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 December 31, 2000

                                       OR

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

       For the transition period from _______________ to _______________.

                         Commission file number: 0-24548

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

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

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 X NO

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

     The aggregate  market value of the voting stock held by  non-affiliates  of
the registrant as of March 12, 2001, was approximately  $34,692,272.  The number
of shares of Common Stock outstanding on March 12, 2001, was 11,176,167 shares.

     Documents incorporated by reference:

     1.  Notice  of  2001  Annual  Meeting  and  Proxy  Statement  (Part  III of
         Form 10-K).

              The exhibit index to this report appears at page 27.




<PAGE>




ITEM 1.  BUSINESS

General

     As of March  12,  2001,  Movie  Gallery,  Inc.  (the  "Company")  owned and
operated  1,035 video  specialty  stores located in 30 states that rent and sell
videocassettes,  digital  video  discs  ("DVDs"),  and  video  games.  Since the
Company's  initial public offering in August 1994, the Company has grown from 97
stores to its present  size  through  acquisitions  and the  development  of new
stores.  The  Company  is the  leading  video  specialty  retailer  in rural and
secondary  markets and is among the three largest video  specialty  retailers in
the United States.

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

Video Industry Overview

     Video Retail  Industry.  According to Paul Kagan  Associates,  Inc.  ("Paul
Kagan"),  the home video rental and sales  industry has grown from $10.9 billion
in  revenue  in  1991  to  $19.9  billion  in 2000  with  87% of all  television
households owning a videocassette  recorder ("VCR") or DVD player.  The industry
is  projected  to reach  $27.4  billion  in revenue by 2010 with 92% VCR and DVD
penetration in television households, according to Paul Kagan.

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

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

     The concept of revenue sharing and risk sharing between major retailers and
the movie  studios was  embraced by the  industry in 1998 and  continued to grow
during 1999 and 2000.  Revenue sharing is a concept whereby  retailers and movie
studios share the risks  associated  with the rental  performance  of individual
titles. Generally,  retailers pay a small upfront fee for each copy leased under
revenue sharing,  typically $0 to $8. As the movies are rented by consumers, the


                                       2
<PAGE>

movie  studio  receives  a  percentage  of  the  revenue  generated  based  on a
predetermined  formula,  which is  generally  less than fifty  percent.  After a
period of time,  generally  six  months to a year,  these  movies  are no longer
subject to  revenue  sharing  and are either  owned  outright  by the  retailer,
purchased  from the movie studio for a nominal amount or returned to the studio.
Revenue  sharing has allowed  retailers to vastly  increase  both copy depth and
breadth for the consumers.

     Movie Studio  Dependence on Video Rental Industry.  The home video industry
is  the  largest  single  source  of  domestic  revenue  to  movie  studios  and
independent suppliers of theatrical and direct-to-video movies and, according to
Paul Kagan, represented approximately $8.0 billion (an 8.5% increase from 1999),
or 49%, of the estimated $16.4 billion of revenue generated in 2000. The Company
believes  that of the many movies  produced by major studios and released in the
United States each year,  relatively few are profitable for the studios based on
box office  revenue  alone.  In addition to  purchasing  box office hits,  video
specialty stores provide the movie studios with a reliable source of revenue for
a large number of their movies by purchasing  movies that were not successful at
the box office.  The Company believes the consumer is more likely to view movies
which were not box office hits via rental than any other  medium  because  video
specialty  stores  provide an inviting  opportunity  to browse and make  impulse
choices among a very broad selection of movie titles.  In addition,  the Company
believes the relatively low cost of video rentals  encourages  consumers to rent
films they might not pay to view at a theater.

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

Operating Strategy

     Movie  Gallery  Stores.  The  Company  maintains a flexible  store  format,
tailoring the size, inventory and look of each store to local demographics.  The
Company's stores generally 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  rental  movies and 200 to 1,000  video games for
rental. The Company builds both freestanding  stores and stores located in strip
centers  anchored by major grocery or discount  drug store  chains,  focusing on
easy access, good visibility and high traffic. The store fixtures, equipment and
layout  are  designed  by the  Company 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 (Movie Gallery Television),  which shows movie previews
and  promotions  of coming  attractions,  and by posters and  stand-up  displays
promoting specific movie titles. Movies are arranged in attractive display boxes
organized into categories by topic, except for new releases, which are assembled
alphabetically  in their own section for ease of  selection  by  customers.  The
Company's  stores are generally open seven days a week, from 10:00 a.m. to 11:00
p.m. on weekends and from 10:00 a.m. to 10:00 p.m. on weekdays.

     The Company's  policy is to constantly  evaluate its existing store base to
determine where improvements may benefit the Company's  competitive position. In
negotiating its leases and renewals,  the Company attempts to obtain short lease
terms and  favorable  options to extend  allowing for the mobility  necessary to


                                       3
<PAGE>

react to changing demographics and other market conditions.  The current average
remaining  life  of  the  Company's  leases  is  approximately  two  years  with
approximately  300 leases considered for renewal each year. The Company actively
pursues  relocation  opportunities  to adapt to  changes  in  customer  shopping
patterns and retail market shifts.  To date, we have not experienced  difficulty
in obtaining  favorable  leases or renewals at or below market rates in suitable
locations.  Similarly, the Company may elect to expand and/or remodel certain of
its stores in order to improve facilities, meet customer demand and maintain the
visual appeal of each store.

     Employees.  As of March 12, 2001, the Company employed  approximately 8,000
persons,  referred to by the Company as  "associates,"  including  approximately
7,700 in retail  stores and the remainder in the  Company's  corporate  offices,
field staff and distribution  facility  ("Support Center Staff").  Of the retail
associates, approximately 1,500 were full-time and 6,200 were part-time. None of
the  Company's  associates  are  represented  by a labor  union and the  Company
believes that its relations with its associates are good.

     Each of the Company's  stores typically  employs five to fourteen  persons,
including one Store Manager and, in larger stores, one Assistant Manager.  Store
Managers  report to District  Managers who supervise the  operations of 10 to 15
stores. The District Managers report to one of ten Regional Managers, who report
directly to the  Company's  Senior Vice  President  - Store  Operations.  As the
Company has grown, it has increased the number of District Managers and Regional
Managers.  The Support  Center Staff has regular and periodic  meetings with the
Regional  Managers and District Managers to review  operations.  Compliance with
the  Company's   policies,   procedures  and   regulations  is  monitored  on  a
store-by-store  basis through  quarterly  quality  assurance audits performed by
District  Managers.  The  performance  and  accuracy of the  quarterly  District
Manager  audits  is  monitored  by the  Company's  quality  assurance  function.
Throughout the last year, the Company has developed  internal  hiring,  training
and retention programs designed to enhance consistent and thorough communication
of Company  operating  policies and  procedures  as well as increase the rate of
internal promotions.

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

     New  Release  Purchases.  The  Company  actively  manages  its new  release
purchases  in  order  to  balance  customer  demand  with  the  maximization  of
profitability.  Buying  decisions are made centrally which allows the Company to
obtain volume discounts,  market  development funds and cooperative  advertising
credits  that are  generally  not  available  to  single  store  or small  chain
operators.  In order to maximize profits, the Company varies the quantity of its
new release inventory, the rental and sales prices for videocassettes,  DVDs and
video games, and the rental period from location to location to meet competition
and demographic  demand in the area. The Company  generally has a one-day rental
term for new release  movies  (increasing  to five days once  rental  demand has
fallen  below  predetermined  levels),  which  tends to keep new  releases  more
readily available and requires the purchase of fewer copies of new releases than
a longer rental policy.  Video games  generally have a five-day  rental term for
both the most recent releases and older titles.

     Marketing  and  Advertising.  The Company  uses market  development  funds,
cooperative  allowances from its suppliers and movie studios, and internal funds
to purchase radio  advertising,  direct mail,  newspaper  advertising,  in-store
visual  merchandising  and  in-store  media to promote new  releases.  The video
specialty  stores  and the  Company's  trade  name are  promoted  along with the
appropriate suppliers' product. Creative copy is prepared by the Company and the
studios,  with  advertising  being placed by in-house media buyers.  The Company
also  prepares a monthly  consumer  magazine  called Video Buzz and a customized
video program (MGTV), both of which feature Company programs, promotions and new
releases.  The Company  also  benefits  from the  advertising  and  marketing by
studios  and  theaters in  connection  with their  efforts to promote  films and


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<PAGE>

increase  box  office  revenue.  In  addition  to  these  traditional  forms  of
advertising,  the Company  has  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. The Company
has also executed  strategically timed trivia games to drive customer visits and
to   increase    awareness   of   the    Company's    internet    offerings   at
www.moviegallery.com.  Expenditures  for  marketing  and  advertising  above the
amount of the  Company's  advertising  allowances  from its  suppliers and movie
studios have been minimal.

