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 April 4, 1999

                                       OR

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

          For The Transition Period From___________ to__________


                         Commission file number 0-24548

                               Movie Gallery, Inc.
             (Exact name of registrant as specified in its charter)

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



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

                                 (334) 677-2108
              (Registrant's telephone number, including area code)

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 filing requirements
for the past 90 days. YES X NO ____


The number of shares outstanding of the registrant's  common stock as of May 12,
1999 was 13,431,115.


<PAGE>

                               Movie Gallery, Inc.

                                      Index


Part I.  Financial Information

Item 1.  Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets - April 4, 1999 and January 3, 1999................1

Consolidated Statements of  Income - Thirteen weeks ended April 4, 1999
and April 5, 1998..............................................................2

Consolidated Statements of Cash Flows - Thirteen weeks ended April 4, 1999
and April 5, 1998..............................................................3

Notes to Consolidated Financial Statements - April 4, 1999.....................4

Item 2.  Management's Discussion and Analysis of Results of Operations
and Financial Condition........................................................6

Item 3.  Quantitative and Qualitative Disclosures About Market Risk...........11

Part II.  Other Information

Item 6.  Exhibits and Reports on Form 8-K.....................................11


<PAGE>

<TABLE>

                               Movie Gallery, Inc.

                           Consolidated Balance Sheets
                                 (in thousands)

<CAPTION>
                                                             April 4,     January 3,
                                                               1999          1999
                                                            ------------------------
                                                            (unaudited)
<S>                                                         <C>            <C>               
Current Assets:
   Cash and cash equivalents                                $   4,351      $   6,983
   Merchandise inventory                                       10,760         11,824
   Prepaid expenses                                               910            779
   Store supplies and other                                     3,563          3,772
   Deferred income taxes                                          308            312
                                                            ---------      ---------
Total current assets                                           19,892         23,670

Rental inventory, net                                          45,090         44,998
Property, furnishings and equipment, net                       41,261         43,920
Goodwill and other intangibles, net                            83,932         85,743
Deposits and other assets                                       2,181          1,799
Deferred income taxes                                           1,157          2,239
                                                            ---------      ---------
Total assets                                                $ 193,513      $ 202,369
                                                            =========      =========
                                                            

Liabilities and stockholders' equity 
Current liabilities:
   Accounts payable                                         $  19,905      $  23,396
   Accrued liabilities                                          6,456          7,426
   Current portion of long-term debt                              252            442
                                                            ---------      ---------
Total current liabilities                                      26,613         31,264

Long-term debt                                                 40,634         46,212
Other accrued liabilities                                         572            778

Stockholders' equity:
   Preferred stock, $.10 par value; 2,000,000 shares
     authorized, no shares issued and outstanding                  --             --
   Common stock, $.001 par value; 60,000,000
     shares authorized, 13,431,115 shares issued
     and outstanding                                               13             13
   Additional paid-in capital                                 131,743        131,743
   Retained earnings (deficit)                                 (5,165)        (7,146)
   Treasury stock (200,200 and 115,200 shares)                   (897)          (495)
                                                            ---------      ---------
Total stockholders' equity                                    125,694        124,115
                                                            ---------      ---------
Total liabilities and stockholders' equity                  $ 193,513      $ 202,369
                                                            =========      =========
                                                            
See accompanying notes.

</TABLE>

                                       1
<PAGE>


<TABLE>
                               Movie Gallery, Inc.

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

<CAPTION>
                                                     Thirteen weeks ended
                                                     April 4,     April 5,
                                                       1999         1998
                                                     ---------------------

<S>                                                  <C>          <C>
Revenues:
   Rentals                                           $ 59,326     $ 58,933
   Product sales                                       10,294       11,558
                                                     --------     --------
                                                       69,620       70,491
Operating costs and expenses:
   Store operating expenses                            35,853       35,050
   Amortization of rental inventory                    13,751       17,302
   Amortization of intangibles                          1,838        1,747
   Cost of product sales                                6,884        7,519
   General and administrative                           4,917        4,260
                                                     --------     --------
Operating income                                        6,377        4,613
Interest expense, net                                    (866)      (1,577)
                                                     --------     --------
Income before income taxes, extraordinary loss
   and cumulative effect of accounting change           5,511        3,036
Income taxes                                            2,149        1,154
                                                     --------     --------
 
