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 July 1, 2001

                                       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)


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 August
8, 2001 was 11,597,853.


<PAGE>

                                Movie Gallery, Inc.

                                      Index



Part I.  Financial Information

Item 1.  Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets - July 1, 2001 and December 31, 2000...............1

Consolidated Statements of Income - Thirteen weeks and twenty-six weeks
ended July 1, 2001 and July 2, 2000............................................2

Consolidated Statements of Cash Flows - Twenty-six weeks ended
July 1, 2001 and July 2, 2000..................................................3

Notes to Consolidated Financial Statements - July 1, 2001......................4

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk...........10

Part II.  Other Information

Item 4.  Submission of Matters to a Vote of Security Holders..................10

Item 6.  Exhibits and Reports on Form 8-K.....................................10

<PAGE>

                               Movie Gallery, Inc.
                           Consolidated Balance Sheets
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                  July 1,      December 31,
                                                                   2001            2000
                                                                ----------     -----------
                                                                (Unaudited)
<S>                                                              <C>             <C>

Assets
Current assets:
   Cash and cash equivalents                                     $  7,619        $  7,029
   Merchandise inventory                                            5,962           9,264
   Prepaid expenses                                                 2,268           1,000
   Notes receivable                                                11,010              --
   Store supplies and other                                         4,093           3,852
   Deferred income taxes                                              491             502
                                                                 --------        --------
Total current assets                                               31,443          21,647

Rental inventory, net                                              63,059          61,773
Property, furnishings and equipment, net                           54,209          53,124
Goodwill and other intangibles, net                                74,474          77,926
Deposits and other assets                                           3,254           3,066
                                                                 --------        --------
Total assets                                                     $226,439        $217,536
                                                                 ========        ========

Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                                              $ 28,297        $ 31,111
   Accrued liabilities                                             12,533          11,631
                                                                 --------        --------
Total current liabilities                                          40,830          42,742

Long-term debt                                                     40,700          40,600
Other accrued liabilities                                             400             253
Deferred income taxes                                               5,595           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, 11,381,128 and 11,136,167
       shares issued and outstanding                                   11              11
   Additional paid-in capital                                     126,600         121,841
   Retained earnings                                               12,303           7,357
                                                                 --------        --------
Total stockholders' equity                                        138,914         129,209
                                                                 --------        --------
Total liabilities and stockholders' equity                       $226,439        $217,536
                                                                 ========        ========

See accompanying notes.

</TABLE>


                                       1
<PAGE>


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

<TABLE>
<CAPTION>
                                             Thirteen Weeks Ended      Twenty-Six Weeks Ended
                                             ---------------------     ----------------------
                                              July 1,      July 2,      July 1,      July 2,
                                               2001         2000         2001         2000
                                             ---------    --------     ---------    ---------
<S>                                          <C>          <C>          <C>          <C>
Revenues:
   Rentals                                   $  70,953    $  66,309    $ 148,851    $ 136,086
   Product sales                                12,034       11,036       25,707       22,752
                                             ---------    ---------    ---------    ---------
                                                82,987       77,345      174,558      158,838
Cost of sales:
   Cost of rental revenues                      22,035       19,467       44,634       40,058
   Cost of product sales                         7,335        7,127       16,451       14,317
                                             ---------    ---------    ---------    ---------
Gross margin                                    53,617       50,751      113,473      104,463

Operating costs and expenses:
   Store operating expenses                     40,477       37,995       81,871       76,108
   General and administrative                    6,417        6,258       14,741       12,574
   Amortization of intangibles                   1,590        2,261        3,504        4,066
   Stock option compensation                     2,533           --        3,344           --
                                             ---------    ---------    ---------    ---------
Operating income                                 2,600        4,237       10,013       11,715

Interest expense, net                             (790)        (957)      (1,455)      (1,825)
                                             ---------    ---------    ---------    ---------
Income before income taxes and
   extraordinary item                            1,810        3,280        8,558        9,890