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

Products

     For the fiscal year ended  December  31,  2000,  over 87% of the  Company's
rental revenue was derived from the rental of movies on videocassettes  and DVD,
with the  remainder  being  derived  primarily  from the rental of video  games.
Substantially all of the Company's revenue from product sales during this period
was derived from the sale of new and  previously  viewed  movies,  confectionery
items and video  accessories,  such as blank cassettes,  cleaning  equipment and
movie memorabilia.

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

     During 1999 and early 2000,  the Company  rolled out DVD product for rental
and sale to all Company stores. During December 1999, DVD revenues accounted for
approximately 1% of rental revenues for the Company compared to approximately 4%
for the 2000 fiscal year and over 6% for December 2000.  Paul Kagan reports that
DVD sales exceeded  expectations  for 2000 and predicts that DVD technology will
penetrate  approximately 78% of television households by 2010. This product area
is  growing  rapidly  and the  Company  intends  to follow  the  desires  of its
consumers for DVD by expanding its product  offerings of DVD over time.  Because
of the ease of use and durability of DVD, it is anticipated  that eventually DVD
may replace  videocassettes.  The acquisition costs of DVD hardware have reached
levels competitive with the VCR and the Company anticipates that when recordable
DVD hardware is available to the public at a reasonable price, this product area
could grow at an accelerated  pace. In the near term,  video  retailers have the
opportunity to expand DVD offerings at attractive  pricing comparable to that of
sell-through  movies.  However,  industry  sources  indicate  that  studios  may
eventually  begin to shift the pricing model for DVD toward a structure  similar
to the current rental videocassette pricing, including revenue share programs.

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

     Management  believes  that  internal  factors  which most  affect a typical
store's revenues are its new release title selection and the number of copies of
each new  release  available  for rental as  compared  to the  competition.  The


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<PAGE>

Company is  committed  to offering as many copies and the widest  variety of new
releases as necessary to be competitive within a market,  while at the same time
keeping its costs as low as possible.  New  videocassettes  and DVDs 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.

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

     The Company  rents and sells video games,  which are licensed  primarily by
"Nintendo,"  "Sony" and "Sega." Game rentals as a  percentage  of the  Company's
total  revenues  have  increased  since  early 1997 due to the  increase  in the
installed  base of 32-bit and 64-bit game  platforms.  Sega launched the 128-bit
Dreamcast  system in  September  1999 and Sony  released a  backward  compatible
128-bit  PlayStation 2 ("PS2")  system in November  2000. The release of the PS2
did not meet  expectations  in that hardware  shipments  were less than half the
amount  promised by Sony.  2001 will be a  transitional  year for the video game
industry  as PS2 will  continue to slowly  gain  market  share as  hardware  and
software  becomes  available;  Sega  has  decided  to  cease  production  of the
Dreamcast console  mid-year;  and the market will be anticipating the release of
both the Nintendo  Gamecube and the Microsoft  X-box,  slated for the fall.  The
Company expects video game rentals and sales to be flat during the transition to
the new game  platforms,  with the next  upswing  dependent  upon the timing and
acceptance of the release of the new platforms.

Movie and Video Game Suppliers

     The Company obtains its videocassettes, DVDs and video games for rental and
its movies held for sale through  relationships  with various  distributors  and
through  direct  agreements  with  studios.  Because of revenue  sharing and the
impact  it has had on  distributors,  the  Company  believes  that if one of its
suppliers were unable or unwilling to continue the contractual relationship with
the Company, a viable  replacement could be found without  materially  adversely
impacting the Company's business.

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

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

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<PAGE>

     Several  companies  acquired  by the  Company  had  pre-existing  long-term
contracts with Rentrak Corporation ("Rentrak") whereby product would be provided
under  pay-per-transaction  revenue sharing arrangements.  During late 1996, the
Company   consolidated   existing  contracts  with  Rentrak  into  one  national
agreement. Under this agreement which expires in September 2006, the Company has
a minimum gross annual purchase  commitment in revenue  sharing,  handling fees,
sell-through  fees and end-of-term  buyouts.  The Company  utilizes Rentrak on a
selective  title by title basis.  The Company has exceeded the minimum  purchase
requirements in each year since 1996.

Growth Strategy

     The Company opened a record 110 new stores during 2000,  acquired 16 stores
and reached a milestone  level of 1,020  stores in  operation  at the end of the
year.  This  follows  growth of 53 new stores and 131  acquired  stores in 1999,
including  the  acquisition  of  88  stores   previously   operated  by  Blowout
Entertainment,  Inc.  The  Company  spent  1997 and most of 1998  absorbing  the
significant   growth   experienced   in  1994  through  1996,   primarily   from
acquisitions.  The  following  table  is  a  historical  summary  showing  store
openings, acquisitions and store closings by the Company since January 1, 1996.

<TABLE>
<CAPTION>
                                                           Fiscal Year Ended
                              ----------------------------------------------------------------------
                                                                                                        January 1
                              January 5,    January 4,     January 3,    January 2,     December 31,   to March 12,
                                 1997          1998           1999          2000           2000           2001
                              -----------   -----------    -----------   -----------   -------------   -----------

<S>                               <C>           <C>            <C>           <C>          <C>            <C>
New store openings                 75            50             18            53            110             23
Stores Acquired                   174(1)          2              4           131             16             --
Stores Closed                      48            59             41            58             69              8
Total Stores at End
  of Period                       863           856            837           963          1,020          1,035
<FN>
-----
(1) Includes  98  stores   acquired  on  July  1,  1996  and  accounted  for  as
    poolings-of-interests.
</FN>
</TABLE>

     For 2001, the Company intends to open  approximately 75 new stores and will
evaluate  acquisition   opportunities  as  they  arise.   However,  the  Company
anticipates  that  most of its  store  growth  in 2001  will come in the form of
internally-developed  stores. The Company's ability to execute its stated growth
strategy  will be  dependent  upon  its  ability  to  generate  cash  flow  from
operations.  The key  elements  of the  Company's  development  and  acquisition
strategy include the following:

     Development.  From January 1, 1994 through March 12, 2001,  the Company has
developed 420 stores.  The Company utilizes store  development to complement its
existing base of stores in rural and secondary markets where it finds attractive
locations and a sufficient  population  to support  additional  video  specialty
stores.  Generally,  the Company's stores are located in small towns or suburban
areas  surrounding  mid-sized  cities.  In these areas, the Company's  principal
competition  usually  consists of single store or small chain operators who have
less buying power,  smaller advertising budgets and generally offer fewer copies
of new release movies. The Company attempts to become the leading video retailer
in its markets  and  believes  that it can  achieve a higher  return on invested
capital in these smaller markets than it could in the larger urban areas because
of the reduced level of  competition,  lower  operating  costs and the Company's
expertise in operating in smaller markets.  The Company attempts to develop real
estate  in  3,000  to 4,500  square  foot  locations  primarily  in  towns  with
populations from 3,000 to 15,000.  Although  developed stores generally  require
approximately  one year for revenue to reach the level of a mature  store,  they
typically  become  profitable  within  the first six  months of  operations  and
produce greater returns on investment than acquired stores.  Future sales growth
depends on the  Company's  ability  to  aggressively,  steadily  add stores in a
profitable  manner.

     The Company's real estate and construction  departments are responsible for
new store  development,  including  site  selection,  market  evaluation,  lease
negotiation  and  construction.  The Company  maintains  a flexible  real estate
strategy with  short-term  leases.  Thus, the Company  evaluates over 300 leases
each  year and  does not  hesitate  to close a unit if it is not  profitable  or
on-strategy.  The  cost of  closing  a unit is  minimal  and  usable  inventory,
signage, fixtures and equipment is transferred to existing or new locations. The
Company  usually leases  existing or  build-to-suit  locations from  development
companies which construct  properties to negotiated  specifications.  Full-time,
professional  construction  managers  with  significant  video  specialty  store
construction  experience  are  employed  to manage  the  process  and ensure the
Company's  standards  and  design  elements  are  achieved.  The  balance of the
construction  necessary  to  build-out  the  interior of a new  location is also
contracted and supervised by the construction department.

                                       7
<PAGE>

     The Company  continues  to target new  markets in which to develop  stores.
Most of the new markets are located within states that are either  contiguous to
states in which the  Company  has stores or states  that have not  reached  full
market  penetration.  By concentrating  its new store  development in and around
existing  markets,  the  Company  is able  to  achieve  operating  efficiencies,
primarily consisting of cost savings relating to advertising, training and store
supervision.  The Company also believes that its geographic  dispersion tends to
offset the impact of weather fluctuations and temporary economic and competitive
conditions within individual markets.  The following table provides  information
at March 12, 2001 and March 10,  2000,  regarding  the number of Company  stores
located in each state.

