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 5, 1998

                                       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
12, 1998 was 13,422,380.


<PAGE>
                              



                               Movie Gallery, Inc.

                                      Index


Part I.  Financial Information

Item 1.  Financial Statements (Unaudited)

Consolidated Balance Sheets - July 5, 1998 and January 4, 1998.................1

Consolidated Statements of Operations - Thirteen weeks ended
July 5, 1998 and July 6, 1997; Twenty-six weeks ended
July 5, 1998 and July 6, 1997..................................................2

Consolidated Statements of Cash Flows - Twenty-six weeks ended
July 5, 1998 and July 6, 1997..................................................3

Notes to Consolidated Financial Statements (Unaudited) - July 5, 1998..........4

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

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 5,     January 4,
                                                          1998          1998
                                                         --------     --------
                                                       (Unaudited)
<S>                                                      <C>          <C>     
Assets                                                 
Current assets:                                       
   Cash and cash equivalents                             $  1,216     $  4,459
   Merchandise inventory                                    9,756       13,512
   Prepaid expenses                                         1,483        1,341
   Store supplies and other                                 2,937        2,561
   Deferred income taxes                                      255          531
                                                         --------     --------
Total current assets                                       15,647       22,404


Videocassette rental inventory, net                        88,235       92,183
Property, furnishings and equipment, net                   47,021       50,321
Deferred charges, net                                       7,827        8,940
Excess of cost over net assets acquired, net               81,002       83,381
Deposits and other assets                                   1,887        1,904
                                                         --------     --------
Total assets                                             $241,619     $259,133
                                                         ========     ========

Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                                      $ 12,818     $ 21,517
   Accrued liabilities                                      6,061        7,014
   Current portion of long-term debt                          388        4,751
                                                         --------     --------
Total current liabilities                                  19,267       33,282
 
Long-term debt                                             58,618       63,479
Other accrued liabilities                                   1,389        1,899
Deferred income taxes                                      13,381       12,844

Stockholders' equity:
   Preferred stock, $.10 par value; 2,000,000 shares
       authorized, no shares issued and outstanding          --           --
   Common stock, $.001 par value; 60,000,000
       shares authorized, 13,421,030 and 13,418,885  
       shares issued and outstanding, respectively             13           13
   Additional paid-in capital                             131,694      131,686
   Retained earnings                                       17,257       15,930
                                                         --------     --------
Total stockholders' equity                                148,964      147,629
                                                         --------     --------
Total liabilities and stockholders' equity               $241,619     $259,133
                                                         ========     ========
See accompanying notes.
</TABLE>



                                       1
<PAGE>

                               Movie Gallery, Inc.

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

<TABLE>
<CAPTION>
                                                                 Thirteen weeks ended     Twenty-six weeks ended
                                                                 July 5,       July 6,      July 5,     July 6,
                                                                  1998          1997         1998        1997
                                                                ---------    ---------    ---------    ---------
<S>                                                             <C>          <C>          <C>          <C> 
Revenues:
   Rentals                                                      $  54,090    $  52,045    $ 113,023    $ 107,628
   Product sales                                                    9,572        9,283       21,130       19,378
                                                                ---------    ---------    ---------    ---------
                                                                   63,662       61,328      134,153      127,006
Operating costs and expenses:                                                                
   Store operating expenses                                        33,341       32,860       68,391       66,014
   Amortization of videocassette rental inventory                  17,094       17,293       34,396       33,576
   Amortization of intangibles                                      1,747        1,762        3,494        3,536
   Cost of product sales                                            6,678        5,561       14,197       11,266
   General and administrative                                       4,307        4,085        8,567        8,131
                                                                ---------    ---------    ---------    ---------   
Operating income (loss)                                               495         (233)       5,108        4,483
Interest expense, net                                              (1,391)      (1,546)      (2,968)      (3,042)
                                                                ---------    ---------    ---------    ---------         
Income (loss) before income taxes                                    (896)      (1,779)       2,140        1,441       
Income taxes                                                         (341)        (576)         813          648
                                                                ---------    ---------    ---------    ---------
Net income (loss)                                               $    (555)   $  (1,203)   $   1,327    $     793                 
                                                                =========    =========    =========    =========
                                                                
Basic and diluted earnings (loss) per share                     $    (.04)   $    (.09)   $     .10    $     .06
                                                                =========    =========    =========    ========= 

Weighted average shares outstanding:
   Basic                                                           13,421       13,420       13,421       13,420
   Diluted                                                         13,421       13,420       13,895       13,420

See accompanying notes.

</TABLE>



                                       2
<PAGE>


                               Movie Gallery, Inc.

