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 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 August
13, 1999 was 13,232,415.




<PAGE>


                               Movie Gallery, Inc.

                                      Index



Part I.   Financial Information

Item 1.   Consolidated Financial Statements (Unaudited)

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

Consolidated Statements of  Operations - Thirteen and twenty-six weeks
ended July 4, 1999 and July 5, 1998............................................2

Consolidated  Statements of Cash Flows - Twenty-six weeks ended July 4, 1999
and July 5, 1998...............................................................3

Notes to Consolidated Financial Statements - July 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 4.   Submission of Matters to a Vote of Security Holders.................11

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




<PAGE>

<TABLE>

                               Movie Gallery, Inc.

                           Consolidated Balance Sheets
                                 (in thousands)
<CAPTION>


                                                             July 4,    January 3,
                                                              1999         1999
                                                          ------------------------
                                                          (Unaudited)
<S>                                                        <C>          <C>
Assets
Current assets:
   Cash and cash equivalents                               $   3,937    $   6,983
   Merchandise inventory                                      11,063       11,824
   Prepaid expenses                                              941          779
   Store supplies and other                                    3,338        3,772
   Deferred income taxes                                         343          312
                                                           ---------    ---------
Total current assets                                          19,622       23,670


Rental inventory, net                                         46,619       44,998
Property, furnishings and equipment, net                      40,891       43,920
Goodwill and other intangibles, net                           81,617       85,743
Deposits and other assets                                      2,456        1,799
Deferred income taxes                                          1,609        2,239
                                                           ---------    ---------
Total assets                                               $ 192,814    $ 202,369
                                                           =========    =========

Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                                        $  19,282    $  23,396
   Accrued liabilities                                         8,900        7,426
   Current portion of long-term debt                             256          442
                                                           ---------    ---------
Total current liabilities                                     28,438       31,264

Long-term debt                                                37,597       46,212
Other accrued liabilities                                        400          778

Stockholders' equity:
   Preferred stock, $.10 par value; 2,000,000 shares
     authorized, no shares issued and outstanding               --           --
   Common stock, $.001 par value; 35,000,000
     shares authorized, 13,232,415 and 13,315,915
     shares issued and outstanding                                13           13
   Additional paid-in capital                                130,852      131,248
   Retained earnings (deficit)                                (4,486)      (7,146)
                                                           ---------    ---------
Total stockholders' equity                                   126,379      124,115
                                                           ---------    ---------
Total liabilities and stockholders' equity                 $ 192,814    $ 202,369
                                                           =========    =========

See accompanying notes.

</TABLE>

                                     1
<PAGE>

<TABLE>

                               Movie Gallery, Inc.

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


<CAPTION>
                                                          Thirteen weeks ended    Twenty-six weeks ended
                                                          July 4,      July 5,      July 4,      July 5,
                                                           1999         1998         1999         1998
                                                        ------------------------------------------------

<S>                                                     <C>          <C>          <C>          <C>
Revenues:
   Rentals                                              $  55,971    $  54,090    $ 115,297    $ 113,023
   Product sales                                            9,539        9,572       19,833       21,130
                                                        ---------    ---------    ---------    ---------
                                                           65,510       63,662      135,130      134,153
Cost of sales:
   Cost of rental revenues                                 16,904       18,181       33,530       37,843
   Cost of product sales                                    6,067        6,678       12,951       14,197
                                                        ---------    ---------    ---------    ---------
Gross profit                                               42,539       38,803       88,649       82,113

Operating costs and expenses:
   Store operating expenses                                33,095       32,254       66,073       64,944
   Amortization of intangibles                              2,320        1,747        4,158        3,494
   General and administrative                               5,118        4,307       10,035        8,567
                                                        ---------    ---------    ---------    ---------
Operating income                                            2,006          495        8,383        5,108

Interest expense, net                                        (814)      (1,391)      (1,680)      (2,968)
                                                        ---------    ---------    ---------    ---------
Income (loss) before income taxes, extraordinary item
    and cumulative effect of accounting change              1,192         (896)       6,703        2,140