                                                      Number of Stores
                                                      ----------------
                                                  March 12,       March 10,
                                                    2001            2000
                                                 ------------    ------------
 Alabama.....................................          150            144
 Florida.....................................          122            119
 Texas ......................................           92             95
 Georgia.....................................           91             82
 Virginia....................................           60             59
 Tennessee...................................           57             49
 Maine.......................................           48             44
 Ohio........................................           43             46
 Mississippi ................................           42             37
 Missouri....................................           38             32
 Indiana.....................................           35             37
 South Carolina .............................           33             31
 Wisconsin...................................           30             31
 North Carolina..............................           24             18
 Kentucky....................................           23             23
 Illinois....................................           21             11
 Oklahoma....................................           20             10
 Kansas......................................           16             18
 Louisiana...................................           16             17
 Massachusetts...............................           15             14
 New Hampshire...............................           15             14
 Connecticut.................................           11              3
 Arkansas....................................           10              3
 Pennsylvania................................            8              5
 Iowa........................................            6              4
 California..................................            -              2
 Michigan....................................            3              2
 West Virginia...............................            3              1
 Colorado....................................            1              1
 New York....................................            1              1
 Vermont.....................................            1              1
                                                     -----          -----
          TOTAL..............................        1,035            954
                                                     =====          =====

                                       8
<PAGE>


     Acquisitions.  The Company's real estate and  construction  departments are
responsible for  identifying,  selecting,  and implementing  acquisitions.  From
January 1, 1994  through  March 12,  2001,  the  Company  acquired  850  stores.
Acquisitions  permitted the Company to quickly gain market share and experienced
management  in markets  that the  Company  believed  had  potential  for growth.
Through a combination of volume purchase discounts,  larger advertising credits,
more efficient  inventory  management and lower average labor costs, the Company
believes it is generally able to operate these acquired  stores more  profitably
than their prior owners, typically single store or small chain operators. During
2001, the Company intends to evaluate acquisition  opportunities that may arise,
but   anticipates   that   most  of  its   store   growth   will   result   from
internally-developed locations.

E-Commerce Initiative

     During 1999,  the Company  developed and released to the general public its
e-commerce business, located at www.moviegallery.com.  The Company has developed
a  consumer-oriented,  on-line business that sells new and used movies and games
to consumers. The Company's main goal with MovieGallery.com is to strengthen its
existing relationship with its millions of customers that frequent the Company's
brick and mortar  stores.  The Company has gathered in excess of 250,000  e-mail
addresses from Movie Gallery  customers and through third party  advertising and
partnerships,  and is actively marketing its immense product library,  in excess
of 75,000 titles,  to these customers.  Due to physical  constraints  within the
stores,  the Company can offer,  at most, a few hundred movie titles for sale to
its customers.  However,  MovieGallery.com  enables  consumers to find the exact
movie of their  choice by simply  logging on to  www.moviegallery.com.  Customer
traffic and sales have grown consistently since the inception of the business in
September 1999.

     The Company does not intend to spend a  disproportionate  amount of capital
on its e-commerce  business.  The Company lost approximately $1.1 million to run
this  business in 2000 and has  budgeted a loss of  approximately  $400,000  for
2001. The Company believes that this approach to developing its on-line business
will  build  strong  customer  loyalty  for the Movie  Gallery  concept  without
materially  diminishing  the Company's  future  earnings.  The major  e-commerce
initiatives for 2001 include reaching  customers  outside the established  Movie
Gallery store base to increase volume,  minimizing  expenses,  and continuing to
adjust the pricing  structure to find the right  balance  between  investment of
resources and operating results.

Information Systems

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

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

     The Company also maintains a financial  reporting  system,  relating to the
general ledger, human resources/payroll, revenue and accounts payable functions,
capable of handling the Company's current needs and anticipated  growth, as well
as additional  systems which have been developed and  implemented by the Company
including a  Collections  system,  a  Processing/Distribution  Center system and
various other database systems and auditing systems.

                                       9
<PAGE>

Competition and Technological Obsolescence

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

     The Company believes the principal  competitive factors in the video retail
industry  are store  location and  visibility,  title  selection,  the number of
copies of each new release available,  customer service and, to a lesser extent,
pricing.  With 30% of stores  having been newly  built,  relocated  or remodeled
within the last three years,  the Company has a relatively young store base. The
Company  believes it generally  offers  superior  service,  more titles and more
copies of new releases than most of its competitors.

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

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

                                       10
<PAGE>

Cautionary Statements

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

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

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

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

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


                                       11
<PAGE>

(viii) a reduction in, or elimination of, the period of time between the release
of hit movie titles to the home video market and the release of these hit movies
to the Pay-Per-View markets (the "release window"), currently 30 to 80 days.

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

Directors and Executive Officers of the Company
<TABLE>
<CAPTION>

Name                                 Age    Position(s) Held
----                                 ---    ----------------
<S>                                  <C>    <C>
Joe Thomas Malugen(1)                 49    Chairman of the Board and Chief Executive Officer
H. Harrison Parrish(1)                53    President and Director
William B. Snow(1)(2)(3)              69    Vice Chairman of the Board
J. Steven Roy                         40    Executive Vice President and Chief Financial Officer
Jeffrey S. Stubbs                     38    Senior Vice President - Store Operations
S. Page Todd                          39    Senior Vice President, Secretary and General Counsel
Keith A. Cousins                      32    Senior Vice President - Real Estate/Development
Theodore L. Innes                     51    Senior Vice President - Sales and Marketing
Richard R. Langford                   44    Senior Vice President - Management Information Systems
Mark S. Loyd                          45    Senior Vice President - Purchasing and Product Management
Sanford C. Sigoloff(2)(3)             70    Director
Philip B. Smith(2)(3)                 65    Director
Joseph F. Troy (1)                    62    Director
<FN>
-------------------
(1)  Member of Executive Committee.
(2)  Member of Compensation Committee.
(3)  Member of Audit Committee.
</FN>
</TABLE>

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

                                       12
<PAGE>

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

     Mr. Snow was elected Vice Chairman of the Board in July 1994, and he served
as Chief  Financial  Officer from July 1994 until May 1996.  Since May 1996, Mr.
Snow has  continued  to serve as Vice  Chairman of the Board and has served as a
consultant to the Company.  Mr. Snow was the Executive  Vice President and Chief
Financial Officer and a Director of Consolidated Stores Corporation,  a publicly
held specialty retailer,  from 1985 until he retired in June 1994. Mr. Snow is a
director  of Homeland  Stores,  Inc.,  a publicly  held  company.  Mr. Snow is a
Certified   Public   Accountant,   and  he  received  his  Masters  in  Business
Administration  from the Kellogg  Graduate  School of Management at Northwestern
University and his Masters in Taxation from DePaul University.

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

     Mr. Stubbs was elected to his current  position as Senior Vice  President -
Store  Operations  in November  1997. He joined the Company in November 1995 and
served as Regional  Manager over Texas,  Louisiana,  and  Mississippi.  Prior to
joining the Company,  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.

     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 to his current  position as Senior Vice President -
Real  Estate/Development  in March 1999. He joined the Company in August 1998 as
Senior  Director of  Development,  Planning and  Analysis.  Prior to joining the
Company,  Mr. Cousins  acquired four years of management  consulting  experience
with  Computer  Sciences  Corporation  as Program  Control  Manager;  Management
Consulting and Research,  Inc. as Cost Analyst;  and Tecolote Research,  Inc. as
Advanced Cost  Estimator.  He has 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 the  Company  in May 1999 and was  elected  Senior  Vice
President - Sales and Marketing in June 1999.  From October 1997 until he joined
the Company,  Mr. Innes was a marketing  consultant with Neighborhood  Marketing
Institute,   a  neighborhood  marketing  and  consulting  firm  specializing  in
multi-unit  restaurants and retailers,  most recently  serving as Executive Vice
President and Chief Operating Officer. From November 1989 to September 1997, Mr.
Innes was employed with Blockbuster Entertainment, most recently serving as Vice
President  -  Marketing.  Prior to  joining  Blockbuster  Entertainment,  he was
employed with Long John Silver's Seafood Shoppe for fifteen years, most recently
serving  as  Controller  of Retail  Operations  and  Marketing.  Mr.  Innes is a
Certified Public Accountant and a Certified Management Accountant and received a
B.S. degree in Business Administration from the University of Kentucky.

                                       13
<PAGE>

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

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

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

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

     Mr. Troy became a director of the Company in  September  1994.  Mr. Troy is
the founder  and has been a member of the law firm of Troy & Gould  Professional
Corporation since May 1970.

     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  115,000 shares of Common Stock to each of Messrs.  Sigoloff and Smith,
vested  options to purchase  140,000  shares to Mr.  Troy and vested  options to
purchase  150,000  shares to Mr. Snow,  in each case at or above the fair market
value of the Common Stock on the date of grant.

ITEM 2. PROPERTIES

     At March 12, 2001,  all but one of the Company's  1,035 stores were located
on premises leased from  unaffiliated  persons pursuant to leases with remaining
terms which generally vary from one month to six years. The Company is generally
responsible for taxes,  insurance and utilities  under its leases.  Rental rates
often  increase  upon  exercise  of any  renewal  option,  and some  leases have
percentage rental arrangements pursuant to which the Company is obligated to pay
a base rent plus a  percentage  of the  store's  revenues  in excess of a stated


                                       14
<PAGE>

minimum.  In  general,  the  stated  minimums  are set at such a high  level  of
revenues  that the Company does not pay  additional  rents based on reaching the
required revenue levels and does not anticipate  paying such additional rents in
the future.  The Company  anticipates that future stores will also be located in
leased premises.  The Company owns a family  entertainment  center,  including a
video specialty store, in Meridian, Mississippi.