Income before extraordinary loss and cumulative
   effect of accounting change                          3,362        1,882
Extraordinary loss on early extinguishment of debt       (682)          --
Cumulative effect of accounting change                   (699)          --
                                                     --------     --------
Net income                                           $  1,981     $  1,882
                                                     ========     ========
 
Basic and diluted earnings per share:
Income before extraordinary loss and cumulative
   effect of accounting change                       $   0.25     $   0.14
Extraordinary loss on early extinguishment of debt      (0.05)          --
Cumulative effect of accounting change                  (0.05)          --
                                                     --------     --------
Net income                                           $   0.15     $   0.14
                                                     ========     ========

Weighted average shares outstanding:
   Basic                                               13,279       13,419
   Diluted                                             13,614       13,818


See accompanying notes.
</TABLE>

                                       2
<PAGE>

<TABLE>

                               Movie Gallery, Inc.

                      Consolidated Statements of Cash Flows
                                   (Unaudited)
                                 (in thousands)
<CAPTION>
                                                          Thirteen weeks ended
                                                          April 4,     April 5,
                                                            1999         1998
                                                          ---------------------

<S>                                                       <C>          <C>
Operating activities
Net income                                                $  1,981     $  1,882
Adjustments to reconcile net income to net
  cash provided by operating activities: 
     Extraordinary loss on early extinguishment of debt        682           --
     Cumulative effect of accounting change                    699           --
     Depreciation and amortization                          18,757       22,248
     Deferred income taxes                                   1,813        1,154
Changes in operating assets and liabilities:
     Merchandise inventory                                   1,064          714
     Other current assets                                       78         (348)
     Deposits and other assets                                (755)         (41)
     Accounts payable                                       (3,491)      (3,871)
     Accrued liabilities                                    (1,844)        (321)
                                                          --------     --------
Net cash provided by operating activities                   18,984       21,417

Investing activities
Business acquisitions                                          (65)          --
Purchases of rental inventory, net                         (13,812)     (15,397)
Purchases of property, furnishings and equipment            (1,569)      (1,551)
                                                           --------    --------
Net cash used in investing activities                      (15,446)     (16,948)

Financing activities
Net proceeds from issuance of common stock                      --            7
Purchases of treasury stock                                   (402)          --
Payments on notes payable                                       --         (200)
Principal payments on long-term debt                        (5,768)      (4,764)
                                                          --------     --------
                                                          
Net cash used in financing activities                       (6,170)      (4,957)
                                                          --------     --------
                                                      
Decrease in cash and cash equivalents                       (2,632)        (488)
Cash and cash equivalents at beginning of period             6,983        4,459
                                                          --------     --------
Cash and cash equivalents at end of period                $  4,351     $  3,971                                   
                                                          ========     ========

See accompanying notes.

</TABLE>

                                       3
<PAGE>


                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (Unaudited)

                                  April 4, 1999

1.  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly,  the financial statements do not include all of the
information and footnotes required by generally accepted  accounting  principles
for complete financial statements. In the opinion of management, all adjustments
(consisting  of  normal  recurring  accruals)  considered  necessary  for a fair
presentation have been included.  Operating results for the thirteen week period
ended April 4, 1999 are not  necessarily  indicative  of the results that may be
expected for the fiscal year ending  January 2, 2000.  For further  information,
refer to the consolidated financial statements and footnotes thereto included in
Movie  Gallery,  Inc.'s  annual  report on Form 10-K for the  fiscal  year ended
January 3, 1999.

2.  Rental Inventory

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

The new method of amortization  has been applied to all rental inventory held at
July 6, 1998. The adoption of the new method of amortization  has been accounted
for as a change  in  accounting  estimate  effected  by a change  in  accounting
principle.  Prior to July 6, 1998,  rental  inventory  was  recorded at cost and
amortized  over  its  economic  useful  life.  Videocassettes  and  video  games
considered  to  be  base  stock  were  amortized  over  thirty-six  months  on a
straight-line basis to a $5 salvage value. New release  videocassettes and video
games were  amortized as follows:  (i) the fourth and any  succeeding  copies of
each title per store were amortized on a straight-line  basis over six months to
an average  net book  value of $5 which was then  amortized  on a  straight-line
basis over the next thirty months or until the  videocassette  or video game was
sold, at which time the unamortized  book value was charged to cost of sales and
(ii) copies one  through  three of each title per store were  amortized  as base
stock.

