<PAGE>   1
                                UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549

                           ----------------------

                                  FORM 10-Q

(Mark One)
 [ X ]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
              SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended                August 2, 1997
                               -----------------------------

                                            OR

 [    ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
              SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number        0-19526
                                      Goody's Family Clothing, Inc.
              (Exact name of registrant as specified in its charter)

         Tennessee                                     62-0793974
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                       Identification Number)
400 Goody's Lane,               Knoxville, Tennessee              37922
(Address of principal executive offices)                        (Zip Code)

                            (423) 966-2000
              (Registrant's telephone number, including area code)

         (Former name,  former  address and former fiscal year, if changed since
last report.)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or 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
                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.
                     Common Stock, no par value,  16,295,407 shares  outstanding
as of August 12, 1997.




<PAGE>   2


                          Goody's Family Clothing, Inc.
                               Index to Form 10-Q
                                 August 2, 1997



Part I - Financial Information:

     Item 1 - Consolidated Financial Statements

         Consolidated Statements of Operations........................   3

         Consolidated Balance Sheets..................................   4

         Consolidated Statements of Cash Flows........................   5

         Notes to Consolidated Financial Statements...................   6 - 7

         Independent Accountants' Review Report.......................   8

     Item 2 - Management's Discussion and Analysis of Financial Condition and
                Results of Operations.................................   9-12


Part II - Other Information...........................................   13
          -----------------

     Item 1.  Legal Proceedings
     Item 2.  Changes in Securities
     Item 3.  Defaults upon Senior Securities
     Item 4.  Submission of Matters to a Vote of Security Holders
     Item 5.  Other Information
     Item 6.  (a)  Exhibits
     Item 6.  (b)  Reports on Form 8-K


Signatures.............................................................  14




<PAGE>   3



PART 1 - FINANCIAL INFORMATION

----------------------------------------------------------------------------

Item 1  - Consolidated Financial Statements

Goody's Family Clothing, Inc. and Subsidiaries
Consolidated Statements of Operations - Unaudited
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                     Thirteen                            Twenty-six
                                                  Weeks Ended                           Weeks Ended
                                           August 2,           August 3,          August 2,         August 3,
                                             1997                1996               1997               1996
                                          -------------      ------------       -------------     ---------
<S>                                      <C>                <C>                 <C>                 <C>


Sales                                       $  212,206         $  183,411         $  402,263        $  334,177
Cost of sales and occupancy expenses           154,036            138,174            289,116           246,295
                                          ------------       ------------       ------------      ------------
     Gross profit                               58,170             45,237            113,147            87,882

Selling, general and administrative
  expenses                                      49,800             43,235             97,045            82,510
                                          ------------       ------------       ------------      ------------
     Earnings from operations                    8,370              2,002             16,102             5,372

Interest expense                                    94                193                219               280
Investment income                                  392                388                878               660
                                          ------------       ------------       ------------      ------------
     Earnings before income taxes                8,668              2,197             16,761             5,752

Provision for income taxes                       3,250                835              6,285             2,186
                                          ------------       ------------       ------------      ------------
Net earnings                                $    5,418         $    1,362         $   10,476        $    3,566
                                          ============       ============       ============      ============

Earnings per common share                   $     0.32         $     0.08         $     0.62        $     0.22
                                          ============       ============       ============      ============

Weighted average common
    shares outstanding                          16,932             16,126             16,895            16,126
                                          ============       ============       ============      ============


</TABLE>












See accompanying Notes to Consolidated Financial Statements and Independent
Accountants' Review Report.


<PAGE>   4


Goody's Family Clothing, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
                                                               August 2,          February 1,        August 3,
                                                                 1997                1997               1996
                                                              (unaudited)                           (unaudited)
<S>                                                           <C>                 <C>               <C>

ASSETS
Current Assets
   Cash and cash equivalents                                   $   41,667          $   43,316        $   19,631
   Investments                                                      1,512               1,453             1,410
   Inventories                                                    153,653             107,495           141,610
   Accounts receivable and other current assets                    15,836               9,689            13,606
                                                             ------------        ------------      ------------
   Total current assets                                           212,668             161,953           176,257
Property and equipment, net                                        90,355              88,955            90,203
Other assets                                                        3,200               3,439             3,455
                                                             ------------        ------------      ------------