     During 2000, the Company's Support Center offices and distribution facility
were  consolidated  from six  different  locations  into one 90,000  square foot
location purchased by the Company at 900 West Main Street, Dothan, Alabama.

ITEM 3.  LEGAL PROCEEDINGS

     The  Company  is  subject to  various  legal  proceedings  in the course of
conducting its business.  However,  the Company believes that these  proceedings
are not likely to result in judgments  that will have a material  adverse effect
on its business.

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

     None.



                                       15
<PAGE>





                                     PART II

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


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

<TABLE>
<CAPTION>
                                                           High       Low
<S>                                                       <C>        <C>
2001
First Quarter (through March 12, 2001)................... $ 6.03     $ 3.06


2000
First Quarter............................................   4.38       2.88
Second Quarter...........................................   4.44       3.25
Third Quarter............................................   4.50       3.50
Fourth Quarter...........................................   3.75       3.00


1999
First Quarter.............................................  7.50       3.88
Second Quarter............................................  6.38       4.69
Third Quarter.............................................  6.19       5.19
Fourth Quarter............................................  5.44       3.75
</TABLE>

     The last sale price of the  Company's  Common Stock on March 12,  2001,  as
reported  on the Nasdaq  National  Market  was $6.03 per share.  As of March 12,
2001,  there were  approximately  2,100 holders of the  Company's  Common Stock,
including 108 stockholders of record.

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


                                       16
<PAGE>



ITEM 6.  SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                                                 Fiscal Year Ended
                                                      -----------------------------------------------------------------
                                                      December 31,  January 2,    January 3,    January 4,    January 5,
                                                          2000         2000          1999          1998       1997(2)(3)(4)
                                                      -----------------------------------------------------------------
                                                                    (dollars in thousands, except per share data)
<S>                                                   <C>           <C>           <C>           <C>           <C>
Statement of Operations Data:
Revenues:
   Rentals                                            $ 271,457     $ 235,452     $ 222,784     $ 220,787     $ 219,002
   Product sales                                         47,479        41,493        44,849        39,569        35,393
                                                      ---------     ---------     ---------     ---------     ---------
                                                        318,936       276,945       267,633       260,356       254,395
Cost of sales:
   Cost of rental revenues                               81,958        69,716       113,192(1)     72,806        66,412(5)
   Cost of product sales                                 31,213        25,884        29,744        24,597        21,143
                                                      ---------     ---------     ---------     ---------     ---------
Gross margin                                            205,765       181,345       124,697       162,953       166,840

Operating costs and expenses:
   Store operating expenses                             153,665       137,128       130,473       130,512       121,588
   Amortization of intangibles                            7,465         8,452         7,068         7,206         7,160
   General and administrative                            24,945        21,403        17,996        17,006        20,266
   Restructuring and other charges                         --            --            --            --           9,595
                                                      ---------     ---------     ---------     ---------     ---------
Operating income (loss)                                  19,690        14,362       (30,840)        8,229         8,231

Interest expense, net                                    (3,779)       (3,349)       (5,325)       (6,326)       (5,619)
                                                      ---------     ---------     ---------     ---------     ---------
Income (loss) before income taxes, extraordinary
   item and cumulative effect of accounting change       15,911        11,013       (36,165)        1,903         2,612
Income taxes                                              6,425         4,615       (13,089)          998         1,006(6)
                                                      ---------     ---------     ---------     ---------     ---------
Income (loss) before extraordinary item and
   cumulative effect of accounting change                 9,486         6,398       (23,076)          905         1,606
Extraordinary loss on early extinguishment of debt,
   net of tax                                              --            (682)         --            --            --
Cumulative effect of accounting change, net of tax         --            (699)         --            --            --
                                                      ---------     ---------     ---------     ---------     ---------
Net income (loss)                                     $   9,486     $   5,017     $ (23,076)    $     905     $   1,606
                                                      =========     =========     =========     =========     =========

Basic and diluted earnings (loss) per share           $    0.83     $    0.38     $   (1.72)    $    0.07     $    0.12
                                                      =========     =========     =========     =========     =========

Shares used in computing earnings (loss) per share:
   Basic                                                 11,467        13,115        13,388        13,420        13,241
                                                      =========     =========     =========     =========     =========
   Diluted                                               11,497        13,370        13,388        13,421        13,368
                                                      =========     =========     =========     =========     =========

Operating Data:
Number of stores at end of period                         1,020           963           837           856           863

Adjusted EBITDA (7)                                   $  39,744     $  35,494     $  37,378     $  26,898     $  26,232

Cash earnings per diluted share (8)                   $    1.47     $    1.11     $    0.87     $    0.60     $    1.01

Increase (decrease) in same-store revenues (9)              3.8%          0.4%          3.9%          1.1%         (1.0)%
</TABLE>


                                       17
<PAGE>




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

                                                      December 31,  January 2,    January 3,    January 4,    January 5,
                                                         2000          2000          1999          1998          1997
                                                      -----------------------------------------------------------------
                                                                             (dollars in thousands)
<S>                                                   <C>           <C>           <C>           <C>           <C>
Balance Sheet Data:

Cash and cash equivalents                             $   7,029     $   6,970     $   6,983     $   4,459     $   3,982

Rental inventory, net                                    61,773        52,357        44,998        92,183        89,929

Total assets                                            217,536       209,527       202,369       259,133       261,577

Long-term debt, less current maturities                  40,600        44,377        46,212        63,479        67,883

Total liabilities                                        88,327        84,106        78,254       111,504       114,853

Stockholders' equity                                    129,209       125,421       124,115       147,629       146,724

---------------------
<FN>

(1)  Effective July 6, 1998, the Company changed its method of amortizing rental
     inventory  resulting  in  a  non-recurring,  non-cash,  pre-tax  charge  of
     approximately $43.6 million.
(2)  On July 1, 1996,  the  Company  adopted a fiscal  year  ending on the first
     Sunday following December 30, which  periodically  results in a fiscal year
     of 53 weeks.  The 1996 fiscal  year,  ended on January 5, 1997,  reflects a
     53-week year.
(3)  Includes a non-recurring  charge of  approximately  $10.4 million for store
     closures, corporate restructuring and merger-related expenses.
(4)  Includes the results of Home Vision Entertainment, Inc. ("Home Vision") and
     Hollywood  Video,  Inc.  ("Hollywood  Video"),  which were  acquired in two
     separate  pooling-of-interests  transactions on July 1, 1996. The Company's
     results for the fiscal year ended January 5, 1997 are combined with results
     of Home Vision and  Hollywood  Video for the period  January 1, 1996 to the
     date of the acquisitions.
(5)  Effective  April 1, 1996,  the  Company  changed  its method of  amortizing
     rental  inventory  resulting  in a one-time,  non-cash,  pre-tax  charge of
     approximately $7.7 million.
(6)  Includes pro forma  adjustments  to reflect  income tax expense which would
     have been  recognized if Hollywood  Video had been taxed as a C corporation
     for all periods presented.  Historical operating results of Hollywood Video
     do not include any  provision for income taxes prior to July 1, 1996 due to
     their S corporation status prior to that date.
(7)  Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
     and  amortization,  excluding  non-recurring  charges,  less the  Company's
     purchase of rental  inventory  which excludes  rental  inventory  purchases
     specifically  for new store openings.  Adjusted EBITDA should be considered
     in  addition  to, but not as a  substitute  for or superior  to,  operating
     income, net income,  cash flow and other measures of financial  performance
     prepared in accordance with generally accepted accounting principles.
(8)  Cash  earnings  is  defined  as  net  income  before  extraordinary  items,
     cumulative effect accounting  changes,  non-recurring  non-cash charges and
     amortization of intangibles. Cash earnings should be considered in addition
     to, but not as a  substitute  for or superior  to,  operating  income,  net
     income, cash flow and other measures of financial  performance  prepared in
     accordance with generally accepted accounting principles.
(9)  Same-store  revenue  is  defined  as the  aggregate  revenues  from  stores
     operated by the Company for at least 13 months.
</FN>
</TABLE>


                                       18
<PAGE>


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

Results of Operations

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

Statement of Operations Data:
<TABLE>
<CAPTION>
                                                                  Fifty-Two Weeks Ended
                                                          ----------------------------------
                                                          December 31, January 2,  January 3,
                                                              2000        2000        1999
                                                          ----------------------------------
<S>                                                       <C>          <C>         <C>
Revenues:
   Rentals                                                     85.1 %       85.0 %      83.2 %
   Product sales                                               14.9         15.0        16.8
                                                          ---------    ---------   ---------
                                                              100.0        100.0       100.0
Cost of sales:
   Cost of rental revenues
     Recurring                                                 25.7         25.2        26.0
     Policy change                                               --           --        16.3
   Cost of product sales                                        9.8          9.3        11.1
                                                          ---------    ---------   ---------
Gross margin                                                   64.5         65.5        46.6