Income taxes                                       706        1,345        3,435        4,055
                                             ---------    ---------    ---------    ---------
Income before extraordinary item                 1,104        1,935        5,123        5,835
Extraordinary loss on early extinguishment
   of debt                                        (177)          --         (177)          --
                                             ---------    ---------    ---------    ---------
Net income                                   $     927    $   1,935    $   4,946    $   5,835
                                             =========    =========    =========    =========

Basic earnings  per share:
Income before extraordinary item             $    0.10    $    0.17    $    0.46    $    0.49
Extraordinary loss on early extinguishment
   of debt                                       (0.02)          --        (0.02)          --
                                             ---------    ---------    ---------    ---------
Net income per share - basic                 $    0.08    $    0.17    $    0.44    $    0.49
                                             =========    =========    =========    =========

Diluted earnings per share:
Income before extraordinary item             $    0.09    $    0.17    $    0.44    $    0.49
Extraordinary loss on early extinguishment
   of debt                                       (0.01)          --        (0.01)          --
                                             ---------    ---------    ---------    ---------
Net income per share - diluted               $    0.08    $    0.17    $    0.43    $    0.49
                                             =========    =========    =========    =========

Weighted average shares outstanding:
   Basic                                        11,286       11,321       11,220       11,798
   Diluted                                      11,890       11,368       11,608       11,827

See accompanying notes.
</TABLE>


                                       2
<PAGE>

                             Movie Gallery, Inc.
                    Consolidated Statements of Cash Flows
                                 (Unaudited)
                                (in thousands)


<TABLE>
<CAPTION>
                                                              Twenty-Six Weeks Ended
                                                             -------------------------
                                                              July 1,          July 2,
                                                               2001             2000
                                                             --------         --------
<S>                                                          <C>              <C>
Operating activities:
Net income                                                   $  4,946         $  5,835
Adjustments to reconcile net income to net cash
 provided by operating activities:
   Extraordinary loss on early extinguishment of debt             177               --
   Depreciation and amortization                               43,066           37,477
   Stock option compensation                                    3,344               --
   Deferred income taxes                                        1,455            1,622
Changes in operating assets and liabilities:
   Merchandise inventory                                        3,302            5,387
   Notes receivable                                           (11,010)              --
   Other current assets                                        (1,509)             (34)
   Deposits and other assets                                     (573)          (1,760)
   Accounts payable                                            (2,819)          (4,593)
   Accrued liabilities                                          1,149             (373)
                                                             --------         --------
Net cash provided by operating activities                      41,528           43,561

Investing activities:
Business acquisitions                                            (120)            (721)
Purchases of rental inventory, net                            (33,024)         (29,991)
Purchases of property, furnishings and equipment               (8,841)         (10,098)
                                                             --------         --------
Net cash used in investing activities                         (41,985)         (40,810)

Financing activities:
Purchases and retirement of common stock                           --           (5,698)
Proceeds from issuance of long-term debt                          100            1,823
Proceeds from exercise of stock options                           947               --
Principal payments on long-term debt                               --             (146)
                                                             --------         --------
Net cash provided by (used in) financing activities             1,047           (4,021)
                                                             --------         --------
Increase (decrease) in cash and cash equivalents                  590           (1,270)
Cash and cash equivalents at beginning of period                7,029            6,970
                                                             --------         --------
Cash and cash equivalents at end of period                   $  7,619         $  5,700
                                                             ========         ========


See accompanying notes.

</TABLE>

                                        3
<PAGE>

                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (Unaudited)

                                   July 1, 2001

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  twenty-six  week
period ended July 1, 2001 are not necessarily indicative of the results that may
be expected  for the fiscal year ending  January 6, 2002  ("Fiscal  2001").  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 December 31, 2000 ("Fiscal 2000").