                      Consolidated Statements of Cash Flows
                                   (Unaudited)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                          Twenty-six weeks ended
                                                            July 5,     July 6,
                                                             1998        1997
                                                           --------    --------

<S>                                                        <C>         <C>    
Operating activities                                   
Net income                                                 $  1,327    $    793
Adjustments to reconcile net income to  net cash
  provided by operating activities:
   Depreciation and amortization                             44,189      42,399
   Deferred income taxes                                        813         648
Changes in operating assets and liabilities:
   Merchandise inventory                                      3,756         272
   Other current assets                                        (518)       (405)
   Deposits and other assets                                     17         256
   Accounts payable                                          (8,699)     (6,289)
   Accrued liabilities                                       (1,463)        915
                                                           --------    --------
Net cash provided by operating activities                    39,422      38,589

Investing activities
Business acquisitions                                            (2)       (262)
Purchases of videocassette rental inventory, net            (30,448)    (37,031)
Purchases of property, furnishings and equipment             (2,999)     (8,099)
                                                           --------    --------
Net cash used in investing activities                       (33,449)    (45,392)

Financing activities
Net proceeds from issuance of common stock                        8        --
Payments on notes payable                                      (200)       --
Proceeds from issuance of long-term debt                       --         4,000
Principal payments on long-term debt                         (9,024)       (129)
                                                           --------    --------
Net cash (used in) provided by financing activities          (9,216)      3,871
                                                           --------    --------
Decrease in cash and cash equivalents                        (3,243)     (2,932)
Cash and cash equivalents at beginning of period              4,459       3,982
                                                           --------    --------
Cash and cash equivalents at end of period                 $  1,216    $  1,050
                                                           ========    ========

See accompanying notes.

</TABLE>


                                       3
<PAGE>
                               
                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (Unaudited)
      
                                  July 5, 1998

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 5, 1998 are not necessarily indicative of the results that may
be expected for the fiscal year ended January 3, 1999. 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 4, 1998.

2.   Financing Obligations

The  Company has a Credit  Agreement  with First  Union  National  Bank of North
Carolina with respect to a reducing  revolving credit facility (the "Facility").
At July 5, 1998,  $58.3 million was  outstanding and $18.2 million was available
for borrowing under the Facility.  The available  amount of the Facility reduces
quarterly  with a final  maturity of June 30,  2000.  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 has entered into an interest rate swap  agreement  with a commercial
bank which effectively fixes the Company's interest rate exposure on $37 million
of the amount  outstanding under the Facility at 6.22% plus an applicable margin
percentage.  The  interest  rate swap  reduces the risk of increases in interest
rates during the remaining  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.

3.  Earnings Per Share

Effective January 4, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share".  This statement is effective for fiscal
periods  ending  after  December  15,  1997 and  requires  restatement  of prior
periods'  earnings  per share data.  Under this  Statement  the  calculation  of
primary and fully diluted  earnings per share is replaced with basic and diluted
earnings  per share and  requires  presentation  of both  amounts  on the income
statement.  Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of common stock equivalents.  Diluted earnings per share is
similar to the previously reported fully diluted earnings per share. Adoption of
this Statement had no significant  impact on earnings per share calculations for
any period presented.




                                       4
<PAGE>


                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (Unaudited)(continued)
                                 

3. Earnings Per Share (continued)

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  (none for the  thirteen  weeks  ended July 5, 1998 and  474,000 for the
twenty-six  weeks ended July 5, 1998; none for the thirteen weeks and twenty-six
weeks ended July 6, 1997). No adjustments  were made to net income (loss) in the
computation of basic or diluted earnings per share.

4. Recently Issued Accounting Standard

In April 1998, the AICPA issued Statement of Position (SOP) 98-5,  Reporting the
Costs of Start-up Activities.  The SOP is effective for the Company beginning on
January 4, 1999, and requires that start-up costs  capitalized  prior to January
4, 1999 be written-off and any future start-up costs to be expensed as incurred.
The unamortized  balance of start-up costs as of January 3, 1998 will be written
off as a cumulative  effect of an accounting  change as of January 4, 1999.  The
impact of adopting this SOP has not yet been determined.



                                       5
<PAGE>


  
                               Movie Gallery, Inc.