3.  Financing Obligations

On July 10, 1996, the Company  entered into a Credit  Agreement with First Union
National  Bank of North  Carolina  ("First  Union")  with  respect to a reducing
revolving credit facility (the "Original  Facility").  The Original Facility was
unsecured and involved a $90 million commitment that reduced quarterly beginning
March 31, 1998.  $46 million was  outstanding  at January 3, 1999.  The Original
Facility was replaced on January 7, 1999 with a new Credit  Agreement with First
Union (the "New  Facility").  The New Facility is an unsecured  revolving credit
facility  that will mature in its entirety on January 7, 2002.  The New Facility
provides for  borrowings of up to $65 million,  and the Company may increase the
amount of the New  Facility  to $85  million if existing  banks  increase  their
commitments or if any new banks enter the Credit Agreement. The interest rate of
the New 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 New  Facility  at any time  without  penalty.  The more
restrictive  covenants of the New Facility  restrict  borrowings based upon cash
flow levels.

                                        4
<PAGE>
                              Movie Gallery, Inc.

        Notes to Consolidated Financial Statements (Unaudited)(continued)

Concurrent with the New Facility, the Company amended its existing interest rate
swap to coincide  with the maturity of the New  Facility.  The amended  interest
rate swap agreement  effectively  fixes the Company's  interest rate exposure on
$37  million of the amount  outstanding  under the New  Facility at 5.8% plus an
applicable  margin  percentage.  The  interest  rate  swap  reduces  the risk of
increases  in interest  rates during the life of the New  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 New Facility matures.

As a result of the New Facility and the amended  interest  rate swap  agreement,
the Company recognized an extraordinary loss on the early extinguishment of debt
of $682,000  (net of taxes of  $359,000),  or $0.05 per share,  during the first
quarter of 1999. The extraordinary  loss was comprised  primarily of unamortized
debt issue costs associated with the Original Facility and the negative value of
the original interest rate swap at January 7, 1999.

4.  Earnings Per Share

Basic  earnings per share is computed  based on the weighted  average  number of
shares of  common  stock  outstanding  during  the  periods  presented.  Diluted
earnings per share is 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  (335,000  and  399,000 for the  thirteen  weeks ended April 4, 1999 and
April 5,  1998,  respectively).  No  adjustments  were made to net income in the
computation of basic or diluted earnings per share.

5.  Cumulative Effect of a Change in Accounting Principle

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 quarter  ended April 4, 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 taxes of $368,000),  or $0.05 per share,  to expense
the unamortized  costs that had been  capitalized  prior to January 4, 1999. The
impact of adoption on income from  continuing  operations  for the quarter ended
April 4, 1999 was not material.


                                        5
<PAGE>


                               Movie Gallery, Inc.

          Management's Discussion and Analysis of Results of Operations
                             and Financial Condition

The  following  table  sets  forth,  for the  periods  indicated,  statement  of
operations  data  expressed as a percentage  of total  revenue,  the  percentage
increase or decrease from the comparable period and the number of stores open at
the end of each period.
<TABLE>
<CAPTION>

                                                         Thirteen weeks ended
                                                        April 4,      April 5,        Increase
                                                          1999          1998         (Decrease)
                                                        ---------------------------------------
<S>                                                     <C>              <C>          <C>
Revenues:
   Rentals                                                 85.2%         83.6%           1.6
   Product sales                                           14.8          16.4           (1.6)
                                                        -------       -------         ------
                                                          100.0         100.0             --
Operating costs and expenses:
   Store operating expenses                                51.5          49.8            1.7
   Amortization of rental inventory                        19.8          24.5           (4.7)
   Amortization of intangibles                              2.6           2.5            0.1
   Cost of product sales                                    9.9          10.7           (0.8)
   General and administrative                               7.1           6.0            1.1
                                                        -------       -------         ------
Total                                                      90.9          93.5           (2.6)
                                                        -------       -------         ------
Operating income                                            9.1           6.5            2.6
Interest expense, net                                      (1.2)         (2.2)           1.0
                                                        -------       -------         ------
Income before income taxes, extraordinary loss
   and cumulative effect of accounting change               7.9           4.3            3.6
Income taxes                                                3.1           1.6            1.5
                                                        -------       -------         ------
Income before extraordinary loss and cumulative
   effect of accounting change                              4.8           2.7            2.1
Extraordinary loss on early extinguishment of debt         (1.0)           --           (1.0)
Cumulative effect of accounting change                     (1.0)           --           (1.0)
                                                        -------       -------         ------
Net income                                                  2.8%          2.7%           0.1%
                                                        =======       =======         ======