   Total assets                                                $  306,223          $  254,347        $  269,915
                                                             ============        ============      ============


LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
    Accounts payable                                           $  118,530          $   75,900      $    116,220
    Accrued expenses                                               38,136              34,841            32,175
    Income taxes payable                                               -                6,957                -
    Current portion of long- term debt                                239                 239               217
                                                             ------------       -------------    --------------
    Total current liabilities                                     156,905             117,937           148,612
Long-term debt                                                        871                 871             1,110
Other long-term liabilities                                         2,639               2,578             2,211
Deferred income taxes                                               9,668               9,385             8,515
                                                             ------------       -------------    --------------
    Total liabilities                                             170,083             130,771          160,448
                                                             ------------       -------------    -------------

Commitments and Contingencies


Shareholders' Equity
    Preferred stock $1.00 par value;
      Authorized - 2,000,000 shares; issued
        and outstanding - none
    Class B Common stock no par value;
    Authorized - 50,000,000 shares; issued
        and outstanding - none
    Common stock no par value;
      Authorized - 50,000,000 shares;
      Issued - 16,495,107, 16,364,832 and 16,328,012 shares;
      Outstanding - 16,295,107, 16,164,832
        and 16,128,012 shares                                      27,662              26,466            26,066
Paid-in capital                                                     4,151               3,259             3,135
Retained earnings                                                 107,429              96,953            83,368
Treasury stock, at cost - 200,000 shares                           (3,102)             (3,102)           (3,102)
                                                             ------------        ------------      ------------
         Total shareholders' equity                               136,140             123,576           109,467
                                                             ------------        ------------      ------------

Total liabilities and shareholders' equity                     $  306,223          $  254,347        $  269,915
                                                             ============        ============      ============
</TABLE>

See accompanying Notes to Consolidated Financial Statements and Independent
Accountants' Review Report.


<PAGE>   5



Goody's Family Clothing, Inc.  and Subsidiaries
Consolidated Statements of Cash Flows - Unaudited
(In thousands)
<TABLE>
<CAPTION>


                                                                                   Twenty-six Weeks Ended
                                                                                  August 2,          August 3,
                                                                                    1997                1996
                                                                                 ------------       --------

<S>                                                                             <C>                 <C>

Cash Flows from Operating Activities
     Net earnings                                                                    $ 10,476           $ 3,566
     Adjustments to reconcile net earnings to net cash provided
     by operating activities:
         Depreciation and amortization                                                  5,522             4,690
         Net loss on asset disposals and write-down                                       488               659
         Changes in assets and liabilities:
             Inventories                                                              (46,159)          (63,343)
             Accounts payable                                                          33,634            52,292
             Income taxes                                                              (7,824)           (1,467)
             Other assets & liabilities                                                  (315)            2,189
                                                                                 -------------    -------------
                 Cash used in operating activities                                     (4,178)          (1,414)
                                                                                 ------------     ------------

Cash Flows from Investing Activities
     Acquisitions of property and equipment                                            (7,414)           (9,963)
     Proceeds from sale of property and equipment                                           4               126
                                                                                 ------------      ------------
                 Cash used in investing activities                                     (7,410)           (9,837)
                                                                                 ------------     ------------- 

Cash Flows from Financing Activities
     Exercise of Stock Options                                                          1,196                24
     Changes in cash management accounts                                                8,743            (2,129)
                                                                                 ------------      ------------ 
                  Cash provided by (used in) financing activities                       9,939            (2,105)
                                                                                 ------------      ------------ 

Cash and cash equivalents
Net decrease for the period                                                            (1,649)          (13,356)
Balance, beginning of period                                                           43,316            32,987
                                                                                 ------------      ------------
Balance, end of period                                                             $   41,667        $   19,631
                                                                                 ============      ============

Supplemental Disclosures
     Interest payments                                                             $      151        $      205
     Income tax payments                                                           $   14,163        $    3,889

</TABLE>







See accompanying Notes to Consolidated Financial Statements and Independent
Accountants' Review Report.