Income taxes                                                  513         (341)       2,662          813
                                                        ---------    ---------    ---------    ---------
Income (loss) before extraordinary item and
  cumulative effect of accounting change                      679         (555)       4,041        1,327
Extraordinary loss on early extinguishment of debt           --           --           (682)        --
Cumulative effect of accounting change                       --           --           (699)        --
                                                        ---------    ---------    ---------    ---------
Net income (loss)                                       $     679    $    (555)   $   2,660    $   1,327
                                                        =========    =========    =========    =========

Basic and diluted earnings (loss) per share:
Income (loss) before extraordinary item and
  cumulative effect of accounting change                $     .05    $    (.04)   $     .30    $     .10
Extraordinary loss on early extinguishment of debt           --           --           (.05)        --
Cumulative effect of accounting change                       --           --           (.05)        --
                                                        ---------    ---------    ---------    ---------
Net income (loss)                                       $     .05    $    (.04)   $     .20    $     .10
                                                        =========    =========    =========    =========

Weighted average shares outstanding:
   Basic                                                   13,231       13,421       13,256       13,421
   Diluted                                                 13,623       13,421       13,619       13,895

See accompanying notes.
</TABLE>


                                        2
<PAGE>


<TABLE>
                               Movie Gallery, Inc.

                      Consolidated Statements of Cash Flows
                                   (Unaudited)
                                 (in thousands)
<CAPTION>
                                                        Twenty-six weeks ended
                                                          July 4,     July 5,
                                                           1999         1998
                                                        ----------------------
<S>                                                     <C>         <C>
Operating activities
Net income                                              $  2,660    $  1,327
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                          36,424      44,189
   Deferred income taxes                                   1,326         813
Changes in operating assets and liabilities:
   Merchandise inventory                                   1,031       3,756
   Other current assets                                      272        (518)
   Deposits and other assets                              (1,030)         17
   Accounts payable                                       (4,114)     (8,699)
   Accrued liabilities                                        91      (1,463)
                                                        --------    --------
Net cash provided by operating activities                 38,041      39,422

Investing activities
Business acquisitions                                     (2,485)         (2)
Purchases of rental inventory, net                       (25,843)    (30,448)
Purchases of property, furnishings and equipment          (3,562)     (2,999)
                                                        --------    --------
Net cash used in investing activities                    (31,890)    (33,449)

Financing activities
Net proceeds from issuance of common stock                     6           8
Purchases of treasury stock                                 (402)       --
Payments on notes payable                                   --          (200)
Principal payments on long-term debt                      (8,801)     (9,024)
                                                        --------    --------
Net cash used in financing activities                     (9,197)     (9,216)
                                                        --------    --------
Decrease in cash and cash equivalents                     (3,046)     (3,243)
Cash and cash equivalents at beginning of period           6,983       4,459
                                                        --------    --------
Cash and cash equivalents at end of period              $  3,937    $  1,216
                                                        ========    ========

See accompanying notes.

</TABLE>


                                       3
<PAGE>

                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (Unaudited)

                                  July 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  twenty-six  week
period ended July 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.

Certain  reclassifications have been made to the prior year financial statements
to conform to the current  year  presentation.  These  reclassifications  had no
impact on stockholders'  equity or net income.  Amortization of rental inventory
and revenue  sharing  expenses have been  combined and are  presented as cost of
rental revenue on the statement of operations.

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 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,  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 January 7, 1999, the Company  entered into a new Credit  Agreement with First
Union  National  Bank of  North  Carolina  ("First  Union")  with  respect  to a
revolving credit facility (the "Facility"). The Facility provides for borrowings
of up to $65 million, is unsecured and will mature in its entirety on January 7,
2002.  The Company  may  increase  the amount of the  Facility to $85 million if
existing banks  increase their  commitments or if any new banks enter the Credit
Agreement.  The  interest  rate  of the  Facility  is  based  on  LIBOR  plus an
applicable  margin  percentage,   which  depends  on  the  Company's  cash  flow
generation and borrowings outstanding. The Company may repay the Facility at any
time without penalty.  The more restrictive  covenants of the Facility  restrict
borrowings based upon cash flow levels.

                                       4
<PAGE>


                               Movie Gallery, Inc.

