The Company's foreign subsidiary  records  transactions using the local currency
as the functional  currency.  In accordance with FASB Statement No. 52, "Foreign
Currency  Translation," the assets and liabilities of the foreign subsidiary are
translated  into U. S. dollars using either the exchange  rates in effect at the
balance sheet dates or historical  exchange  rates,  depending  upon the account
translated.  Income and expenses are translated at average weekly exchange rates
each fiscal period. The translation adjustments that result from translating the
balance  sheets at different  rates than the income  statements  are included in
accumulated  other   comprehensive  loss,  which  is  a  separate  component  of
consolidated stockholders' equity.

Hedging Activities

The  Company  adopted  FASB  Statement  No.  133,   "Accounting  for  Derivative
Instruments  and Hedging  Activities," as amended by Statements No. 137 and 138,
in its fiscal year beginning January 1, 2001. Statement 133 requires the Company
to recognize all  derivatives  on the balance  sheet at fair value.  Derivatives
that are not hedges  must be  adjusted to fair value  through  earnings.  If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of  derivatives  will either be offset against the change in fair value of
the  hedged  assets,   liabilities  or  firm  commitments  through  earnings  or
recognized in other comprehensive  income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings (see Note 4 - Long-Term Debt).

                                      F-8
<PAGE>
                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States  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,  rental inventory  reserves and the
allocation of the purchase  price of acquired  businesses.  These  estimates and
assumptions could change and actual results could differ from these estimates.

Recently Issued Accounting Pronouncements

In June 2001, the FASB issued Statement No. 141,  "Business  Combinations,"  and
Statement  No.  142,  "Goodwill  and Other  Intangible  Assets."  Statement  141
requires that all business combinations be accounted for by the purchase method,
and requires all  intangible  assets  acquired in a business  combination  to be
recognized as assets apart from goodwill if they meet certain  contractual-legal
criterion or  separability  criterion.  The provisions of Statement 141 apply to
all business  combinations with an acquisition date subsequent to June 30, 2001.
Under  Statement 142,  goodwill and indefinite  lived  intangible  assets are no
longer amortized but are reviewed for impairment annually, or more frequently if
impairment indicators arise.  Separable intangible assets that are not deemed to
have an indefinite  life will continue to be amortized  over their useful lives.
Statement 142 is effective  for the Company as of January 7, 2002.  The adoption
of  Statement  142  is  not  expected  to  have  any  material   impact  on  the
classification  of  intangible  assets.   Application  of  the   nonamortization
provisions  of  Statement  142 will  result  in an  increase  in net  income  of
approximately $3.5 million per year. The Company does not anticipate  completion
of the transitional impairment tests to result in any impairment charge.

In  October  2001,  the FASB  issued  Statement  No.  144,  "Accounting  for the
Impairment  or  Disposal  of  Long-Lived   Assets,"  which  addresses  financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes  Statement 121,  "Accounting for the Impairment of Long-Lived  Assets
and for  Long-Lived  Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30,  "Reporting  the Results of Operations for the
Effects of Disposal of a Segment of a Business."  Statement 144 is effective for
the Company  beginning  January 7, 2002 and is not expected to have an impact on
the Company's financial position or results of operations.

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 Fiscal  1999,  2000 and 2001 was  immaterial  to the
Company's operating results.

2.  Acquisitions

Effective  December  21,  2001,  the Company  acquired  100% of the newly issued
common stock of the reorganized  Video Update,  Inc.  ("Video Update") under its
plan of reorganization which was confirmed by the United States Bankruptcy Court
on December 20, 2001.  Video Update had been  operating  under Chapter 11 of the
United States  Bankruptcy Code since its voluntary filing on September 18, 2000.
The  acquisition  of the  newly  issued  common  stock  of Video  Update  was in
satisfaction  of  all  amounts  owed  by  Video  Update  under  a  $6.5  million
debtor-in-possession  financing  agreement between Video Update and the Company.
In addition,  the Company  purchased certain senior secured debt of Video Update
in May 2001 for $8.5  million,  funded  amounts  due to  secured  and  unsecured
creditors in accordance  with  confirmation  of the plan totaling  approximately
$6.3 million,  and assumed other  post-bankruptcy  filing  liabilities  of Video

                                     F-9
<PAGE>
                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

Update as disclosed in the following table. Video Update operates over 320 video
specialty stores in the United States and Canada.  The Company's  acquisition of
Video  Update was made as a  strategic  expansion  of the  Company's  geographic
markets in accordance with the Company's growth plan.