<PAGE>   6



Goody's Family Clothing, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

(1)  Unaudited Financial Information

In   the  opinion  of  the  Company's  management,  the  accompanying  unaudited
consolidated   financial  statements  of  Goody's  Family  Clothing,  Inc.   and
subsidiaries  (the "Company")  include  all adjustments, consisting primarily of
normal  and  recurring  adjustments,  necessary  for  a fair presentation of the
Company's  financial  position,  results  of  operations  and cash flows for the
interim  periods  presented.  Due  to  the  seasonal  nature  of  the  Company's
business,  the results of operations for the interim periods are not necessarily
indicative  of  the  results  that  may be achieved for the entire  year.  These
financial   statements   should   be  read  in  conjunction  with  the   audited
consolidated   financial  statements  and  the  notes  thereto  contained in the
Company's 1996 Annual Report on Form 10-K.                                     
                                                                               
(2)  Use of estimates                                                          
                                                                               
The  preparation  of  financial statements in conformity with generally accepted
accounting  principles  requires  management  to  make estimates and assumptions
that  affect  the  reported amounts  of assets and liabilities and disclosure of
contingent  assets  and liabilities  at the date of the financial statements and
the  reported  amounts  of  revenues  and  expenses during the reporting period.
Actual results could differ from those estimates.                              
                                                                               
(3)  Credit Arrangements                                                       
                                                                               
The  Company  has  a  credit  agreement  with  a  consortium  of  banks  for  an
unsecured   revolving  line  of  credit  which  provides  for  cash   borrowings
for  general  corporate  purposes  as  well  as  for  the issuance of letters of
credit  of up  to $120,000,000 and which expires on May 31, 1999. The Company is
committed  to  pay  (i)  interest  on  the cash borrowings at a fluctuating base
rate  or LIBOR plus an applicable margin, as defined, (ii) letter of credit fees
based  on  the  number  of  days  a  letter  of  credit is outstanding times the
applicable  fee  and  (iii)  an  annual  commitment  fee  payable  quarterly  in
advance.  The  terms  of  this  credit  agreement  require,  among other things,
maintenance   of  minimum  levels  of  shareholders'   equity,  compliance  with
certain  financial ratios and Mr. Robert M. Goodfriend  remaining as Chairman of
the  Board  or  Chief  Executive  Officer of the Company, and place restrictions
on  additional  indebtedness, asset disposals, investments, capital expenditures
and payment of dividends.

(4)  Earnings per share

Weighted average common shares outstanding for the thirteen and twenty-six weeks
ended  August 2, 1997  include  common  equivalent  shares  to  account  for the
dilutive effect of stock options.  Common  equivalent shares were not materially
dilutive in the  thirteen  week and  twenty-six  weeks ended  August 3, 1996 and
therefore  were not included in the earnings  per share  computations  for those
periods.

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards No. 128, "Earnings per Share" ("SFAS No. 128").
This Statement  establishes new standards for computing and presenting  earnings
per share  ("EPS")  information.  SFAS No. 128  simplifies  the  computation  of
earnings per share currently required by Accounting Principles Board Opinion No.
15,  "Earnings  per Share" and its related  interpretations.  The new  Statement
replaces the  presentation  of "primary"  and, when  required,  "fully  diluted"
earnings  per share with  "basic" and  "diluted"  earnings  per share.  This new
Statement is effective for financial  statements issued for periods ending after
December  15,  1997,  including  interim  periods;  earlier  application  is not
permitted. The Company's computation of basic and diluted EPS under SFAS No. 128
for the  thirteen  week and  twenty-six  week  periods  ended August 2, 1997 and
August 3, 1996 will not be materially  different than EPS currently reported for
those periods.


<PAGE>   7



(5)  Recent Accounting Pronouncements

In June 1997, SFAS No. 130, "Reporting  Comprehensive  Income," and SFAS No. 131
"Disclosures  about  Segments of an Enterprise  and Related  Information,"  were
issued and are effective for fiscal  periods  beginning  after December 15, 1997
with early  adoption  permitted.  The Company is  evaluating  the effects  these
statements  will  have  on  its  financial  reporting  and  disclosures.   These
statements  will  have no effect  on the  Company's  results  of  operations  or
financial position.

(6)  Reclassifications

Certain  reclassifications  have been made to the financial  statements of prior
periods to conform to the current period presentation.