       Notes to Consolidated Financial Statements (Unaudited)(continued)

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

As a result of the Facility and the amended  interest rate swap  agreement,  the
Company recognized an extraordinary loss on the 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 Company's  previous credit facility and the
negative value of the previous 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  (392,000 and none for the thirteen weeks ended July 4, 1999 and July 5,
1998,  respectively;  363,000 and 474,000 for the twenty-six weeks ended July 4,
1999 and July 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 first quarter of 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 thirteen and twenty-six
weeks ended July 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,  statements  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          Twenty-six weeks ended
                                        --------------------------------------------------------
                                        July 4,  July 5,   Increase  July 4,   July 5,  Increase
                                         1999     1998    (Decrease)  1999      1998   (Decrease)
                                        --------------------------------------------------------
<S>                                     <C>       <C>       <C>       <C>       <C>      <C>
Revenues:
   Rentals                               85.4%     85.0%      0.4%     85.3%     84.2%     1.1%
   Product sales                         14.6      15.0      (0.4)     14.7      15.8     (1.1)
                                        -----     -----     -----     -----     -----    -----
                                        100.0     100.0       --      100.0     100.0      --
Cost of sales:
   Cost of rental revenues               25.8      28.5      (2.7)     24.8      28.2     (3.4)
   Cost of product sales                  9.3      10.5      (1.2)      9.6      10.6     (1.0)
                                        -----     -----     -----     -----     -----    -----
Gross profit                             64.9      61.0       3.9      65.6      61.2      4.4

Operating costs and expenses:
   Store operating expenses              50.5      50.7      (0.2)     48.9      48.4      0.5
   Amortization of intangibles            3.5       2.7       0.8       3.1       2.6      0.5
   General and administrative             7.8       6.8       1.0       7.4       6.4      1.0
                                        -----     -----     -----     -----     -----    -----
Operating income                          3.1       0.8       2.3       6.2       3.8      2.4

Interest expense, net                    (1.3)     (2.2)      0.9      (1.2)     (2.2)     1.0
                                        -----     -----     -----     -----     -----    -----
Income (loss) before income taxes,
  extraordinary item and cumulative
  effect of accounting change             1.8      (1.4)      3.2       5.0       1.6      3.4

Income taxes                              0.8      (0.5)      1.3       2.0       0.6      1.4
                                        -----     -----     -----     -----     -----    -----
Income (loss) before extraordinary
  item and cumulative effect of
  accounting change                       1.0      (0.9)      1.9       3.0       1.0      2.0
Extraordinary loss on early
  extingushment of debt                   --        --        --       (0.5)      --      (0.5)
Cumulative effect of accounting
  change                                  --        --        --       (0.5)      --      (0.5)
                                        -----     -----     -----     -----     -----    -----
Net income (loss)                         1.0%     (0.9)%     1.9%      2.0%      1.0%     1.0%
                                        =====     =====     =====     =====     =====    =====
Number of stores open at
   end of period                          903       842        61       903       842       61
                                        =====     =====     =====     =====     =====    =====
</TABLE>

                                        6
<PAGE>

                               Movie Gallery, Inc.

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

For the thirteen weeks and twenty-six  weeks ended July 4, 1999,  total revenues
were $65.5 million and $135.1 million, respectively,  increases of 2.9% and 0.7%
over the  comparable  periods in 1998.  Revenues for the second  quarter of 1999
were driven by an approximate 3.0% increase in same-store rental revenues, which
follows a 2% increase in rental revenues for the first quarter of 1999.  Overall
same-store  revenues for the second  quarter of 1999  increased  1.4% due to the
rental revenue growth,  offset partially by a decrease in product sales revenue.
For  the  fiscal   year-to-date   period,   same-store   revenues  increased  by
approximately  1%. The  increase in  same-store  rental  revenues for the second
quarter and year-to-date period 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 for the second  quarter of 1999 is primarily due to a
decrease in titles released directly to sell-through by movie studios, offset in
part by increases  in  previously  viewed movie sales.  In addition to the fewer
titles released directly to sell-through,  the year-to-date period product sales
were  negatively   impacted  by  a  short-term   disruption  in  the  supply  of
videocassettes  held for sale  from our  primary  distributor  during  the first
quarter.