Operating costs and expenses:
   Store operating expenses                                    48.2         49.5        48.7
   Amortization of intangibles                                  2.3          3.1         2.7
   General and administrative                                   7.8          7.7         6.7
                                                          ---------    ---------   ---------
Operating income (loss)                                         6.2          5.2       (11.5)

Interest expense, net                                          (1.2)        (1.2)       (2.0)
                                                          ---------    ---------   ---------
Income (loss) before income taxes, extraordinary item
   and cumulative effect of accounting change                   5.0          4.0       (13.5)
Income taxes                                                    2.0          1.7        (4.9)
                                                          ---------    ---------   ---------
Income (loss) before extraordinary item and
   cumulative effect of accounting change                       3.0          2.3        (8.6)
Extraordinary loss on early extinguishment
   of debt, net of tax                                           --         (0.2)         --
Cumulative effect of accounting change, net of tax               --         (0.3)         --
                                                          ---------    ---------   ---------
Net income (loss)                                               3.0 %       1.8 %       (8.6)%
                                                          =========    =========   =========

Adjusted EBITDA (in thousands)                            $  39,744    $  35,494   $  37,378
                                                          =========    =========   =========

Number of stores open at end of period                        1,020          963         837
                                                          =========    =========   =========
</TABLE>


                                       19
<PAGE>

Fiscal year ended December 31, 2000 ("Fiscal  2000") compared to the fiscal year
ended January 2,2000 ("Fiscal 1999")

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 the  Company's  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  deemphasis  on the sale of
older sell-through titles in certain stores.

Cost of Sales.  Rental  revenue  costs as a  percentage  of rental  revenues for
Fiscal 2000 was 30.2%, a slight increase from 29.6% 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 by the Company.

Cost of  product  sales  includes  the  costs of new  videocassettes  and  DVDs,
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  revenue  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.

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  revenue in Fiscal  2000 and a  reduction  in  goodwill
impairment  write-offs  during  Fiscal  2000  required by  Financial  Accounting
Standards Board Statement No. 121,  "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."

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 the Company's new store  development which began to intensify in the latter
half  of  1999,  as well as  incremental  expenses  from  the  operation  of the
Company's e-commerce effort which was launched in September 1999, were offset by
revenue increases in Fiscal 2000.

                                       20
<PAGE>

As a result of the above factors,  operating  income increased by 37.1% to $19.7
million in Fiscal 2000 from $14.4 million in Fiscal 1999.

For Fiscal 2000 the Company's  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.

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

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

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

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

                                       21
<PAGE>

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

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

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

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

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

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

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

For Fiscal 1999 the Company's  effective  income tax rate was 41.9%, as compared
to a 36.2%  effective  rate for Fiscal 1998. The increase in the income tax rate
in  Fiscal  1999 is  primarily  due to a  shortfall  in  pre-tax  income  versus
expectations,   which  causes  the   non-tax-deductible   goodwill  amortization
associated  with stock  acquisitions  made in  previous  years to  increase  the
effective tax rate of the Company.

                                       22
<PAGE>

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

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

Liquidity and Capital Resources

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

During  Fiscal 2000,  the Company  generated  $39.7  million in Adjusted  EBITDA
versus  $35.5  million for Fiscal  1999.  The  increase  in Adjusted  EBITDA was
primarily  driven by the  operating  earnings  generated by a 15.2%  increase in
total revenue.  Adjusted EBITDA is defined as earnings before  interest,  taxes,
depreciation and amortization,  less the Company's  purchase of rental inventory
which excludes rental inventory  purchases  specifically for new store openings.
Adjusted EBITDA should be considered in addition to, but not as a substitute for
or superior to, operating  income,  net income,  cash flow and other measures of
financial  performance prepared in accordance with generally accepted accounting
principles.

Cash earnings for Fiscal 2000  increased  14.1% to $17.0  million,  or $1.47 per
diluted share,  from $14.9 million,  or $1.11 per diluted share for Fiscal 1999.
Contributing  to this  increase was a 14.0% decline in weighted  average  shares
outstanding  as a result of share  repurchases.  Cash earnings is defined as net
income before  extraordinary  items,  cumulative effect  accounting  changes and
amortization of intangibles.  Cash earnings should be considered in addition to,
but not as a substitute for or superior to, operating income,  net income,  cash
flow and other  measures of financial  performance  prepared in accordance  with
generally accepted accounting principles.

Net cash provided by operating  activities  was $99.2 million for Fiscal 2000 as
compared to $84.4 million for Fiscal 1999.  The increase in net cash provided by
operating  activities  was  primarily  the  result of  increased  net income and
depreciation,  decreased  levels of  merchandise  inventory  due to fewer titles
being released at sell-through  price points and a deemphasis on the sale of new
movies  in  certain  stores,  as  well  as  increased  accounts  payable  due to
significant  rental  inventory  purchases  in the fourth  quarter of 2000 versus
1999.  The increase was partially  offset by reductions in accrued  liabilities.
Net cash  provided by operating  activities  continues to be sufficient to cover
capital resource and debt service needs.

Net cash used in  investing  activities  was $89.4  million  for Fiscal  2000 as
compared  to $78.7  million  for Fiscal  1999.  This  increase in funds used for
investing   activities   is  primarily   the  result  of  increases  in  capital
expenditures related to rental inventory and property, furnishings and equipment
purchased to support the growth in the  Company's  store base and the  Company's
increased new store development plan.

                                       23
<PAGE>

Net cash used by  financing  activities  was $9.7  million  for  Fiscal  2000 as
compared  to $5.7  million  for Fiscal  1999.  This  increase  in funds used for
financing  activities  is due to more  stock  repurchases  and more  significant
reductions in long-term debt during Fiscal 2000 versus Fiscal 1999.

On January 7, 1999, the Company entered into a Credit Agreement with First Union
National Bank of North Carolina with respect to a revolving credit facility (the
"Facility").  The Facility  provides  for  borrowings  of up to $65 million,  is
unsecured and will mature in its entirety on January 7, 2002.  The interest rate
of the Facility is based on LIBOR plus an applicable  margin  percentage,  which
depends on the Company's cash flow  generation and borrowings  outstanding.  The
Company may repay the Facility at any time without penalty. The more restrictive
covenants of the Facility restrict  borrowings based upon cash flow levels.  The
Company is currently negotiating a replacement for the existing Facility.

The Company  grows its store base  through  internally  developed  and  acquired
stores.  The  Company  opened 110  internally-developed  stores and  acquired 16
stores during  Fiscal 2000.  During the year 2001,  the Company  intends to open
approximately   75  new  stores  and  will   entertain   potential   acquisition
transactions;  however,  the number of acquired stores in 2001 is anticipated to
be less than the number of internally developed stores. To the extent available,
new stores and future  acquisitions may be completed using funds available under
the Facility,  financing provided by sellers, alternative financing arrangements
such as funds raised in public or private debt or equity  offerings or shares of
the Company's stock issued to sellers.  However,  there can be no assurance that
financing will be available to the Company on terms which will be acceptable, if
at all.

During the first quarter of 2000, the Company completed its previously announced
$5  million  stock  repurchase  plan and  announced  a second $5  million  stock
repurchase plan which was completed in May 2000. During Fiscal 2000, the Company
repurchased  1.4 million shares for $5.7 million,  which was funded through cash
flow from operations.

At  December  31,  2000,  the  Company  had a working  capital  deficit of $21.1
million,  due to  the  accounting  treatment  of its  rental  inventory.  Rental
inventory is treated as a noncurrent asset under generally  accepted  accounting
principles  because  it is a  depreciable  asset  and is not an  asset  which is
reasonably  expected  to be  completely  realized  in cash or sold in the normal
business  cycle.  Although  the  rental of this  inventory  generates  the major
portion of the Company's revenue, the classification of this asset as noncurrent
results in its exclusion from working capital.  The aggregate amount payable for
this  inventory,  however,  is reported as a current  liability  until paid and,
accordingly, is included in working capital.  Consequently, the Company believes
that  working  capital is not an  appropriate  measure of its  liquidity  and it
anticipates that it will continue to operate with a working capital deficit.

The Company believes its projected cash flow from operations, borrowing capacity
with the  Facility,  cash on hand and trade  credit will  provide the  necessary
capital  to fund its  current  plan of  operations  for the  fiscal  year  2001,
including its anticipated new store openings and a modest potential  acquisition
program.  However,  to fund a major acquisition  program, or to provide funds in
the event that the  Company's  need for funds is greater  than  expected,  or if
certain of the  financing  sources  identified  above are not  available  to the
extent anticipated or if the Company increases its growth plan, the Company will
need to seek additional or alternative sources of financing.  This financing may
not be  available  on terms  satisfactory  to the  Company.  Failure  to  obtain
financing to fund the Company's expansion plans or for other purposes could have
a material adverse effect on the Company.