<PAGE>   8



INDEPENDENT ACCOUNTANTS' REVIEW REPORT

Board of Directors and Shareholders
Goody's Family Clothing, Inc.
Knoxville, Tennessee:

We have  reviewed the  accompanying  condensed  consolidated  balance  sheets of
Goody's Family  Clothing,  Inc. and subsidiaries as of August 2, 1997 and August
3, 1996,  and the related  condensed  consolidated  statements of operations and
cash flows for the  thirteen  and  twenty-six  week  periods  then ended.  These
financial statements are the responsibility of the Company's management.

We  conducted  our  reviews in  accordance  with  standards  established  by the
American  Institute  of  Certified  Public  Accountants.  A  review  of  interim
financial  information consists principally of applying analytical procedures to
financial data and of making inquiries of persons  responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the  expression  of an opinion  regarding the  financial  statements  taken as a
whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with generally
accepted accounting principles.

We have  previously  audited,  in accordance  with generally  accepted  auditing
standards,  the consolidated balance sheet of Goody's Family Clothing,  Inc. and
subsidiaries as of February 1, 1997, and the related consolidated  statements of
operations,  shareholders'  equity,  and cash flows for the year then ended (not
presented  herein);  and in our report  dated March 19,  1997,  we  expressed an
unqualified  opinion  on  those  financial  statements.   In  our  opinion,  the
information set forth in the accompanying  condensed  consolidated balance sheet
as of February 1, 1997 is fairly stated, in all material  respects,  in relation
to the consolidated balance sheet from which it has been derived.


Deloitte & Touche LLP
Atlanta, Georgia
August 21, 1997











<PAGE>   9


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

This Quarterly  Report contains  certain  forward-looking  statements  which are
based upon current expectations,  plans and estimates and involve material risks
and uncertainties  including,  but not limited to, customer demand and trends in
the apparel and retail  industry and to the acceptance of  merchandise  acquired
for  sale  by  the  Company,   the  effectiveness  of  planned  advertising  and
promotional  events,  the  impact  of  competitors'  pricing,  individual  store
performance,  including new stores, adverse weather conditions,  and the general
economic conditions within the Company's markets. The Company does not undertake
to publicly update or revise its  forward-looking  statements even if experience
or future changes make it clear that any projected  results expressed or implied
therein  will not be  realized.  Additional  information  on factors  that could
potentially affect the Company's financial results may be found in the Company's
other filings with the Securities and Exchange Commission.

Results of Operations

The following table sets forth unaudited results of operations,  as a percent of
sales, for the periods indicated:
<TABLE>
<CAPTION>

                                                             Thirteen                    Twenty-six
                                                           Weeks Ended                 Weeks Ended
                                                      August 2,    August 3,        August 2,   August 3,
                                                       1997           1996          1997          1996
                                                   ------------   -----------    -----------   -------
<S>                                               <C>              <C>            <C>           <C>    <C>

    Sales                                            100.0%          100.0%        100.0%        100.0%
    Cost of  sales and occupancy expenses             72.6            75.3          71.9          73.7
                                                     -----           -----         -----         -----
    Gross profit                                      27.4            24.7          28.1          26.3
    Selling, general and administrative expenses      23.5            23.6          24.1          24.7
                                                     -----           -----         -----         -----
    Earnings from operations                           3.9             1.1           4.0           1.6
    Interest expense                                     -             0.1           -             0.1
    Investment income                                  0.2             0.2           0.2           0.2
                                                     -----           -----         -----         -----
    Earnings before income taxes                       4.1             1.2           4.2           1.7
    Provision for income taxes                         1.5             0.5           1.6           0.6
                                                     -----           -----         -----         -----
    Net earnings                                       2.6%            0.7%          2.6%          1.1%
                                                     =====           =====         =====         =====

</TABLE>

Thirteen Weeks Ended August 2, 1997 Compared with Thirteen Weeks Ended August 3,
1996

Overview - During the second quarter of fiscal 1997, the Company opened four new
stores,  relocated two stores and closed one store, bringing the total number of
stores in  operation  at August 2, 1997 to 212,  compared  with 194 at August 3,
1996. During the  corresponding  period of the previous fiscal year, the Company
opened one new store and  relocated  three  stores.  Net earnings for the second
quarter  of  fiscal  1997  were  $5,418,000,  or 2.6% of  sales,  compared  with
$1,362,000, or 0.7% of sales, for the second quarter of fiscal 1996.