The following  table  summarizes  the  preliminary  estimated fair values of the
assets acquired and liabilities  assumed at the date of acquisition.  Due to the
acquisition  occurring near the end of the Company's fiscal year, the closing of
the final  books and  records  of Video  Update  has not been  completed.  Final
determination  of the  purchase  price  allocation  will  be  made  as  soon  as
practicable upon completion of the final closing and adjustments to the purchase
price allocation, if any, will be recorded at that time.

<TABLE>

                               Video Update, Inc.
                             Condensed Balance Sheet
                             As of December 21, 2001
                                 (in thousands)

   <S>                                                          <C>
   Current assets                                               $    3,017
   Rental inventory, net                                            21,801
   Property, furnishings and equipment, net                         12,596
   Deferred income taxes                                             8,468
                                                                ----------
   Total assets acquired                                            45,882

   Accruals for settlement of liabilities
       subject to compromise                                         6,253
   Current liabilities and accrued expenses                         24,669
   Notes payable to parent                                           8,460
                                                                ----------
   Total liabilities assumed                                        39,382
                                                                ----------
   Net investment in common stock                               $    6,500
                                                                ==========

</TABLE>

The purchase price  allocation  for Video Update  includes  accrued  expenses of
approximately  $1.3  million to  terminate  the  operations  of the Video Update
corporate  office and to transition  those functions to the Company's  corporate
offices.  The accrual  consists  primarily of payroll costs,  rent and utilities
during the transition period. The accrual is subject to change if the transition
period extends beyond that originally  anticipated.  Adjustments to the accrual,
if any, will be reported as an adjustment to the purchase price allocation.

The results of  operations  of Video Update have been  included in the Company's
consolidated  statement  of  income  since  December  21,  2001.  The  following
unaudited pro forma information  presents the consolidated results of operations
of the Company as though the  acquisition of Video Update had occurred as of the
beginning of Fiscal 2000.  The pro forma  information  is not  indicative of the
results of operations  that actually would have been obtained if the transaction
had  occurred  at the  beginning  of Fiscal  2000.  Additionally,  the pro forma
information is not intended to be a projection of future results.

                                      F-10
<PAGE>

                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

<TABLE>
<CAPTION>
                                                       Fiscal Year Ended
                                               --------------------------------
                                               December 31,          January 6,
                                                   2000                 2002
                                               --------------------------------
                                             (in thousands, except per share data)
<S>                                               <C>              <C>
Revenue                                           $   426,426      $  466,557
Income before extraordinary item                       13,844          14,535
Net income                                             13,844          14,358
Income per share before extraordinary item:
   Basic                                                 0.54            0.56
   Diluted                                               0.54            0.53
Net income per share:
   Basic                                                 0.54            0.56
   Diluted                                               0.54            0.53
</TABLE>

In addition to the Video Update acquisition,  the Company purchased 31 stores in
five separate transactions for approximately $6.6 million during Fiscal 2001 and
recorded approximately $3.5 million of goodwill related to these transactions.