Adjusted EBITDA (in thousands)                          $11,509       $11,747         $ (238)
                                                        =======       =======         ======     

Number of stores open at end of period                      826           849            (23)
                                                        =======       =======         ======
</TABLE>
           
For the thirteen weeks ended April 4, 1999,  revenues were $69.6 million, a 1.2%
decrease  from $70.5  million in the  comparable  period of the prior year.  The
Company  had 2.7%  fewer  stores in the  operating  base at the end of the first
quarter  versus  the prior  year.  Revenues  for the first  quarter of 1999 were
driven by a 2%  increase in  same-store  revenues  from  rentals  while  overall
same-store  revenues  increased  only slightly due to decreases in product sales
revenue.  The increase in  same-store  rental  revenues for the first quarter of
1999 was the result of (i) an  increase  in the number of copies of new  release
videocassettes  available to customers as a result of the  Company's  continuing
focus on the use of copy-depth  initiatives,  including revenue sharing programs
and other depth of copy programs available from movie studios;  (ii) an increase
in the game rental  business due to both increasing  consumer  acceptance of the
Nintendo 64 and Sony Playstation game platforms and an increase in the number of
game  titles  available  for  these  platforms;  and (iii)  chain-wide  internal
marketing programs designed to generate more consumer  excitement and traffic in
the  Company's  base of stores.  The  decrease  in  product  sales  revenue  was
primarily the result of a short-term  disruption in the supply of videocassettes
held for sale from our primary distributor.

                                       6
<PAGE>
 

                               Movie Gallery, Inc.

          Management's Discussion and Analysis of Results of Operations
                       and Financial Condition (continued)



Product  sales as a percentage  of total  revenue for the  thirteen  weeks ended
April 4, 1999 was 14.8%,  compared to 16.4% for the  comparable  period in 1998.
This decrease  reflects the net impact of the increased  rental  revenue and the
short-term  disruption in the supply of  videocassettes  held for sale discussed
above.

Store  operating  expenses,  which reflect  direct store  expenses such as lease
payments and in-store  payroll,  increased as a percentage  of revenues to 51.5%
for the  thirteen  weeks ended April 4, 1999 from 49.8% for the  thirteen  weeks
ended April 5, 1998. This increase in store  operating  expenses as a percentage
of revenues  was  primarily  due to a  continuing  increase  in revenue  sharing
expenses as a result of the  Company's  focus on the purchase of rental  product
using various copy-depth initiatives.

Effective July 6, 1998, the Company changed its  amortization  policy for rental
inventory,  which was accounted for as a change in accounting  estimate effected
by a change in accounting  principle and resulted in a non-recurring,  non-cash,
pre-tax  charge of $43.6 million in the quarter ended October 4, 1998. The major
impetus  for the  change  in  amortization  policy  is the  changing  purchasing
economics within the industry,  which have resulted in a significant increase in
new release videos  available for rental.  While revenue sharing  agreements 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 has changed its amortization policy for
rental inventory as described in Note 2 of the "Notes to Consolidated  Financial
Statements."

Amortization of rental  inventory for the thirteen weeks ended April 4, 1999 was
19.8%, down from 24.5% for the comparable period in 1998. Amortization of rental
inventory for all periods ending prior to July 6, 1998, was calculated under the
previous  policy  described  in Note 2 of the "Notes to  Consolidated  Financial
Statements." A reduction in capital expended for rental inventory purchases from
1998 to 1999, as well as continued increases in the use of revenue sharing,  are
the main reasons that the  amortization  of rental  inventory as a percentage of
revenue in 1999 has declined from 1998 levels.