Sales - Sales for the second quarter of fiscal 1997 were  $212,206,000,  a 15.7%
increase over the  $183,411,000  in sales for the second quarter of fiscal 1996.
This  increase of  $28,795,000  consisted of (i) a 7.3%  increase in  comparable
store sales of $12,332,000 over the corresponding  period of the previous fiscal
year and (ii)  additional  sales from new and transition  stores of $16,463,000.
Sales for the quarter were driven by continuing  customer  acceptance of certain
brand-name and private label merchandise.

Gross  Profit  -  Gross  profit  for the  second  quarter  of  fiscal  1997  was
$58,170,000,  or 27.4% of sales, a $12,933,000  increase over the $45,237,000 in
gross  profit,  or 24.7% of  sales,  generated  for the  second  quarter  of the
previous fiscal year. The 2.7% increase in gross profit,  as a percent of sales,
in the second  quarter of fiscal 1997 compared with the second quarter of fiscal
1996 resulted primarily from well-positioned inventories at the beginning of the
quarter,  better  inventory  management  and control and customer  acceptance of
certain key merchandise items, including private label merchandise.

Selling,   General   and   Administrative   Expenses  -  Selling,   general  and
administrative  expenses for the second quarter of fiscal 1997 were $49,800,000,
or 23.5% of sales,  an  increase of  $6,565,000  from  $43,235,000,  or 23.6% of
sales,  for the second  quarter of fiscal  1996.  The 0.1%  decrease in selling,
general  and  administrative  expenses,  as a percent  of sales,  in the  second
quarter of fiscal 1997 compared with the second  quarter of fiscal 1996 resulted
from (i) a 0.2% decrease in advertising and promotional expenses and (ii) a 0.5%
decrease in other  selling,  general  and  administrative  expenses,  which were
offset by (a) a 0.5%  increase in payroll  expenses  and (b) a 0.1%  increase in
depreciation  and amortization  expenses.  Selling,  general and  administrative
expenses for the second quarter of fiscal 1996 included a provision of $691,000,
or 0.4% as a percent of sales,  in connection  with the early  termination  of a
lease of one of the Company's stores which closed in August 1996.

Interest  Expense -  Interest  expense  for the second  quarter  of fiscal  1997
decreased  $99,000  compared with the second quarter of the previous fiscal year
primarily  because  the  Company had no  borrowings  under its credit  agreement
during the second quarter of fiscal 1997.

Investment  Income  -  Investment  income  for the second quarter of fiscal 1997
was  $392,000  compared  with  $388,000  for  the second quarter of the previous
fiscal year.

Income Taxes - The provision  for income taxes for the second  quarter of fiscal
1997 was  $3,250,000,  an effective tax rate of 37.5% of earnings  before income
taxes, compared with $835,000, an effective tax rate of 38.0% of earnings before
income taxes,  for the second quarter of the previous  fiscal year. The decrease
in the  overall  effective  tax  rate is  primarily  due to a  reduction  in the
combined effective state income tax rate.

Twenty-Six  Weeks  Ended  August  2,  1997  Compared with Twenty-Six Weeks Ended
August 3, 1996

Overview - During the twenty-six  weeks ended August 2, 1997, the Company opened
11 new stores,  relocated four stores and closed two stores,  bringing the total
number of stores in  operation  at August 2, 1997 to 212,  compared  with 194 at
August 3, 1996. During the corresponding period of the previous fiscal year, the
Company opened 10 new stores, relocated four stores and remodeled one store. Net
earnings for the twenty-six weeks ended August 2, 1997 were $10,476,000, or 2.6%
as a percent of sales, compared with $3,566,000,  or 1.1% as a percent of sales,
for the twenty-six weeks ended August 3, 1996.

Sales - Sales for the twenty-six weeks ended August 2, 1997 were $402,263,000, a
20.4% increase over the  $334,177,000 in sales for the  corresponding  period of
the previous fiscal year. This increase of $68,086,000  consisted of (i) a 10.9%
increase  in  comparable  store  sales of  $33,881,000  over the  sales  for the
corresponding  period of the previous fiscal year and (ii) additional sales from
new and transition  stores of $34,205,000.  Sales for the twenty-six weeks ended
August  2, 1997  were  driven  by  continuing  customer  acceptance  of  certain
brand-name and private label merchandise.