                                       24
<PAGE>



Other Matters

Market Risk  Sensitive  Instruments.  The market risk  inherent in the Company's
financial  instruments  represents  the  increased  interest  costs arising from
adverse  changes in interest rates  (primarily  LIBOR and prime bank rates).  In
order to manage  this risk,  the  Company  entered  into an  interest  rate swap
agreement  that  effectively  fixes the Company's  interest rate exposure on $37
million of the amount  outstanding under the Facility at 5.8% plus an applicable
margin  percentage.  Assuming a  hypothetical  10%  adverse  change in the LIBOR
interest rate and assuming debt levels  outstanding as of December 31, 2000, the
Company would incur an immaterial  amount of additional  annual interest expense
on  unhedged   variable  rate  borrowings.   These  amounts  are  determined  by
considering  the  impact of the  hypothetical  change in  interest  rates on the
Company's  cost of  borrowing.  The analysis  does not  consider  the  potential
negative  impact  on  overall  economic  activity  that  could  exist in such an
environment.  The Company  believes  that its exposure to adverse  interest rate
changes and its impact on its total cost of  borrowing  capital has been largely
mitigated by the interest rate swap agreement that is in place.

Supply Contract. In March 2001, the Company and Rentrak Corporation  ("Rentrak")
amended the terms of the Company's  existing supply  contract with Rentrak.  The
Company  paid  Rentrak  $1,600,000  in  connection  with  the  amendment  to the
contract. Additionally, the Company prepaid approximately $900,000 to be applied
over a three-year period against future amounts due under the contract.

Stock  Repricing.  In March 2000,  the FASB issued  FASB  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 384,000 stock options in March 2001, and reduced
the exercise price to $4 per share.  Under the  Interpretation,  the options are
accounted for as variable until the options are  exercised,  forfeited or expire
unexercised.  The Company will record compensation  expense in the first quarter
of fiscal 2001 that will  approximate the difference  between the exercise price
of the repriced options and the market price at the end of the quarter.

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

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

     None.



                                       25
<PAGE>


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item (other than the information regarding
executive  officers  set forth at the end of Item 1 of Part I of this Form 10-K)
will be contained  in the  Company's  definitive  Proxy  Statement  for its 2001
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 2001 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 2001 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 2001 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 and January 2,
          2000.

          Consolidated  Statements  of  Operations  for the Fiscal  Years  Ended
          December 31, 2000, January 2, 2000, and January 3, 1999.

          Consolidated  Statements of Stockholders'  Equity for the Fiscal Years
          Ended December 31, 2000, January 2, 2000, and January 3, 1999.

          Consolidated  Statements  of Cash  Flows for the  Fiscal  Years  Ended
          December 31, 2000, January 2, 2000, and January 3, 1999.

          Notes to Consolidated Financial Statements.

   (a)(2) Schedules:

          None.


                                       26
<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.
            (filed herewith)
10.8    -   Credit  Agreement  between First Union  National Bank of North
            Carolina and Movie  Gallery,  Inc. dated January 7, 1999. (5)
18      -   Change in Accounting Principle. (6)
21      -   List of Subsidiaries. (filed herewith)
23      -   Consent of  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 5,
     1999,  as an exhibit to the  Company's  Form 10-K for the fiscal year ended
     January 3, 1999.
(6)  Previously  filed with the Securities  and Exchange  Commission on November
     18, 1998,  as an exhibit to the  Company's  Form 10-Q for the quarter ended
     October 4, 1998.

   (b)  Reports on Form 8-K:

     The Company  did not file any reports on Form 8-K during the quarter  ended
December 31, 2000.

   (c)  Exhibits:

     See (a)(3) above.

                                       27
<PAGE>


SIGNATURES

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

                                            MOVIE GALLERY, INC.



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

Date:  April 2, 2001


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

Signature                              Title                           Date
---------                              -----                           ----
/s/ JOE THOMAS MALUGEN       Chairman of the Board and Chief       April 2, 2001
-----------------------      Executive Officer
Joe Thomas Malugen

/s/ WILLIAM B. SNOW          Vice Chairman of the Board            April 2, 2001
-----------------------
William B. Snow

/s/ H. HARRISON PARRISH      Director and President                April 2, 2001
-----------------------
H. Harrison Parrish

/s/ SANFORD C. SIGOLOFF      Director                              April 2, 2001
-----------------------
Sanford C. Sigoloff

/s/ J. STEVEN ROY            Executive Vice President and          April 2, 2001
-----------------------      Chief Financial Officer
J. Steven Roy

/s/ IVY M. JERNIGAN          Vice President - Controller           April 2, 2001
-----------------------
Ivy M. Jernigan




                                       28
<PAGE>



                               Movie Gallery, Inc.

                        Consolidated Financial Statements

    Fiscal years ended December 31, 2000, January 2,2000 and January 3, 1999


                                    Contents

Report of  Independent Auditors.............................................F-1

Audited Financial Statements

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


<PAGE>


                         Report of 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 2, 2000,  and the related  consolidated
statements of  operations,  stockholders'  equity and cash flows for each of the
three years in period ended December 31, 2000.  These  financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the 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 2, 2000,  and the  consolidated
results  of its  operations  and its cash  flows for each of the three  years in
period  ended  December 31,  2000,  in  conformity  with  accounting  principles
generally accepted in the United States.

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


                                            /s/ Ernst & Young, LLP



Birmingham, Alabama
February 16, 2001, except
for Note 8, as to which the
date is March 30, 2001



                                      F-1

<PAGE>


                             Movie Gallery, Inc.

                         Consolidated Balance Sheets
                               (in thousands)
<TABLE>
<CAPTION>

                                                            December 31, January 2,
                                                                2000        2000
                                                             ---------   ---------
<S>                                                         <C>          <C>
Assets
Current assets:
   Cash and cash equivalents                                $   7,029    $   6,970
   Merchandise inventory                                        9,264       15,148
   Prepaid expenses                                             1,000          814
   Store supplies and other                                     3,852        3,395
   Deferred income taxes                                          502          229
                                                            ---------    ---------
Total current assets                                           21,647       26,556

Rental inventory, net                                          61,773       52,357
Property, furnishings and equipment, net                       53,124       44,320
Goodwill and other intangibles, net                            77,926       83,539
Deposits and other assets                                       3,066        2,543
Deferred income taxes                                              --          212
                                                            ---------    ---------
Total assets                                                $ 217,536    $ 209,527
                                                            =========    =========


Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                                         $  31,111    $  26,243
   Accrued liabilities                                         11,631       12,989
   Current portion of long-term debt                               --          263
                                                            ---------    ---------
Total current liabilities                                      42,742       39,495

Long-term debt                                                 40,600       44,377
Other accrued liabilities                                         253          234
Deferred income taxes                                           4,732           --

Stockholders' equity:
   Preferred stock, $.10 par value; 2,000,000 shares
      authorized, no shares issued or outstanding                  --           --
   Common stock, $.001 par value; 35,000,000
      shares authorized, 11,136,167 and 12,549,667
      shares issued and outstanding                                11           13
   Additional paid-in capital                                 121,841      127,537
   Retained earnings (deficit)                                  7,357       (2,129)
                                                            ---------    ---------
Total stockholders' equity                                    129,209      125,421
                                                            ---------    ---------
Total liabilities and stockholders' equity                  $ 217,536    $ 209,527
                                                            =========    =========

See accompanying notes.

</TABLE>
                                      F-2

<PAGE>



                       Movie Gallery, Inc.

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

<TABLE>
<CAPTION>
                                                                        Fiscal Year Ended
                                                                -----------------------------------
                                                                December 31, January 2,  January 3,
                                                                    2000        2000        1999
                                                                -----------------------------------
<S>                                                             <C>          <C>          <C>
Revenues:
  Rentals                                                       $ 271,457    $ 235,452    $ 222,784
  Product sales                                                    47,479       41,493       44,849
                                                                ---------    ---------    ---------
                                                                  318,936      276,945      267,633
Cost of sales:
  Cost of rental revenues                                          81,958       69,716      113,192
  Cost of product sales                                            31,213       25,884       29,744
                                                                ---------    ---------    ---------
Gross margin                                                      205,765      181,345      124,697

Operating costs and expenses:
  Store operating expenses                                        153,665      137,128      130,473
  Amortization of intangibles                                       7,465        8,452        7,068
  General and administrative                                       24,945       21,403       17,996
                                                                ---------    ---------    ---------
Operating income (loss)                                            19,690       14,362      (30,840)

Interest expense, net                                              (3,779)      (3,349)      (5,325)
                                                                ---------    ---------    ---------
Income (loss) before income taxes, extraordinary item
  and cumulative effect of accounting change                       15,911       11,013      (36,165)
Income taxes                                                        6,425        4,615      (13,089)
                                                                ---------    ---------    ---------
Income (loss) before extraordinary item and
  cumulative effect of accounting change                            9,486        6,398      (23,076)
Extraordinary loss on early extinguishment of debt,
  net of income taxes of $359                                          --         (682)          --
Cumulative effect of accounting change, net of
  income taxes of $368                                                 --         (699)          --
                                                                ---------    ---------    ---------
Net income (loss)                                               $   9,486    $   5,017    $ (23,076)
                                                                =========    =========    =========

Basic and diluted earnings (loss) per share:
Income (loss) before extraordinary item and
  cumulative effect of accounting change                        $    0.83    $    0.48    $   (1.72)
Extraordinary loss on early extinguishment of debt,
  net of income taxes                                                  --        (0.05)          --
Cumulative effect of accounting change, net of income taxes            --        (0.05)          --
                                                                ---------    ---------    ---------
Net income (loss)                                               $    0.83    $    0.38    $   (1.72)
                                                                =========    =========    =========

Weighted average shares outstanding:
  Basic                                                            11,467       13,115       13,388
  Diluted                                                          11,497       13,370       13,388

See accompanying notes.
</TABLE>

                                       F-3


<PAGE>

                               Movie Gallery, Inc.