2. Notes Receivable

In May 2001, the Company purchased  substantially all of the senior secured bank
debt of Video Update,  Inc.  ("Video  Update"),  which has a total face value of
$121 million,  from a syndication of financial  institutions led by BNP Paribas.
The  Company's  portion of the bank debt was purchased  for  approximately  $8.5
million.  The  Company  subsequently  made  advances  to  Video  Update  under a
revolving credit agreement of approximately  $2.5 million through the end of the
quarter.  Since July 1, 2001, the Company has made  additional  advances of $2.0
million.  Video  Update,  which is currently  operating  under Chapter 11 of the
United States Bankruptcy Code, owns and operates over 350 video specialty retail
stores in the United States and Canada. A plan of reorganization  was filed with
the United States Bankruptcy Court on July 31, 2001,  which, if approved,  would
result in Video Update's  emergence from bankruptcy as a wholly owned subsidiary
of the Company.

3. Financing Obligations

On June 27, 2001, the Company  entered into a credit  agreement with  SouthTrust
Bank with respect to a new  revolving  credit  facility (the  "Facility").  This
Facility  replaces a similar revolving credit facility with First Union National
Bank of North  Carolina  dated  January 7, 1999,  and which was due to expire on
January 7, 2002. The new Facility is unsecured and provides for borrowings of up
to $65 million  through July 6, 2002,  $55 million  through July 5, 2003 and $45
million until final  maturity on July 4, 2004. The interest rate on the Facility
is based on LIBOR plus an  applicable  margin  percentage,  which depends on the
Company's  cash flow  generation and  borrowings  outstanding.  The terms of the
Facility  also  require  the  Company  to enter  into a new  interest  rate swap
agreement no later than September 1, 2001.  The previous  interest rate swap was
structured  to fix the  Company's  interest  rate exposure on $37 million of the
outstanding  borrowings at 5.8% plus the  applicable  margin  percentage and was
terminated prior to refinancing of the credit facility.

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

Effective with Fiscal 2001, any interest rate swap agreements are required to be
accounted for under Financial  Accounting Standards Board ("FASB") Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." Adoption of
Statement  133 had no impact on the Company's  financial  position or results of
operations.

                                       4
<PAGE>

                              Movie Gallery, Inc.

        Notes to Consolidated Financial Statements (Unaudited)(continued)

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  (604,000 and 47,000 for the thirteen  weeks ended July 1, 2001 and July
2, 2000, respectively; 388,000 and 29,000 for the twenty-six weeks ended July 1,
2001 and July 2, 2000, respectively).  No adjustments were made to net income in
the computation of basic or diluted earnings per share.

5. Stock Option 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 repriced stock options are accounted
for as variable  until the stock  options  are  exercised,  forfeited  or expire
unexercised.  Stock option  compensation  expense  represents  the excess of the
market  price at the end of the quarter  over the  exercise  price of the vested
variable stock options.

6. Supply Contract

In March 2001, the Company and Rentrak Corporation ("Rentrak") amended the terms
of  the  Company's   existing   supply   contract  with  Rentrak.   General  and
administrative  expenses for the twenty-six weeks ended July 1, 2001,  include a
nonrecurring  charge of $1,600,000 ($0.08 per diluted share,  after tax) paid to
Rentrak 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.

7. Recently Issued Accounting Pronouncements

In June 2001, the FASB issued Statements of Financial  Accounting  Standards No.
141,  "Business  Combinations,"  and No.  142,  "Goodwill  and Other  Intangible
Assets," effective for fiscal years beginning after December 15, 2001. Under the
new rules,  goodwill and intangible  assets deemed to have indefinite lives will
no  longer be  amortized  but will be  subject  to  annual  impairment  tests in
accordance  with the  Statements.  Other  intangible  assets will continue to be
amortized over their useful lives.

The  Company  will  apply the new rules on  accounting  for  goodwill  and other
intangible assets beginning in the first quarter of fiscal 2002.  Application of
the  nonamortization  provisions  of the  Statement  is expected to result in an
increase in net income of approximately  $3.5 million per year. During 2002, the
Company will perform the first of the required  impairment tests of goodwill and
indefinite  lived  intangible  assets  as of  January  7,  2002  and has not yet
determined  what the effect of these tests will be on the earnings and financial
position of the Company.