Gross  Profit - Gross profit for the  twenty-six  weeks ended August 2, 1997 was
$113,147,000,  or 28.1% of sales, a $25,265,000 increase over the $87,882,000 in
gross profit, or 26.3% of sales,  generated for the corresponding  period of the
previous fiscal year. The 1.8% increase in gross profit,  as a percent of sales,
for the twenty-six weeks ended August 2, 1997 compared with the twenty-six weeks
ended August 3, 1996  resulted  from (i) a 1.6%  increase in gross  margins as a
result of better  inventory  management  and  control  and  continuing  customer
acceptance  of  certain  key   merchandise   items,   including   private  label
merchandise, and (ii) a 0.2% decrease in occupancy costs resulting from leverage
achieved from higher sales.

Selling,   General   and   Administrative   Expenses  -  Selling,   general  and
administrative  expenses  for the  twenty-six  weeks  ended  August 2, 1997 were
$97,045,000,  or 24.1% of sales, an increase of $14,535,000 from $82,510,000, or
24.7% of sales,  for the  corresponding  period of the previous fiscal year. The
0.6% decrease in selling,  general and administrative  expenses, as a percent of
sales,  for the  twenty-six  weeks  ended  August  2,  1997  compared  with  the
twenty-six  weeks  ended  August 3, 1996  resulted  from (i) a 0.5%  decrease in
advertising and promotional  expenses and (ii) a 0.3% decrease in other selling,
general and  administrative  expenses,  which were offset by a 0.2%  increase in
payroll  expenses.   Selling,   general  and  administrative  expenses  for  the
twenty-six weeks ended August 3, 1996 included a provision of $691,000,  or 0.2%
as a percent of sales,  in connection  with the early  termination of a lease of
one of the Company's stores which closed in August 1996.

Interest  Expense - Interest  expense for the  twenty-six  weeks ended August 2,
1997 decreased by $61,000 compared with the corresponding period of the previous
fiscal year  primarily  because the Company had no  borrowings  under its credit
agreement during the twenty-six weeks ended August 2, 1997.

Investment  Income - Investment  income for the twenty-six weeks ended August 2,
1997 was $878,000  compared  with $660,000 for the  corresponding  period of the
previous  fiscal year. The increase in investment  income is primarily due to an
increase in invested funds during the period.

Income Taxes - The  provision  for income taxes for the  twenty-six  weeks ended
August  2,  1997  was  $6,285,000,  an  effective  tax rate of 37.5% of earnings
before  income  taxes,  compared  with  $2,186,000,  an  effective  tax  rate of
38.0% of earnings  before  income  taxes,  for the  corresponding  period of the
previous  fiscal  year.  The  decrease  in the  overall  effective  tax  rate is
primarily due to a reduction in the combined effective state income tax rate.

Liquidity and Capital Resources

Financial  Position - The Company's  primary sources of liquidity are cash flows
from  operations,  including credit terms from vendors  and borrowings under its
credit  agreement.  At  August  2,  1997,  the  Company's  working  capital  was
$55,763,000  compared  with  $27,645,000  at August 3,  1996.  At the end of the
twenty-six  week period ended  August 2, 1997  compared  with the  corresponding
period  of  the  previous  year,  (i)  cash,  cash  equivalents  and  investment
securities  increased  $22,138,000,  (ii) net property and  equipment  increased
$152,000,  (iii) inventories  increased  $12,043,000  relating  primarily to new
stores and (iv) accounts  payable  increased  $2,310,000.  Trade payables,  as a
percent  of  inventories,  decreased  to 77.1% at August  2, 1997 as compared
with 82.1% at August 3, 1996.