3.  Property, Furnishings and Equipment

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

<TABLE>
<CAPTION>
                                        December 31,       January 6,
                                            2000              2002
                                        -----------        ---------

<S>                                     <C>                <C>
Land and buildings                      $     4,006        $   6,735
Furniture and fixtures                       37,291           45,395
Equipment                                    33,616           44,364
Leasehold improvements and signs             36,860           48,342
                                        -----------        ---------
                                            111,773          144,836
Accumulated depreciation                    (58,649)         (73,097)
                                        -----------        ---------
                                        $    53,124        $  71,739
                                        ===========        =========
</TABLE>

4.  Long-Term Debt

On June 27, 2001, the Company  entered into a credit  agreement with a syndicate
of banks,  led by  SouthTrust  Bank,  with  respect  to a new  revolving  credit
facility (the  "Facility").  This Facility  replaces a similar  revolving credit
facility  with First Union  National  Bank of North  Carolina  (the "First Union
Facility")  which was due to expire on  January  7, 2002.  The new  Facility  is
unsecured and provides for borrowings of up to $65 million through July 6, 2002,
$55 million through July 5, 2003 and $45 million until final maturity on July 4,
2004.  The interest  rate on the  Facility is based on LIBOR plus an  applicable
margin  percentage,  which depends on the  Company's  cash flow  generation  and
borrowings  outstanding.  At January  6,  2002,  $26  million  was  outstanding,
approximately  $38.5  million was  available  for  borrowing  and the  effective
interest rate was approximately 4.5%.

The terms of the new Facility  required the Company to enter into a new interest
rate swap agreement. In December 2001, the Company entered into an interest rate
swap  with  SouthTrust  Bank  in  order  to  hedge  exposure  to  interest  rate
fluctuations.  The  Company's  interest  rate  swap  pays a 3.5%  fixed  rate of
interest plus an applicable  margin  percentage  and receives  variable rates of
interest  for two  years  on $10  million  of  debt  outstanding  under  the new
Facility. The swap is considered a cash flow hedge and is accounted for pursuant
to Statement 133.

                                      F-11
<PAGE>

                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

As a result of the new Facility,  the Company incurred an extraordinary  loss on
the early  extinguishment  of debt of  approximately  $177,000  (net of taxes of
$113,000), or less than $0.01 per diluted share. The extraordinary loss consists
primarily of unamortized  debt issue costs  associated  with the previous credit
facility and unamortized amounts associated with the termination of the interest
rate swap agreement.

The First  Union  Facility  provided  for  borrowings  of up to $65  million and
carried an interest  rate based on LIBOR plus an applicable  margin  percentage,
dependant  upon the Company's cash flow  generation and borrowings  outstanding.
Concurrent with the First Union Facility,  the Company amended its then existing
interest  rate swap to coincide  with the maturity of the First Union  Facility.
The amended interest rate swap was structured to fix the Company's interest rate
exposure on $37 million of the outstanding borrowings at 5.8% plus an applicable
margin percentage and was terminated prior to refinancing of the credit facility
in June 2001.  Under the amended  interest  rate swap,  the Company paid a fixed
rate of interest and received payment based on a variable rate of interest.  The
difference  in amounts  paid and  received  under the  contract  was accrued and
recognized  as an  adjustment  to  interest  expense  on the debt,  prior to the
adoption of Statement 133.

As a result of the First  Union  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 $.02 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.

5.  Income Taxes

The following reflects actual income tax expense (in thousands):

<TABLE>
<CAPTION>
                                                     Fiscal Year Ended
                                      -----------------------------------------------
                                        January 2,      December 31,       January 6,
                                           2000             2000              2002
                                      -----------------------------------------------
<S>                                     <C>             <C>                <C>
Current payable:
  Federal                               $   1,673       $    1,439         $   5,548
  State                                       198              315               653
                                        ---------       ----------         ---------
Total current                               1,871            1,754             6,201


Deferred:
  Federal                                   2,454            4,056             3,456
  State                                       290              615               244
                                        ---------       ----------         ---------
Total deferred                              2,744            4,671             3,700
                                        ---------       ----------         ---------
                                        $   4,615       $    6,425         $   9,901
                                        =========       ==========         =========

</TABLE>

                                      F-12

<PAGE>

                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

A  reconciliation  of income tax expense 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,   December 31,    January 6,
                                                2000           2000           2002
                                              ---------------------------------------

<S>                                              <C>            <C>           <C>
Income tax expense  at statutory rate            $3,855         $5,569        $8,552
State income tax expense, net of
   federal income tax benefit                       317            604           583
Other, net (primarily goodwill not
  deductible for tax purposes)                      443            252           766
                                                 ------         ------        ------
                                                 $4,615         $6,425        $9,901
                                                 ======         ======        ======
</TABLE>