8. Subsequent Event

In July 2001, the Company's Board of Directors  approved a  three-for-two  stock
split,  which  will  be  effected  in  the  form  of a  50%  stock  dividend  to
stockholders  of record as of the close of business on August 17, 2001.  The new
shares will be distributed on August 31, 2001. As of August 8, 2001, the Company
has approximately 11,598,000 shares of common stock outstanding. The stock split
will increase the number of shares of common stock  outstanding to approximately
17,397,000 shares.


                                       5
<PAGE>


                               Movie Gallery, Inc.

           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,  the  percentage  increase or
decrease from the comparable  period,  adjusted  EBITDA and the number of stores
open at the end of each period.

<TABLE>
<CAPTION>
                                                     Thirteen Weeks Ended                    Twenty-Six Weeks Ended
                                              ----------------------------------      -----------------------------------
                                                July 1,      July 2,    Increase        July 1,       July 2,    Increase
                                                 2001         2000     (Decrease)        2001          2000     (Decrease)
                                              --------     --------     --------      --------      --------     --------
<S>                                           <C>          <C>          <C>           <C>           <C>          <C>
Revenues:
   Rentals                                        85.5%        85.7%        (0.2)%        85.3%         85.7%        (0.4)%
   Product sales                                  14.5         14.3          0.2          14.7          14.3          0.4
                                              --------     --------     --------      --------      --------     --------
                                                 100.0        100.0           --         100.0         100.0           --
Cost of sales:
   Cost of rental revenues                        26.6         25.2          1.4          25.6          25.2          0.4
   Cost of product sales                           8.8          9.2         (0.4)          9.4           9.0          0.4
                                              --------     --------     --------      --------      --------     --------
Gross margin                                      64.6         65.6         (1.0)         65.0          65.8         (0.8)

Operating costs and expenses:
   Store operating expenses                       48.8         49.2         (0.4)         46.9          47.9         (1.0)
   General and administrative                      7.7          8.1         (0.4)          8.5           7.9          0.6
   Amortization of intangibles                     1.9          2.9         (1.0)          2.0           2.6         (0.6)
   Stock option compensation                       3.0           --          3.0           1.9            --          1.9
                                              --------     --------     --------      --------     ---------     --------
Operating income                                   3.2          5.4         (2.2)          5.7           7.4         (1.7)

Interest expense, net                             (1.0)        (1.2)         0.2          (0.8)         (1.2)         0.4
                                              --------     --------     --------      --------      --------     --------
Income before income taxes and
  extraordinary item                               2.2          4.2         (2.0)          4.9           6.2         (1.3)

Income taxes                                       0.9          1.7         (0.8)          2.0           2.5         (0.5)
                                              --------     --------     --------      --------       -------     --------
Income before extraordinary item                   1.3          2.5         (1.2)          2.9           3.7         (0.8)
Extraordinary loss on early extinguishment
  of debt                                         (0.2)          --         (0.2)         (0.1)           --         (0.1)
                                              --------     --------     --------      --------      --------     --------
Net income                                         1.1%         2.5%        (1.4)%         2.8%          3.7%        (0.9)%
                                              ========     ========     ========      ========      ========     ========

Adjusted EBITDA (in thousands)                $ 12,823     $  9,433     $  3,390      $ 28,848      $ 22,097     $  6,751
                                              ========     ========     ========      ========      ========     ========
Number of stores open at end of period           1,050          959           91         1,050           959           91
                                              ========     ========     ========      ========      ========     ========