Rental  revenue costs as a percentage  of rental  revenues for the thirteen week
and  twenty-six   week  periods  ended  July  4,  1999  were  30.2%  and  29.1%,
respectively,  a decrease  from 33.6% and 33.5% for the  comparable  fiscal 1998
periods.  These costs  include both the  amortization  of rental  inventory  and
revenue sharing  expenses  incurred by the Company.  The decreases are primarily
due to the Company's  change in amortization  policy during the third quarter of
1998, the Company's  reduced per unit costs of acquiring  rental product through
the various copy-depth programs available from the movie studios, as well as the
more efficient allocation of product to our store base.

Effective July 6, 1998, the Company changed its  amortization  policy for rental
inventory.  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."

Product  sales costs as a percentage  of product sales for the thirteen week and
twenty-six  week periods ended July 4, 1999 were 63.6% and 65.3%,  respectively,
compared to 69.8% and 67.2% for the  comparable  periods in 1998.  The increased
gross margin from product  sales is primarily  due to an increase in  previously
viewed  movie sales and a decrease in new movie sales  during  1999.  Previously
viewed movies carry gross margins that are substantially higher than the average
gross margins for new movie sales.

As a result of the improved  margins on both rental  revenues and product sales,
total gross profit  margins for the thirteen  week and  twenty-six  week periods
ended July 4, 1999  increased to 64.9% and 65.6%,  respectively,  from 61.0% and
61.2% for the comparable periods in 1998.

                                        7
<PAGE>
                              Movie Gallery, Inc.

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

Store operating expenses as a percentage of revenues was 50.5% and 48.9% for the
thirteen  weeks and  twenty-six  weeks  ended  July 4,  1999,  respectively,  as
compared to 50.7% and 48.4% in 1998.  The increase in store  operating  expenses
was  primarily  the  result  of  the  acquisition  of  88  stores  from  Blowout
Entertainment,  Inc.  ("Blowout") in May of 1999. The overall strong increase in
revenues  for the  second  quarter  of 1999  resulted  in a  decrease  in  store
operating  expenses as a percentage  of total  revenue,  while the  year-to-date
period  percentage  of  store  operating  expenses  to total  revenue  increased
slightly.

Amortization  of  intangibles  as a percentage of total revenue for the thirteen
weeks and twenty-six  weeks ended July 4, 1999 was 3.5% and 3.1%,  respectively,
increases from 2.7% and 2.6% for the  comparable  periods in 1998. The increased
amortization  of intangibles is primarily the result of the write off of certain
intangible  assets as a part of the Company's  ongoing  review of its intangible
assets for  impairment,  as prescribed by Financial  Accounting  Standards Board
Statement No. 121,  "Accounting for the Impairment of Long-Lived  Assets and for
Long-Lived Assets to Be Disposed Of."

General and administrative expenses as a percentage of revenue increased to 7.8%
and 7.4%, respectively,  for the second quarter and year-to-date periods of 1999
from 6.8% and 6.4% for the comparable periods in 1998. The increase is primarily
the result of increased  staffing costs associated with the Company's ramp up in
new  store  development,  as  well  as  expense  increases  resulting  from  the
acquisition of stores from Blowout in May of 1999.

Net  interest  expense as a percentage  of revenues  decreased to 1.3% and 1.2%,
respectively, for the second quarter and year-to-date period of fiscal 1999 from
2.2% for the comparable  periods in 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."

Effective  January 4, 1999,  the Company  adopted the provisions of the American
Institute  of  Certified   Accountants   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  twenty-six  weeks  ended July 4, 1999 and July 5, 1998,  the Company
generated  approximately $19.4 million in Adjusted EBITDA.  "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 $38.0 million for the twenty-six
weeks ended July 4, 1999 as compared to $39.4 million for the  twenty-six  weeks
ended July 5, 1998.  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 $31.9  million for the  year-to-date
period of fiscal 1999 as compared to $33.4 million for the comparable  period of
1998.  This decrease in funds used for  investing  activities is the result of a
decrease in the expenditures of capital for rental inventory,  offset in part by
increased capital expenditures related to property, furnishings and equipment in
1999 versus  1998 and the capital  required to  consummate  the  acquisition  of
Blowout in May 1999.

                                        8
<PAGE>
                              Movie Gallery, Inc.