Pending  the  completion of  final closing  tax returns  for Video  Update,  the
Company had net operating loss  carryforwards  at January 6, 2002 resulting from
the Video Update acquisition (see Note 2 - Acquisitions) of approximately  $67.0
million for income taxes that expire in years 2007 through 2021. The Company has
recorded a valuation  allowance of $18.4 million related to its net deferred tax
assets as management is uncertain as to whether  sufficient  taxable income will
be generated to allow the net deferred tax assets to be realized.

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>

                                                   December 31,      January 6,
                                                       2000             2002
                                                   ---------------------------
<S>                                                <C>               <C>
Deferred tax assets:
  Non-compete agreements                           $     4,979       $   4,573
  Alternative minimum tax credit carryforward            4,163           4,169
  Net operating loss carryforwards                           -          25,490
  Accrued liabilities                                      502             770
  Other                                                    731           1,357
                                                   -----------       ---------
Total deferred tax assets                               10,375          36,359
Valuation allowance                                          -         (18,412)
                                                   -----------       ---------
Net deferred tax assets                                 10,375          17,947
Deferred tax liabilities:
  Furnishings and equipment                             (6,003)         (6,494)
  Rental inventory                                      (6,351)         (6,473)
  Goodwill                                              (2,251)         (1,986)
  Other                                                      -          (2,459)
                                                   -----------       ---------
Total deferred tax liabilities                         (14,605)        (17,412)
                                                   -----------       ---------
Net deferred tax assets (liabilities)              $    (4,230)      $     535
                                                   ===========       =========

</TABLE>

                                      F-13
<PAGE>

                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

6.  Stockholders' Equity

Common Stock

The Company's Board of Directors approved two three-for-two stock splits,  which
were  effected  on  August  31,  2001 and  January  3, 2002 in the form of stock
dividends.  The stock  splits  increased  the  number of shares of common  stock
outstanding  by a total of  14,894,399  shares.  All  prior  periods  have  been
restated to reflect the stock splits.

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 6, 2002,  common  stock of  approximately
$83,000,000 was available to be issued from this registration.

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  (574,000,  67,000  and  1,383,000  for  Fiscal  1999,  2000  and  2001,
respectively).  No  adjustments  were made to net income in the  computation  of
basic or diluted earnings per share.

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  6,750,000  shares are reserved  for issuance  under the
Plan,  2,553,458  of which have been  exercised  as of January 6, 2002.  Options
granted  under the Plan have a ten-year  term and  generally  vest over three to
five years.

In accordance  with the  provisions of FASB Statement No. 123,  "Accounting  for
Stock-Based  Compensation,"  the Company  applies  Accounting  Principles  Board
Opinion  No. 25 and  related  interpretations  in  accounting  for the 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.

                                      F-14

<PAGE>

                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

<TABLE>
<CAPTION>
                                                   Fiscal Year Ended
                                       -----------------------------------------
                                       January 2,     December 31,    January 6,
                                          2000            2000            2002
                                       -----------------------------------------
                                         (in thousands, except per share data)

<S>                                    <C>            <C>              <C>
Pro forma net income                   $   3,801      $     8,496      $ 18,376
Pro forma earnings per share:
   Basic                                    0.13             0.33          0.71
   Diluted                                  0.13             0.33          0.68
</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,     December 31,    January 6,
                                          2000            2000           2002
                                       -----------------------------------------
<S>                                      <C>             <C>            <C>
Expected volatility                      0.720           0.703          0.706
Risk-free interest rate                  6.39%           5.15%          5.41%
Expected life of option in years         6.0             5.7            5.5
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.