</TABLE>

Revenue.  For the thirteen weeks and twenty-six  weeks ended July 1, 2001, total
revenues were $83.0 million and $174.6 million, respectively,  increases of 7.3%
and 9.9% over the comparable periods in Fiscal 2000. Revenues for the first half
of Fiscal 2001 were driven by a 1.5% increase in same-store  sales,  achieved in
spite of slightly  negative  same-store  sales for the second quarter  against a
second  quarter record last year of 8.5%. An 8.0% increase in the average number
of stores open has also  contributed  to the increase in revenues this year. The
increase in same-store sales for the first half of Fiscal 2001 was the result of
(i) successful, chain-wide internal marketing programs designed to generate more
consumer  excitement  and  traffic  in the  Company's  base of  stores;  (ii) an
increase in the sales of previously  viewed movies and previously  played games;
(iii) significant  increases in DVD (digital versatile disk) rental revenue; and
(iv) marginally favorable weather conditions. The revenue increase was partially


                                       6
<PAGE>
                              Movie Gallery, Inc.

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


offset by soft game rentals due to consumer  anticipation  of new game platforms
being  introduced  late in the year as well as a decline in new movie sales as a
result of fewer  titles  being  released at  sell-through  price  points and the
continued liquidation of older sell-through titles in certain stores.

Cost of Sales.  The gross  margin on rental  revenue for the second  quarter and
year-to-date  periods of Fiscal 2001 was 68.9% and 70.0%,  respectively,  versus
70.6% for both the comparable  quarter and year-to-date  periods of Fiscal 2000.
The cost of rental revenues  includes both the  amortization of rental inventory
and revenue sharing expenses incurred by the Company.  The slight decline in the
gross margin on rental revenue  reflects the net impact of trailing rental costs
related to  significant  rental  inventory  purchases  in the fourth  quarter of
Fiscal 2000, partially offset by the overall increase in same-store sales.

Cost of  product  sales  includes  the costs of new  videocassettes  and  DVD's,
confectionery  items  and  other  goods,  as well as the  unamortized  value  of
previously  viewed rental inventory sold during the period.  The gross margin on
product sales increased to 39.0% in the second quarter of Fiscal 2001 from 35.4%
in  the  second  quarter  of  Fiscal  2000,  and  decreased  to  36.0%  for  the
year-to-date  period of Fiscal 2001 versus 37.1% in the comparable period of the
prior  year.  The  increase  in  profitability  of product  sales for the second
quarter  reflects the impact of the  continuing  promotion and  availability  of
previously viewed movies with only limited levels of new sell-through  titles in
inventory.  The  decrease  in  profitability  for the  year-to-date  period  was
primarily the result of significant  discounting  associated  with the continued
liquidation  of older  sell-through  titles and other slow moving  inventory  in
certain stores, concentrated in the first quarter.

Operating  Costs  and  Expenses.   Store  operating   expenses,   which  include
store-level  expenses such as lease payments and in-store payroll,  decreased to
48.8% and 46.9% of total revenue for the second quarter and year-to-date periods
of Fiscal 2001,  respectively.  This  reflects a decline from 49.2% and 47.9% in
the  comparable  periods of Fiscal  2000,  respectively.  The  decrease in store
operating  expenses was primarily due to the  same-store  sales increase of 1.5%
during the first half of the year and continued  initiatives to reduce operating
costs, as well as strong  performance of new stores  complemented by the closure
of under-performing units.

Amortization  of  intangibles  as a percentage of total revenue for the thirteen
weeks and twenty-six  weeks ended July 1, 2001 was 1.9% and 2.0%,  respectively,
decreases  from 2.9% and 2.6% for the  comparable  periods in Fiscal 2000.  This
decrease is  primarily  due to the  increase in revenue  and the  expiration  of
significant levels of five-year non-compete agreements throughout Fiscal 2000.

Stock option compensation expense represents the non-cash charge associated with
the excess  market price over the exercise  price of certain  stock options that
were  repriced  during  the first  quarter of Fiscal  2001 and are  subsequently
accounted  for as  variable  stock  options  under FASB  Interpretation  No. 44,
"Accounting  for  Certain   Transactions  involving   Stock   Compensation,   an
interpretation of APB Opinion No. 25."