At  August  2, 1997, the Company had an unsecured  revolving line of credit from
a   consortium  of  banks,  which  provides  for  cash  borrowings  for  general
corporate  purposes  as  well  as for the issuance of letters of credit of up to
$120,000,000  and  which  expires  on  May  31,  1999.  The terms of this credit
agreement  require,  among  other  things,  maintenance  of  minimum  levels  of
shareholders'  equity,  compliance  with certain financial ratios and Mr. Robert
M.  Goodfriend  remaining as Chairman of the Board or Chief Executive Officer of
the   Company,   and   place  restrictions  on  additional  indebtedness,  asset
disposals,  investments,  capital  expenditures and  payment of  dividends.  See
Note  3  to  the Notes to Consolidated Financial Statements.  At August 2, 1997,
the   Company   had   no   cash  borrowings  under  this  credit  agreement  and
$64,466,000  was  in  use  for outstanding  letters of credit, compared  with no
cash   borrowings   and   $36,804,000   utilized   for  outstanding  letters  of
credit  at  August  3, 1996.  In  addition, there were no cash borrowings during
the   twenty-six   weeks   ended   August   2,   1997   compared   with  maximum
borrowings  of  $8,000,000  during  the  twenty-six  weeks ended August 3, 1996,
which   amount   was   repaid   prior to  August  3,  1996.  Letters  of  credit
outstanding  averaged  $53,984,000  during  the twenty-six weeks ended August 2,
1997  compared  with  $25,269,000  during  the  twenty-six weeks ended August 3,
1996.  The  highest  balance  of  letters  of  credit  outstanding  during  the
twenty-six  weeks  ended  August 2, 1997 was $71,900,000 (in June 1997) compared
with  $38,783,000  (in  July  1996)  during the twenty-six weeks ended August 3,
1996.

Cash Flows - Operating  activities  used cash of  $4,178,000  in the  twenty-six
weeks ended August 2, 1997 compared with  $1,414,000  used in the  corresponding
period of the previous fiscal year. Cash used for increases in inventory  during
the  twenty-six  weeks ended August 2, 1997 and August 3, 1996 were  $46,159,000
and $63,343,000, respectively. Accounts payable provided cash of $33,634,000 and
$52,292,000  in the  twenty-six  weeks ended  August 2, 1997 and August 3, 1996,
respectively.   Depreciation  and  amortization  expenses  were  $5,522,000  and
$4,690,000  for the  twenty-six  weeks ended  August 2, 1997 and August 3, 1996,
respectively.

     Cash flows from investing  activities reflected a $7,410,000 and $9,837,000
net use of cash for the  twenty-six  weeks  ended  August 2, 1997 and  August 3,
1996, respectively. Cash was used primarily to fund capital expenditures for new
and relocated stores opened during the first twenty-six weeks of fiscal 1997 and
1996.

Cash provided by financing  activities for the twenty-six  weeks ended August 2,
1997 was $9,939,000  compared with cash used of $2,105,000 for the corresponding
period of the previous fiscal year. Cash management  programs  maintained by the
Company provided cash of $8,743,000 in the twenty-six weeks ended August 2, 1997
compared  with  cash  used of  $2,129,000  for the  corresponding  period of the
previous  fiscal year.  During the  twenty-six  weeks ended August 2, 1997,  the
Company received $1,196,000 from the issuance of common stock on the exercise of
stock options compared with $24,000 received during the corresponding  period of
the previous year.

Outlook - The  Company  plans to open 20 to 24 new stores  (including  12 stores
opened to date  during  fiscal  1997),  relocate  approximately  nine stores and
expand or remodel  approximately  seven stores  during  fiscal 1997.  Management
estimates  that capital  expenditures  will total  approximately  $23,000,000 in
fiscal  1997 for  opening  new stores,  upgrading  existing  stores,  purchasing
computer systems and equipment and for other capital expenditure requirements.

The Company's  primary needs for capital resources are for the purchase of store
inventories,  capital expenditures and for normal operating expenses. Management
believes that cash flows from  operations,  including  credit terms from vendors
and the borrowings  available under the credit agreement,  will be sufficient to
meet the Company's  operating and capital  expenditure  requirements  through at
least the remainder of fiscal 1997.


<PAGE>   10


Seasonality and Inflation

The Company's  business is seasonal by nature.  The Christmas season  (beginning
the Sunday before  Thanksgiving and ending the second Saturday after Christmas),
the back-to-school season (beginning approximately the second week of August and
continuing  through  the  second  week  of  September)  and  the  Easter  season
(beginning  approximately two weeks before Easter Sunday and ending the Saturday
preceding Easter) collectively  accounted for approximately 36% of the Company's
annual sales,  based on the Company's  last three fiscal years ended February 1,
1997. In general,  sales volume varies directly with customer traffic,  which is
heaviest during the third and fourth  quarters of a fiscal year.  Because of the
seasonality  of  the  Company's  business,  results  for  any  quarter  are  not
necessarily indicative of the results that may be achieved for the full year.