                 Consolidated Statements of Stockholders' Equity
                                 (in thousands)


<TABLE>
<CAPTION>

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

<S>                                             <C>          <C>          <C>          <C>
Balance at January 4, 1998                      $      13    $ 131,686    $  15,930    $ 147,629
  Net loss                                           --           --        (23,076)     (23,076)
  Exercise of stock options for 12,230 shares        --             48         --             48
  Tax benefit of stock options exercised             --              9         --              9
  Repurchase and retirement of 115,200 shares        --          (495)         --           (495)
                                                ---------    ---------    ---------    ---------
Balance at January 3, 1999                             13      131,248       (7,146)     124,115
  Net income                                         --           --          5,017        5,017
  Exercise of stock options for 12,350 shares        --             48         --             48
  Tax benefit of stock options exercised             --              7         --              7
  Repurchase and retirement of 778,598 shares        --         (3,766)        --         (3,766)
                                                ---------    ---------    ---------    ---------
Balance at January 2, 2000                             13      127,537       (2,129)     125,421
  Net income                                         --           --          9,486        9,486
  Repurchase and retirement of 1,413,500 shares        (2)      (5,696)        --         (5,698)
                                                ---------    ---------    ---------    ---------
Balance at December 31, 2000                    $      11    $ 121,841    $   7,357    $ 129,209
                                                =========    =========    =========    =========

See accompanying notes.

</TABLE>


                                      F-4

<PAGE>


                              Movie Gallery, Inc.

                      Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                Fiscal Year Ended
                                                       -----------------------------------
                                                       December 31, January 2,   January 3,
                                                           2000        2000         1999
                                                       -----------------------------------
<S>                                                    <C>          <C>          <C>
Operating activities:
Net income (loss)                                      $   9,486    $   5,017    $ (23,076)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
 Extraordinary loss on early extinguishment of debt,
  net of taxes                                              --            682         --
 Cumulative effect of accounting change, net of taxes       --            699         --
 Depreciation and amortization                            76,787       72,205      126,257
 Deferred income taxes                                     4,671        2,744      (14,855)
 Changes in operating assets and liabilities:
  Merchandise inventory                                    5,884       (2,788)       1,911
  Other current assets                                      (643)         348         (649)
  Deposits and other assets                                 (518)      (1,104)         105
  Accounts payable                                         4,868        2,847        1,879
  Accrued liabilities                                     (1,356)       3,740         (709)
                                                        ---------    ---------    ---------
Net cash provided by operating activities                 99,179       84,390       90,863

Investing activities:
Business acquisitions                                     (3,085)     (11,839)        (799)
Purchases of rental inventory, net                       (63,211)     (54,259)     (59,266)
Purchases of property, furnishings and equipment         (23,086)     (12,573)      (6,251)
                                                       ---------    ---------    ---------
Net cash used in investing activities                    (89,382)     (78,671)     (66,316)

Financing activities:
Net proceeds from issuance of common stock                  --             48           48
Purchases and retirement of common stock                  (5,698)      (3,766)        (495)
Payments on notes payable                                   --           --           (200)
Principal payments on long-term debt                      (4,040)      (2,014)     (21,376)
                                                       ---------    ---------    ---------
Net cash used in financing activities                     (9,738)      (5,732)     (22,023)
                                                       ---------    ---------    ---------
Increase (decrease) in cash and cash equivalents              59          (13)       2,524
Cash and cash equivalents at beginning of period           6,970        6,983        4,459
                                                       ---------    ---------    ---------
Cash and cash equivalents at end of period             $   7,029    $   6,970    $   6,983
                                                       =========    =========    =========

Supplemental disclosures of cash flow information:
Cash paid during the period for interest               $   3,817    $   3,076    $   5,066
Cash paid during the period for income taxes               1,688        2,705          478
Noncash investing and financing information:
 Tax benefit of stock options exercised                     --              7            9

See accompanying notes.
</TABLE>

                                      F-5

<PAGE>


                               Movie Gallery, Inc.

                   Notes to Consolidated Financial Statements

             December 31, 2000, January 2, 2000 and January 3, 1999

1.  Accounting Policies

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

The Company owns and operates video specialty stores in 30 states.

Fiscal Year

The Company's fiscal year ends on the first Sunday following  December 30, which
periodically  results in a fiscal  year of 53 weeks.  Results  for fiscal  years
ended  December 31, 2000 ("Fiscal  2000"),  January 2, 2000 ("Fiscal  1999") and
January 3, 1999 ("Fiscal 1998") reflect 52-week years. The Company's fiscal year
includes revenues and certain operating  expenses,  such as salaries,  wages and
other miscellaneous  expenses,  on a daily basis. All other expenses,  primarily
depreciation and amortization,  are calculated and recorded monthly, with twelve
months included in each fiscal year.

Cash Equivalents

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

Merchandise Inventory

Merchandise  inventory consists primarily of videocassette  tapes, digital video
discs (DVDs),  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 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 2000, 1999 and
1998  includes  an  impairment  loss  of  $1,000,000,  $1,600,000  and  $84,000,
respectively,  to  write-off  the net book  value of  goodwill  in excess of its
estimated fair market value.

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

Rental Inventory

Effective July 6, 1998, the Company  changed its method of amortizing  movie and
video game rental  inventory.  This method  accelerates the rate of amortization
and was adopted as a result of an industry trend towards  significant  increases

                                      F-6

<PAGE>

                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

1.  Accounting Policies (continued)

in copy-depth  availability  from movie studios,  which have resulted in earlier
satisfaction  of  consumer  demand,  thereby,  accelerating  the rate of revenue
recognition.  Under  this  method,  the  cost of  base  stock  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  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.

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

Rental inventory consists of the following (in thousands):

                                              December 31,   January 2,
                                                 2000           2000
                                              ---------      ----------

Rental inventory                               $ 145,557     $  183,185
Less accumulated amortization                    (83,784)      (130,828)
                                               ---------     ----------
                                               $  61,773     $   52,357
                                               =========     ==========

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  2, 2000 was  $35,830,000  and
$32,097,000, respectively.

                                      F-7

<PAGE>
                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

1.   Accounting Policies (continued)

Income Taxes

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

Rental Revenue

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

Advertising Costs

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

Store Opening and Start-up Costs

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

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

Fair Value of Financial Instruments

At December  31,  2000 and  January 2, 2000,  the  carrying  value of  financial
instruments such as cash and cash equivalents,  accounts payable,  notes payable
and long-term debt approximated  their fair values,  calculated using discounted
cash flow analysis at the Company's incremental borrowing rate.

Use of Estimates

The preparation of financial statements in conformity with 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. These estimates and assumptions could
change and actual results could differ from these estimates.

                                      F-8

<PAGE>
                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

1.  Accounting Policies (continued)

Recently Issued Accounting Pronouncements

The FASB has issued  Statement No. 133,  "Accounting for Derivative  Instruments
and  Hedging  Activities"  (as amended by  Statements  No. 137 and 138) which is
required to be adopted by the Company in fiscal  year 2001.  Statement  133 will
require 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
income.  If a  derivative  is a hedge,  depending  on the  nature of the  hedge,
changes in the fair value of the  derivative  will  either  offset  against  the
change in fair value of the hedged item  through  earnings or be  recognized  in
other  comprehensive  income  until the hedged item is  recognized  in earnings.
Management  does not anticipate  that the adoption of this Statement will have a
significant effect on earnings or the financial position of the Company.

Employee Benefits

The Company has a 401(k) savings plan available to all active  employees who are
over 21 years of age and have  completed one year of service.  The Company makes
discretionary and matching  contributions  based on employee  compensation.  The
matching  contribution  for Fiscal  2000,  1999 and 1998 was  immaterial  to the
Company's operating results.