Cost of product sales  includes the costs of new  videocassettes,  confectionery
items and other goods,  as well as the  unamortized  value of previously  viewed
rental inventory sold in the Company's  stores.  Cost of product sales decreased
with the  decreased  revenue  from  product  sales and  increased  slightly as a
percentage  of revenues  from product  sales from 65.1% for the first quarter of
1998 to 66.9% for the first quarter of 1999. The decrease in product sales gross
margins  resulted  primarily  from  efforts by the Company to promote  increased
product sales through discounted pricing and special sales promotions.

General and administrative expenses as a percentage of revenue increased to 7.1%
for the first quarter of 1999 from 6.0% for the comparable period in 1998 as the
Company  increased its human  resources in preparation for a more aggressive new
store development effort in 1999.

As a result of the above  factors,  primarily the reduction in  amortization  of
rental  inventory,  operating  income  increased by 38.2% to $6.4 million in the
first quarter of 1999 from $4.6 million in the first quarter of 1998.

Net interest expense as a percentage of revenues decreased to 1.2% for the first
quarter of 1999 from 2.2% for the first quarter of 1998.  These  decreases  were
due primarily to reductions in total debt outstanding from 1998 to 1999.  

During the first quarter of 1999, the Company incurred an extraordinary  loss on
the early  extinguishment  of debt of $682,000  (net of taxes of  $359,000),  or
$0.05 per 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  its  debt
obligations discussed below in "Liquidity and Capital Resources."

                                       7
<PAGE>
                              Movie Gallery, Inc.

          Management's Discussion and Analysis of Results of Operations
                       and Financial Condition (continued)


Effective  January 4, 1999,  the  Company  adopted the  provisions  of the AICPA
Statement  of  Position   ("SOP")  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 taxes of $368,000),  or $0.05
per share, to expense the unamortized portion of certain start-up costs that had
been  capitalized  prior to January 4,  1999,  discussed  fully in Note 5 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.  The Company has funded inventory  purchases,  remodeling and relocation
programs, new store opening costs and acquisitions primarily from cash flow from
operations,  the proceeds of two public equity offerings,  loans under revolving
credit facilities and seller financing.

During  the first  quarter  of 1999,  the  Company  generated  $11.5  million in
Adjusted  EBITDA  versus  $11.7  million  for the  comparable  period  in  1998.
"Adjusted  EBITDA"  is  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.

Net cash  provided  by  operating  activities  was $19.0  million  for the first
quarter of 1999 as compared to $21.4 million for the first quarter of 1998.  The
decrease in net cash  provided by  operating  activities  was  primarily  due to
decreases in depreciation and amortization and accrued  liabilities,  as well as
an increase in deposits and other assets,  partially  offset by higher operating
income in the first quarter of 1999 versus the first quarter of 1998.

Net cash used in investing activities was $15.4 million for the first quarter of
1999 as compared to $16.9 million for the first  quarter of 1998.  This decrease
in funds  used for  investing  activities  is the  result of a  decrease  in the
expenditures  of capital for rental  inventory  during the first quarter of 1999
versus the first quarter of 1998.

Net cash used in financing  activities  was $6.2  million for the quarter  ended
April 4, 1999 as compared to $5.0  million  for the  comparable  period in 1998.
This  increase  represents an increase in principal  payments on long-term  debt
versus the prior year.

During 1996, the Company  entered into an unsecured  reducing  revolving  credit
facility (the "Original  Facility") which involved a $90 million commitment that
reduced  quarterly  beginning  March 31, 1998.  $46 million was  outstanding  at
January 3, 1999.  The  Original  Facility was replaced on January 7, 1999 with a
new Credit  Agreement with First Union National Bank of North Carolina (the "New
Facility"). The New Facility provides for borrowings of up to $65 million, is an
unsecured  revolving credit facility and matures on January 7, 2002. The Company
may  increase  the amount of the New  Facility to $85 million if existing  banks
increase their commitments or if any new banks enter the Credit  Agreement.  The
interest  rate of the New 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 New Facility at any time without penalty.
The more  restrictive  covenants of the New Facility  restrict  borrowings based
upon cash flow levels.

                                       8
<PAGE>

                              Movie Gallery, Inc.