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

Net cash used in  financing  activities  was $9.2  million for the  year-to-date
periods of 1999 and 1998.  Long-term debt paydowns were  approximately  the same
during the first half of 1999 and 1998.

On January 7, 1999, the Company  entered into a new Credit  Agreement with First
Union  National  Bank of North  Carolina  with  respect  to a  revolving  credit
facility (the  "Facility").  The Facility  provides for  borrowings of up to $65
million,  is unsecured  and will mature in its entirety on January 7, 2002.  The
Company may increase the amount of the Facility to $85 million if existing banks
increase their commitments or if any new banks enter the Credit  Agreement.  The
interest  rate of the  Facility  is  based on LIBOR  plus an  applicable  margin
percentage,  which depends on the Company's cash flow  generation and borrowings
outstanding. The Company may repay the Facility at any time without penalty. The
more restrictive  covenants of the Facility restrict  borrowings based upon cash
flow levels.

The Company  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  both through opening
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  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 4, 1999, the Company had a working capital deficit of $8.8 million,  due
to the accounting treatment of its rental inventory. Rental inventory is treated
as a noncurrent asset under generally accepted accounting  principles because it
is a depreciable  asset and is not an asset which is  reasonably  expected to be
completely  realized in cash or sold in the normal business cycle.  Although the
rental of this inventory  generates the major portion of the Company's  revenue,
the  classification  of this asset as noncurrent  results in its exclusion  from
working capital.  The aggregate amount payable for this inventory,  however,  is
reported  as a current  liability  until paid and,  accordingly,  is included in
working capital.  Consequently, the Company believes that working capital is not
an appropriate measure of its liquidity and it anticipates that it will continue
to operate with a working capital deficit.

The Company believes its projected cash flow from operations, borrowing capacity
with the  Facility,  cash on hand and trade  credit will  provide the  necessary
capital to fund its current plan of  operations  for 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.


                                        9
<PAGE>
                              Movie Gallery, Inc.

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

Other Matters

In March 1999, the Company  entered into a definitive  agreement to purchase the
assets and assume the leases of 88 stores  operated by Blowout for an  aggregate
purchase  price of  approximately  $2.4 million.  Blowout  operates video stores
within large retailers such as Wal-Mart. The acquisition closed in May 1999.

The  Company  plans to  launch  an  e-commerce  sales  and  information  site at
www.moviegallery.com  by the middle of September.  This site will primarily sell
new  videocassette  and DVD movies,  previously  viewed  movies and games to its
customer  base.  The  Company  anticipates  early stage  losses  related to this
venture.  However, the Company does not currently believe that these losses will
exceed $800,000 during the remaining portion of 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.

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 material 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 4. Submission of Matters to a Vote of Security Holders

     The Company's  Annual Meeting of  Stockholders  (the "Annual  Meeting") was
held on June 8, 1999.  The following  actions were taken at the Annual  Meeting,
for which proxies were solicited  pursuant to Regulation 14 under the Securities
Exchange Act of 1934, as amended:

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

        Name                                  For             Withheld
        ----                                  ---             --------
        Joe Thomas Malugen                 11,627,170          28,018
        H. Harrison Parrish                11,627,670          27,518
        William B. Snow                    11,627,670          27,518
        Sanford C. Sigoloff                11,627,670          27,518
        Philip B. Smith                    11,627,670          27,518
        Joseph F. Troy                     11,627,670          27,518

     2. A  proposal  to amend the  Company's  Certificate  of  Incorporation  to
        decrease  the  authorized  shares of common  stock  from  60,000,000  to
        35,000,000  was  approved  by a vote  of  11,637,828  for  versus  7,520
        against. There were 9,840 abstentions and no broker non-votes.

Item 6. Exhibits and Reports on Form 8-K

     a) Exhibits

        3.1.1 Certificate of Amendment of Certificate of Incorporation dated
              June 6, 1996
        3.1.2 Certificate of Amendment of Certificate of Incorporation dated
              July 1, 1999
        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)


Date: August 17, 1999                   /s/ J. Steven Roy
                                        ---------------------------------------
                                        J. Steven Roy, Executive Vice President
                                        and Chief Financial Officer


                                       11