In March 2000, the FASB issued  Interpretation  No. 44,  "Accounting for Certain
Transactions involving Stock Compensation,  an interpretation of APB Opinion No.
25." The  Interpretation  requires that stock options that have been modified to
reduce the exercise  price be accounted  for as variable.  The Company  repriced
864,000 stock options in March 2001, and reduced the exercise price to $1.78 per
share.  Assuming  all repriced  stock  options are  exercised,  the Company will
receive $.6 million less than if no repricing had occurred. Under Interpretation
44, the repriced  stock options are  accounted  for as variable  until the stock
options are exercised, forfeited or expire unexercised.

                                      F-15
<PAGE>


                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

A summary of the Company's stock option  activity and related  information is as
follows:

<TABLE>
<CAPTION>
                                                             Weighted
                                        Outstanding       Average Exercise
                                          Options          Price Per Share
                                        -----------       ----------------
<S>                                       <C>                    <C>
Outstanding at January 4, 1999            4,925,023              $4.32
     Granted                                999,000               1.94
     Exercised                              (27,788)              1.72
     Cancelled                             (773,014)              1.85
                                          ---------

Outstanding at January 2, 2000            5,123,221               4.25
    Granted                                 911,250               1.42
    Exercised                                     -                  -
    Cancelled                              (313,830)              2.28
                                          ---------
Outstanding at December 31, 2000          5,720,641               3.91
    Granted                                       -                  -
    Exercised                            (2,128,927)              2.26
    Cancelled                              (146,205)              4.99
                                          ---------
Outstanding at January 6, 2002            3,445,509               4.71
                                          =========

Exercisable at  January 2, 2000           3,241,960               5.35
                                          =========
Exercisable at December 31, 2000          3,755,941               5.02
                                          =========
Exercisable at January 6, 2002            2,236,021               6.39
                                          =========
</TABLE>

Options  outstanding  as of  January  6, 2002 had a  weighted-average  remaining
contractual  life of 6.3 years and exercise  prices ranging from $1.00 to $18.00
as follows:
<TABLE>
<CAPTION>
                                                                           Exercise price of
                                                      ------------------------------------------------------------
                                                      $1.00 to $2.00        $6.00 to $11.00       $13.00 to $18.00
                                                      ------------------------------------------------------------

<S>                                                     <C>                    <C>                   <C>
Options outstanding                                     2,319,609               619,650               506,250
Weighted-average exercise price                           $1.64                  $7.40                 $15.50
Weighted-average remaining contractual life             7.6 years              3.5 years             3.5 years
Options exercisable                                     1,110,121               619,650               506,250
Weighted-average exercise price of
  exercisable options                                     $1.67                  $7.40                 $15.50
</TABLE>

                                      F-16
<PAGE>
                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

7.  Commitments and Contingencies

Rent expense for Fiscal 1999, 2000 and 2001 totaled $41,683,000, $45,132,000 and
$50,985,000,   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 6,
2002 (in thousands):

          2002                          $  48,584
          2003                             42,587
          2004                             31,454
          2005                             20,189
          2006                             10,051
          Thereafter                       17,439
                                        ---------
                                        $ 170,304
                                        =========

The Company has a supply  contract with Rentrak  Corporation  ("Rentrak")  which
requires the Company to order VHS rental  inventory  under lease  sufficient  to
require an aggregate  minimum payment of $4 million per year in revenue sharing,
handling  fees,  sell through fees and  end-of-term  buyout fees.  The agreement
expires in 2006. In March 2001, the Company and Rentrak amended the terms of the
Company's  existing supply contract with Rentrak.  The Company paid Rentrak $1.6
million in  connection  with the amendment to the  contract.  Additionally,  the
Company prepaid approximately $.9 million to be applied over a three-year period
against future amounts due under the contract.

The Company is a defendant in certain  putative class action  lawsuits  alleging
that the extended  viewing fees charged for keeping rental  products  beyond the
initial  rental  period are  penalties in  violation  of certain  common law and
equitable  principles.  The dollar amounts that the  plaintiffs  seek is not set
forth in the complaints.  The Company believes that the extended viewing fees do
not violate any laws and intends to vigorously defend these lawsuits.