          Management's Discussion and Analysis of Results of Operations
                       and Financial Condition (continued)

The Company  grows its store base  through  internally  developed  and  acquired
stores and may require  capital in excess of internally  generated  cash flow to
achieve its desired growth.  The Company has announced a planned increase in its
unit growth in 1999,  which is planned to be accomplished  via opening up to 100
internally  developed stores and making  selective,  accretive and strategically
consistent acquisitions, if available to the Company on reasonable terms. To the
extent  available,  future  acquisitions  may be completed using funds available
under the New Facility,  financing  provided by sellers,  alternative  financing
arrangements  such as funds raised in public or private debt or equity offerings
or shares of 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.

At April 4, 1999, the Company had a working capital deficit of $6.7 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 New Facility,  cash on hand and trade credit will provide the necessary
capital to fund its current plan of  operations  for Fiscal 1999,  including its
anticipated new store openings.  However,  to fund a resumption of an aggressive
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.

Other Matters

In March 1999, the Company  entered into a definitive  agreement to purchase the
assets  and assume the leases of  approximately  90 stores  operated  by Blowout
Entertainment, Inc. ("Blowout") for an aggregate purchase price of approximately
$2.4  million,  subject  to  adjustment  under  certain  circumstances.  Blowout
operates  video  stores  within  large  retailers  such as  Wal-Mart.  While the
consummation  of the  acquisition is subject to a number of closing  conditions,
the Company anticipates consummation of the transaction to occur in May 1999.

The Company has  performed  an analysis of its  operating  systems to  determine
systems'  compatibility  with the upcoming year 2000.  Substantially  all of the
Company's operating systems are year 2000 compliant, including its point-of-sale
system.  While the  Company  has begun to  actively  replace  or modify  certain
software and hardware so that they will properly function on January 1, 2000 and
thereafter,  the costs associated with these  modifications or replacements have
not been  material to the Company nor does the Company  believe these costs will
be material in the future.

The Company's  payroll  software is not currently year 2000 compliant.  However,
the Company is in the process of replacing  its payroll  system with a year 2000
compliant  package that will provide  management with better  functionality  and
reporting. While the current payroll software is the Company's largest year 2000
issue to resolve,  the Company  believes that its planned  software and hardware
modifications,  as well as its replacement efforts will result in no significant
operational  problems.  However,  if such  modifications and conversions are not
made,  or are not  completed  timely,  the year 2000 issue could have a material
adverse impact on the operations of the Company.

                                       9
<PAGE>


                              Movie Gallery, Inc.

          Management's Discussion and Analysis of Results of Operations
                       and Financial Condition (continued)


The Company is  currently  not aware of any major  vendor  that is not  actively
managing the process of being year 2000  compliant  by December 31, 1999.  Thus,
the Company  does not believe  that there are any vendors with a year 2000 issue
that would  materially  impact the results of operations or the liquidity of the
Company.  However,  the Company has no means of ensuring  that  vendors  will be
adequately prepared for the year 2000.

The Company is developing  contingency plans in the event it experiences  system
failure  related to the year 2000.  The Company  plans to evaluate the status of
year 2000 compliance throughout 1999 to determine whether such contingency plans
are  adequate,  although  at this  time  the  Company  knows  of no  reason  its
modifications  and  replacements of operating  systems will not be effective and
completed in a timely manner.

This report contains certain  forward-looking  statements regarding the Company.
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 a number of  important  risk factors
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.  These risk factors  include  competitive
factors and weather conditions within the Company's geographic markets, adequate
product  availability from movie studios,  the Company's ability to successfully
execute its new store  opening  program and the risk factors that are  discussed
from time-to-time in the Company's SEC reports,  including,  but not limited to,
the report on Form 10-K for the fiscal year ended January 3, 1999.


                                       10
<PAGE>


Item 3.  Quantitative and Qualitative Disclosures About Market Risks

         There have been no changes in the Company's inherent market risks since
the  disclosures  made as of January 3, 1999 in the  Company's  annual report on
Form 10-K.


                           Part II - Other Information


Item 6.  Exhibits and Reports on Form 8-K

         a)  Exhibits

             27  Financial Data Schedule

         b)  Reports on Form 8-K

             None.


                                   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.




                                          Movie Gallery, Inc.
                                 -------------------------------------
                                             (Registrant)



                                 /s/ J. Steven Roy
                                 --------------------------------------
                                 J. Steven Roy, Executive Vice President
                                 and Chief Financial Officer


Date: May 14, 1999

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