General and administrative  expenses include a nonrecurring charge of $1,600,000
related to an amendment of the Company's supply agreement with Rentrak (see Note
6 of the "Notes to Consolidated Financial  Statements").  Excluding this charge,
general and administrative expenses as a percentage of revenue decreased to 7.7%
and 7.5%,  respectively,  for the second  quarter  and  year-to-date  periods of
Fiscal  2001  from 8.1% and 7.9% for the  comparable  periods  in  Fiscal  2000,
respectively.  The decrease was primarily due to increased  revenue  levels with
only minimal increases to administrative staffing levels.

As a result of the above  factors  and  excluding  the  nonrecurring  charge and
non-cash compensation expense, operating income increased by 21.1% and 27.7% for
the second quarter and  year-to-date  periods of Fiscal 2001 to $5.1 million and
$15.0 million, respectively.

                                       7
<PAGE>
                              Movie Gallery, Inc.

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

Extraordinary  Loss.  During the  second  quarter of Fiscal  2001,  the  Company
incurred an extraordinary  loss on the early  extinguishment of debt of $177,000
(net of taxes of $113,000),  or $0.01 per diluted share. The extraordinary  loss
consisted primarily of unamortized debt issue costs associated with the previous
credit facility and unamortized  amounts  associated with the termination of the
interest rate swap agreement.

Liquidity and Capital Resources

The Company's primary capital needs are for opening and acquiring new stores and
for the purchase of inventory.  Other  capital needs include the  refurbishment,
remodeling  and  relocation  of  existing  stores,   as  well  as  common  stock
repurchases  within the past two years.  The Company funds inventory  purchases,
remodeling and relocation  programs,  new store opening costs,  acquisitions and
stock  repurchases  primarily  from cash flow from  operations  and loans  under
revolving credit facilities.

During  the  twenty-six   weeks  ended  July  1,  2001  the  Company   generated
approximately  $28.8  million in Adjusted  EBITDA,  a 30.6%  increase over $22.1
million for the comparable  period in the prior year. The increase was primarily
driven by the 9.9%  increase  in total  revenue  while  leveraging  expenses  as
discussed above. Adjusted EBITDA is defined as earnings before interest,  taxes,
depreciation and  amortization,  non-cash  compensation and nonrecurring  items,
less 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 $41.5 million for the twenty-six
weeks ended July 1, 2001 as compared to $43.6 million for the  twenty-six  weeks
ended July 2, 2000.  The decrease in net cash  provided by operating  activities
was primarily due to the purchase of the bank debt of Video Update and operating
advances  made to Video  Update,  offset  substantially  by  improved  operating
results. 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 $42.0  million for the first half of
Fiscal 2001,  versus  $40.8  million for the  comparable  period in Fiscal 2000.
Results did not fluctuate  significantly  year-over-year  due to comparable  new
store development levels.

Net cash provided by financing activities was $1.0 million for the first half of
Fiscal 2001 as compared to net cash used in financing activities of $4.0 million
for the comparable  period of Fiscal 2000. The fluctuation is due to significant
repurchases  of common  stock made  during the first half of Fiscal 2000 with no
comparable activity in the first half of Fiscal 2001.

On June 27, 2001, the Company  entered into a credit  agreement with  SouthTrust
Bank with respect to a new  revolving  credit  facility (the  "Facility").  This
Facility  replaces a similar revolving credit facility with First Union National
Bank of North  Carolina  dated  January 7, 1999,  and which was due to expire on
January 7, 2002. The new Facility is unsecured and provides for borrowings of up
to $65 million  through July 6, 2002,  $55 million  through July 5, 2003 and $45
million until final  maturity on July 4, 2004. The interest rate on the Facility
is based on LIBOR plus an  applicable  margin  percentage,  which depends on the
Company's  cash flow  generation and  borrowings  outstanding.  The terms of the
Facility  also  require  the  Company  to enter  into a new  interest  rate swap
agreement no later than September 1, 2001.  The previous  interest rate swap was
structured  to fix the  Company's  interest  rate exposure on $37 million of the
outstanding  borrowings at 5.8% plus the  applicable  margin  percentage and was
terminated prior to refinancing of the credit facility.