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-17

<PAGE>
                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)


8.   Foreign Operations

Beginning in Fiscal  2001,  the Company  operated in both the United  States and
Canada.  The following  table sets forth the  consolidated  revenues,  operating
income and assets of the Company by geographic area. All  intercompany  balances
and transactions have been eliminated.
<TABLE>
<CAPTION>
                                                         Fiscal Year Ended
                                                         -----------------
                                                             January 6,
                                                               2002
                                                         -----------------
                                                           (in thousands)
<S>                                                          <C>
        Revenues:
          United States                                      $    367,637
          Canada                                                    1,494
                                                             ------------
        Total revenues                                       $    369,131
                                                             ============
        Operating income:
        United States                                        $     26,696
        Canada                                                        474
                                                             ------------
        Total operating income                               $     27,170
                                                             ============
        Assets (at end of fiscal year):
          United States                                      $    258,691
          Canada                                                   11,441
                                                             ------------
        Total assets                                         $    270,132
                                                             ============
</TABLE>

                                      F-18

<PAGE>
                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

9.  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 2,          July 2,         October 1,      December 31,
                                                2000              2000              2000             2000
                                              ---------------------------------------------------------------
<S>                                           <C>               <C>              <C>             <C>
Revenues                                      $ 81,493          $ 77,345         $  75,350       $  84,748
Operating income                              $  7,478          $  4,237         $   1,893       $   6,082
Net income                                    $  3,900          $  1,935         $     561       $   3,090
Basic and diluted earnings per share          $   0.14          $   0.08         $    0.02       $    0.12

                                                                                                    Fourteen
                                                             Thirteen Weeks Ended                 Weeks Ended
                                              -------------------------------------------------  ------------
                                               April 1,          July 1,        September 30,     January 6,
                                                2001              2001              2001             2002
                                              -------------------------------------------------  ------------
Revenue                                       $ 91,571          $ 82,987         $ 86,467        $  108,106
Operating income                              $  7,413          $  2,600         $  2,750        $   14,407
Income before extraordinary item              $  4,019          $  1,104         $  1,271        $    8,139
Extraordinary loss on early
   extinguishment of debt                            -              (177)              -                 -
                                              --------          --------         --------        ----------
Net income                                    $  4,019          $    927         $  1,271        $    8,139
                                              ========          ========         ========        ==========

Basic earnings per share:
Income before extraordinary item              $   0.16          $   0.04         $   0.05        $     0.30
Extraordinary loss on early
   extinguishment of debt                            -                 -                -                 -
                                              --------          --------         --------        ----------
Net income                                    $   0.16          $   0.04         $   0.05        $     0.30
                                              ========          ========         ========        ==========

Diluted earnings per share:
Income before extraordinary item              $   0.16          $   0.04         $   0.05        $     0.28
Extraordinary loss on early
   extinguishment of debt                            -                 -                -                 -
                                              --------          --------         ---------       ----------
Net income                                    $   0.16          $   0.04         $    0.05       $     0.28
                                              ========          ========         =========       ==========

</TABLE>


                                      F-19

<PAGE>

<TABLE>
                               Movie Gallery, Inc.

                 Schedule II -Valuation and Qualifying Accounts
                                 (in thousands)

<CAPTION>
                                         Balance at           Additions Charged                         Balance at
                                        December 31,            to Costs and                            January 6,
Description                                2000                    Expenses            Deductions(3)       2002
-----------                             -----------           -----------------        -------------    ----------

<S>                                      <C>                      <C>                  <C>               <C>
Rental inventory reserve (1)             $      -                 $  2,100             $   -             $  2,100
Exit cost reserve (2)                    $      -                 $  1,257             $ (23)            $  1,234

------------------------------
<FN>
(1) Reserve is deducted  from net book value of rental  inventory in the balance
    sheet.
(2) Reserve established in conjunction with Video Update  acquisition.  Includes
    employee termination costs, rent and utilities.
(3) Actual payments made against exit cost reserve.
</FN>
</TABLE>


                                      F-20


<PAGE>

                                Index to Exhibits


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

            21               List of Subsidiaries

            23               Consent of  Ernst & Young LLP, Independent Auditors