2.  Property, Furnishings and Equipment

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

                                                December 31,      January 2,
                                                    2000             2000
                                                ---------------------------

Land and buildings                               $   4,006        $   1,889
Furniture and fixtures                              37,291           33,383
Equipment                                           33,616           28,495
Leasehold improvements and signs                    36,860           27,931
                                                 ---------        ---------
                                                   111,773           91,698
Accumulated depreciation                           (58,649)         (47,378)
                                                 ---------        ---------
                                                 $  53,124        $  44,320
                                                 =========        =========


3.  Long-Term Debt

On January 7, 1999, the Company entered into a Credit Agreement with First Union
National Bank of North Carolina with respect to a revolving credit facility (the
"Facility").  The Facility  provides  for  borrowings  of up to $65 million,  is
unsecured and will mature in its entirety on January 7, 2002.  The interest rate
of the Facility is based on LIBOR plus an applicable  margin  percentage,  which
depends on the Company's cash flow  generation and borrowings  outstanding.  The
Company may repay the Facility at any time without penalty. The more restrictive
covenants of the Facility  restrict  borrowings based upon cash flow levels.  At
December 31, 2000,  $40.6 million was outstanding,  approximately  $23.9 million
was available for  borrowing and the effective  interest rate was  approximately
7.4%.

                                      F-9

<PAGE>
                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

3.  Long-Term Debt (continued)

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

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

4.  Income Taxes

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

                                              Fiscal Year Ended
                                 -----------------------------------------
                                 December 31,    January 2,      January 3,
                                    2000            2000            1999
                                 -----------------------------------------
Current payable:
  Federal                        $  1,439        $  1,673       $  1,275
  State                               315             198            491
                                 --------        --------       --------
Total current                       1,754           1,871          1,766

Deferred:
  Federal                           4,056           2,454        (13,423)
  State                               615             290         (1,432)
                                 --------        --------       --------
Total deferred                      4,671           2,744        (14,855)
                                 --------        --------       --------
                                 $  6,425        $  4,615       $(13,089)
                                 ========        ========       ========


                                      F-10

<PAGE>
                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

4.  Income Taxes (continued)

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

                                                    Fiscal Year Ended
                                          -------------------------------------
                                          December 31,   January 2,   January 3,
                                            2000            2000         1999
                                          -------------------------------------

Income tax expense (benefit)
  at statutory rate                        $  5,569       $  3,855     $(12,658)
State income tax expense (benefit)
  net of federal income tax benefit             604            317         (612)
Other, net (primarily goodwill not
  deductible for tax purposes)                  252            443          181
                                           --------       --------     --------
                                           $  6,425       $  4,615     $(13,089)
                                           ========       ========     ========

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):

                                                      December 31,  January 2,
                                                          2000         2000
                                                      -----------------------
Deferred tax liabilities:
 Furnishings and equipment                            $  6,003      $  5,473
 Rental inventory                                        6,351         3,818
 Goodwill                                                2,251         2,026
 Other                                                    --             461
                                                      --------      --------
  Total deferred tax liabilities                        14,605        11,778
Deferred tax assets:
 Non-compete agreements                                  4,979         4,970
 Alternative minimum tax credit carryforward             4,163         2,827
 Net operating loss carryforwards                         --           2,802
 Accrued liabilities                                       502           777
 Other                                                     731           843
                                                      --------      --------
  Total deferred tax assets                             10,375        12,219
                                                      --------      --------
Net deferred tax assets (liabilities)                 $ (4,230)     $    441
                                                      ========      ========


                                      F-11

<PAGE>
                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

5.  Stockholders' Equity

Common Stock

In 1995, the Company  registered shares of common stock with an aggregate public
offering  price of  $127,000,000.  This  common  stock may be  offered  directly
through  agents,  underwriters  or dealers or may be offered in connection  with
business  acquisitions.  As of December 31, 2000,  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 (30,000, 255,000 and none for Fiscal 2000, 1999 and 1998, 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  3,000,000  shares are reserved  for issuance  under the
Plan. Options granted under the Plan have a 10-year term and generally vest over
3 to 5 years.

In 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 its stock option
plan and, accordingly,  has not recognized  compensation cost in connection with
the Plan. If the Company had elected to recognize compensation cost based on the
fair value of the options  granted at grant date as prescribed by Statement 123,
net  income and  earnings  per share  would  have been  reduced to the pro forma
amounts  indicated in the table below. The effect on net income and earnings per
share is not expected to be indicative of the effects on net income and earnings
per share in future years.

                                                  Fiscal Year Ended
                                      ---------------------------------------
                                      December 31,   January 2,     January 3,
                                         2000           2000          1999
                                      ---------------------------------------
                                       (in thousands, except per share data)

Pro forma net income (loss)           $  8,496       $  3,801       $ (24,324)
Pro forma earnings (loss) per share:
  Basic and diluted                       0.74           0.29           (1.82)


                                      F-12

<PAGE>
                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

5.  Stockholders' Equity (continued)

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:

                                                  Fiscal Year Ended
                                   --------------------------------------------
                                   December 31,      January 2,      January 3,
                                       2000             2000            1999
                                   --------------------------------------------
Expected volatility                    0.703            0.720           0.733
Risk-free interest rate                5.15%            6.39%           4.70%
Expected life of option in years       5.7              6.0             6.0
Expected dividend yield                0.0%             0.0%            0.0%

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.

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


<TABLE>
<CAPTION>
                                                                Fiscal Year Ended
                                -------------------------------------------------------------------------------------
                                  December 31, 2000              January 2, 2000             January 3, 1999
                                ---------------------------  --------------------------- ----------------------------
                                              Weighted-                     Weighted-                    Weighted-
                                               Average                       Average                      Average
                                 Options    Exercise Price     Options    Exercise Price    Options    Exercise Price
                                ---------   --------------    ---------   --------------   ---------   --------------
<S>                             <C>           <C>            <C>            <C>            <C>            <C>
Outstanding-beginning
  of year                       2,276,987     $ 9.56         2,188,899      $ 9.73         1,895,537      $ 10.62
Granted                           405,000       3.20           444,000        4.36           363,000         5.13
Exercised                               -          -            12,350        3.88            12,230         3.88
Forfeited                         139,480       5.14           343,562        4.17            57,408        11.32

Outstanding-end of year         2,542,507       8.79         2,276,987        9.56         2,188,899         9.73

Exercisable at end of year      1,669,307      11.30         1,440,871       12.03         1,206,397        12.68

Weighted-average fair value
   of options granted during
   the year                        $ 2.10                       $ 3.05                        $ 3.43


</TABLE>
                                      F-13


<PAGE>
                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

5.  Stockholders' Equity (continued)

Options  outstanding  as of December 31, 2000 had a  weighted-average  remaining
contractual  life of 7.1 years and exercise  prices ranging from $3.00 to $40.00
as follows:

<TABLE>
<CAPTION>
                                                                          Exercise price of
                                                   ----------------------------------------------------------------
                                                    $3.00 to $6.00        $14.00 to $22.00       $24.00 to $40.00
                                                   ----------------------------------------------------------------
<S>                                                    <C>                   <C>                     <C>
Options outstanding                                    1,894,507              380,000                 268,000
Weighted-average exercise price                          $4.05                 $15.16                 $33.22
Weighted-average remaining contractual life            8.0 years             4.3 years               4.4 years
Options exercisable                                    1,030,707              370,600                 268,000
Weighted-average exercise price of
   exercisable options                                   $4.20                 $15.19                 $33.22

</TABLE>

6.  Commitments and Contingencies

Rent expense for Fiscal 2000, 1999 and 1998 totaled $45,132,000, $41,683,000 and
$40,959,000,   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 December 31,
2000 (in thousands):

                 2001                    $ 30,430
                 2002                      26,015
                 2003                      17,037
                 2004                      10,301
                 2005                       4,283
                 Thereafter                 2,944
                                         --------
                                         $ 91,010
                                         ========


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

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


                                      F-14

<PAGE>
                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (continued)

7.  Summary of Quarterly Results of Operations (Unaudited)

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

<TABLE>
<CAPTION>
                                                                Thirteen Weeks Ended
                                                 ----------------------------------------------
                                                 April 2,    July 2,    October 1,  December 31,
                                                   2000       2000         2000         2000
                                                 ----------------------------------------------

<S>                                              <C>         <C>         <C>           <C>
Revenue                                          $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             $  0.32     $  0.17     $  0.05       $  0.28
</TABLE>
<TABLE>
<CAPTION>

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

</TABLE>

8.   Subsequent Events

In March  2001,  the Company  and  Rentrak  amended  the terms of the  Company's
existing  supply contract with Rentrak.  The Company paid Rentrak  $1,600,000 in
connection with the amendment to the contract. Additionally, the Company prepaid
approximately  $900,000 to be applied over a three-year  period  against  future
amounts due under the contract.

In March 2000,  the FASB  issued  FASB  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  384,000 stock options in March 2001, and reduced the exercise price to
$4 per  share.  Under the  Interpretation,  the  options  are  accounted  for as
variable until the options are exercised,  forfeited or expire unexercised.  The
Company  will record  compensation  expense in the first  quarter of fiscal 2001
that will approximate the difference  between the exercise price of the repriced
options and the market price at the end of the quarter.

                                      F-15
<PAGE>


                                Index to Exhibits


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

10.7             Employment agreement between M.G.A., Inc. and Jeffrey S. Stubbs

21               List of Subsidiaries

23               Consent of Independent Auditors