                                       8
<PAGE>
                              Movie Gallery, Inc.

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

The Company  grows its store base  through  internally  developed  and  acquired
stores. The Company opened 52 internally  developed stores during the first half
of Fiscal 2001 and remains on target to open  approximately 75 new stores during
the year. 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.

At July 1, 2001, the Company had a working capital deficit of $9.4 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.

In May 2001, the Company purchased  substantially all of the senior secured bank
debt of Video Update,  Inc.  ("Video  Update"),  which has a total face value of
$121 million,  from a syndication of financial  institutions led by BNP Paribas.
The  Company's  portion of the bank debt was purchased  for  approximately  $8.5
million.  The  Company  subsequently  made  advances  to  Video  Update  under a
revolving credit agreement of approximately  $2.5 million through the end of the
quarter.  Since July 1, 2001, the Company has made  additional  advances of $2.0
million.  Video  Update,  which is currently  operating  under Chapter 11 of the
United States Bankruptcy Code, owns and operates over 350 video specialty retail
stores in the United States and Canada. A plan of reorganization  was filed with
the United States Bankruptcy Court on July 31, 2001,  which, if approved,  would
result in Video Update's  emergence from bankruptcy as a wholly owned subsidiary
of the Company.

The Company believes its projected cash flow from operations, borrowing capacity
under the  Facility,  cash on hand and trade credit will  provide the  necessary
capital to fund its current plan of operations for the remainder of Fiscal 2001,
including its anticipated new store openings and acquisition  program.  However,
to fund a major acquisition, 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  may  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.

Forward Looking Statements

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,  but are not
limited to, the Company's ability to achieve its financial  estimates for Fiscal
2001 and beyond,  the  Company's  ability to continue to expand,  including  its
ability to successfully execute its new store opening program and the successful
reorganization of Video Update,  adequate movie and game product availability at
acceptable  overall per unit costs,  competitive  factors and weather conditions
within the Company's geographic markets, 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 December 31, 2000.


                                       9
<PAGE>


Item 3. Quantitative and Qualitative Disclosures About Market Risks
        -----------------------------------------------------------

There have been no material changes in the Company's inherent market risks since
the disclosures  made as of December 31, 2000 in the Company's  annual report on
Form 10-K.

                           Part II - Other Information

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

         The Company's Annual Meeting of Stockholders (the "Annual Meeting") was
held on June 15, 2001. The following action was taken at the Annual Meeting, for
which proxies were solicited pursuant to Regulation 14 under the Securities
Exchange Act of 1934, as amended:

    The six  nominees  proposed  by the  Board  of  Directors  were  elected  as
    directors by the following votes:

    Name                               For                         Withheld
    ----                               ---                         --------
    Joe T. Malugen                     10,900,344                   239,928
    H. Harrison Parrish                10,900,339                   239,933
    William B. Snow                    11,027,340                   112,932
    Sanford C. Sigoloff                10,970,844                   169,428
    Philip B. Smith                    11,042,645                    97,627
    Joe F. Troy                        11,027,345                   112,927

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

a)  Exhibits

    10.1 Assignment Agreement between BNP Paribas and Movie Gallery,  Inc. dated
         May 2, 2001.

    10.2 Chapter 11 Financing  Agreement  between Video  Update,  Inc. and Movie
         Gallery, Inc. dated May 16, 2001.

    10.3 Credit Agreement between Movie Gallery,  Inc. and SouthTrust Bank dated
         June 27, 2001.

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)



Date:  August 15, 2001                   /s/ J. Steven Roy
                                         ---------------------------------------
                                         J. Steven Roy, Executive Vice President
                                         and Chief Financial Officer


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