Inflation  can affect the costs  incurred by the Company in the  purchase of its
merchandise,  the leasing of its stores and certain  components  of its selling,
general  and  administrative  expenses.  To date,  inflation  has not  adversely
affected  the  Company's  business,  although  there  can be no  assurance  that
inflation will not have a material adverse effect in the future.


<PAGE>   11



PART II - OTHER INFORMATION


Item 1 - Legal Proceedings  -  None
----------------------------       

Item 2. -  Changes in Securities  -  None

Item 3.  -  Defaults Upon Senior Securities  -  None

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

The Company held its Annual Meeting of Shareholders  (the "Meeting") on June 18,
1997 at which the following matters were submitted to a vote of shareholders.

(a)    Election of Directors

At the Meeting,  the following  persons were elected as directors of the Company
for three year terms expiring at the 2000 Annual Meeting of Shareholders:

Harry M. Call -  14,762,019  shares of common  stock  were voted in favor of his
election;  5,129 shares of common stock were withheld;  and 1,423,734  shares of
common stock were not voted.

Samuel J. Furrow - 14,761,569  shares of common stock were voted in favor of his
election;  5,579 shares of common stock were withheld;  and 1,423,734  shares of
common stock were not voted.

The other  directors of the Company  include Robert M.  Goodfriend and Robert F.
Koppel,  whose terms expire at the 1998 Annual Meeting,  and Irwin L. Lowenstein
and Cheryl L. Turnbull, whose terms expire at the 1999 Annual Meeting.

(b)    Approval of the Goody's Family Clothing, Inc. 1997 Stock Option Plan
("1997 Plan")

At the  Meeting,  the  shareholders  approved  the  adoption  of the 1997  Plan;
11,612,557  shares of common  stock  were  voted in favor;  1,282,767  shares of
common stock were voted  against;  18,311 shares of common stock were  withheld;
1,853,513 shares of common stock were not voted by brokers; and 1,423,734 shares
of common stock were not voted. The adoption of the 1997 Plan allows the Company
to reserve  1,000,000  shares of Common  Stock for  issuance  to  directors  and
employees.

(c)    Approval of the Goody's Family Clothing, Inc. Short Term Incentive Plan
 ("Short Term Incentive Plan")

At the  Meeting,  the  shareholders  approved  the  adoption  of the Short  Term
Incentive Plan;  14,713,805  shares of Common Stock were voted in favor;  37,118
shares of Common Stock were voted  against;  16,225  shares of Common Stock were
withheld;  and 1,423,734  shares of common stock were not voted. The adoption of
the Short Term  Incentive  Plan  allows the Company to reward its  eligible  key
employees with performance-based compensation.

Item 5.  -  Other Information  - None

Item 6.  -  Exhibits and Reports on Form 8-K
        a)   Exhibits -
              10.46   -    Deferred Compensation Agreement between the
                           Registrant and Robert M. Goodfriend

              10.47   -    Employment letter from the Registrant to Stanley B.
                           Latacha

              15      -    Accountants' Awareness Letter

              27      -    Financial Data Schedule

        b)   Reports on Form 8-K  -  None






                          GOODY'S FAMILY CLOTHING, INC.



                                   SIGNATURES



                    Pursuant to the requirements of the Securities  Exchange Act
             of 1934, the registrant has duly caused this report to be signed on
             its behalf by the undersigned thereunto duly authorized.





                                                  GOODY'S FAMILY CLOTHING, INC.
                                                  (Registrant)




             Date:    August 21, 1997               /s/ Harry M. Call
                    ------------------------        -----------------
                                                    Harry M. Call
                                                    Director, President and
                                                    Chief Operating Officer



             Date:    August 21, 1997               /s/ Edward R. Carlin
                    ------------------------        --------------------
                                                    Edward R. Carlin
                                                    Executive Vice President,
                                                    Chief Financial Officer
                                                    and Secretary
                                                  (Principal Financial Officer)



             Date:    August 21, 1997               /s/ David G. Peek
                    ------------------------        -----------------
                                                    David G. Peek
                                                    Vice President, Corporate
                                                    Controller and
                                                    Chief Accounting Officer
                                                  (Principal Accounting Officer)