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


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

<TABLE>
<CAPTION>
                                                 Thirteen weeks ended      Twenty-six weeks ended
                                             --------------------------- ---------------------------
                                             July 5,  July 6,  Increase  July 5,  July 6,  Increase
                                              1998     1997   (Decrease)  1998     1997   (Decrease)
                                             --------------------------- ---------------------------
<S>                                          <C>      <C>      <C>       <C>      <C>      <C>
Revenues:
   Rentals                                    85.0%    84.9%     0.1%     84.2%    84.7%    (0.5)%
   Product sales                              15.0     15.1     (0.1)     15.8     15.3      0.5
                                             -----    -----    -----     -----    -----    -----
                                             100.0    100.0      --      100.0    100.0      --
Operating costs and expenses:
   Store operating expenses                   52.4     53.6     (1.2)     51.0     52.0     (1.0)
   Amortization of rental inventory           26.9     28.2     (1.3)     25.6     26.4     (0.8)
   Amortization of intangibles                 2.7      2.9     (0.2)      2.6      2.8     (0.2) 
   Cost of product sales                      10.5      9.0      1.5      10.6      8.9      1.7
   General and administrative                  6.7      6.7      --        6.4      6.4      --
                                             -----    -----    -----     -----    -----    -----
Total                                         99.2    100.4     (1.2)     96.2     96.5     (0.3)
                                             -----    -----    -----     -----    -----    -----
Operating income (loss)                        0.8     (0.4)     1.2       3.8      3.5      0.3
Interest expense, net                         (2.2)    (2.5)     0.3      (2.2)    (2.4)     0.2
                                             -----    -----    -----     -----    -----    -----
Income (loss) before income taxes             (1.4)    (2.9)     1.5       1.6      1.1      0.5
Income taxes                                  (0.5)    (0.9)     0.4       0.6      0.5      0.1
                                             -----    -----    -----     -----    -----    -----
Net income (loss)                             (0.9)%   (2.0)%    1.1%      1.0%     0.6%     0.4%
                                             =====    =====    =====     =====    =====    =====

Number of stores open at end of period         842      862     (20)       842      862      (20)
                                             ======   =====    =====     =====    =====    =====     
</TABLE>
                                                                     
For the thirteen  weeks and twenty-six  weeks ended July 5, 1998,  revenues were
$63.7 million and $134.2 million, respectively,  increases of 3.8% and 5.6% over
the  comparable  periods  in  1997.  The  increase  was  due to an  increase  in
same-store  sales of 4.6% and 6.0% for the  thirteen  week and  twenty-six  week
periods,  respectively,  offset by fewer stores in operation  during 1998 versus
1997. The increase in same-store  sales for the second quarter and  year-to-date
period of 1998 was the result of (i) the  Company's  increase in depth of copies
of hit titles  compared to the prior year periods;  (ii) an increase in the game
rental  business due to  increasing  consumer  acceptance of the Nintendo 64 and
Sony  Playstation  game platforms;  and (iii)  successful,  chain-wide  internal
marketing programs designed to generate more consumer  excitement and traffic in
the Company's base of stores.

Product  sales as a  percentage  of total  revenue  for the  thirteen  weeks and
twenty-six weeks ended July 5, 1998 were 15.0% and 15.8%, respectively, compared
to 15.1%  and 15.3%  for the  comparable  periods  in 1997,  respectively.  This
increase for the twenty-six weeks ended July 5, 1998 was primarily the result of
the Company's  increasing  sale of previously  viewed rental  inventory  due, in
part, to greater quantities of rental product available to consumers.

Store  operating  expenses,  which reflect  direct store  expenses such as lease
payments and in-store  payroll,  decreased as a percentage  of revenues to 52.4%
and 51.0% for the  thirteen  weeks and  twenty-six  weeks  ended  July 5,  1998,
respectively,  from  53.6%  and  52.0%  for  the  comparable  periods  in  1997,
respectively.  The  decrease  in store  operating  expenses as a  percentage  of



                                       6
<PAGE>

                              Movie Gallery, Inc.

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


revenues was primarily due to the same-store  sales increase  during the quarter
and some  decreases  in  several  expense  categories,  offset,  in part,  by an
increase in rental product revenue sharing expense in 1998 versus 1997.

For the  second  quarter  and  year-to-date  period  of  1998,  amortization  of
videocassette rental inventory decreased as a percentage of revenue to 26.9% and
25.6%,  respectively,  from 28.2% and 26.4% for the comparable  periods in 1997,
respectively.  The decrease in  amortization as a percentage of revenues was due
primarily to the increased  revenues  associated  with the Company's  same-store
sales increase for the second quarter and first two quarters of 1998.

Cost of product sales  includes the costs of new  videocassettes,  confectionery
items and other goods,  as well as the  unamortized  value of previously  viewed
rental inventory sold in the Company's  stores.  Cost of product sales increased
with the  increased  revenue from product sales and increased as a percentage of
revenues  from  product  sales from 59.9% and 58.1% for the second  quarter  and
year-to-date  period of 1997,  respectively,  to 69.8% and 67.2% for the  second
quarter and year-to-date period of 1998,  respectively.  The decrease in product
sales gross margins resulted primarily from (i) an intense effort by the Company
to reduce inventory  levels through  discounts on selected  inventory,  and (ii)
lower margins on the sale of previously  viewed tapes due to selling those tapes
earlier than in the past, which results in a higher write-off of the unamortized
value of the tapes at the time of sale.

Net  interest  expense as a  percentage  of revenues  decreased  to 2.2% for the
second quarter and year-to-date period of 1998 from 2.5% and 2.4% for the second
quarter and year-to-date period of 1997, respectively.  These decreases were due
primarily  to both lower  total debt  outstanding  in 1998  versus  1997 and the
increasing revenues that the Company has achieved.

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  remodeling of existing  stores,  the  relocation of
existing  stores and the  continued  maintenance  and upgrading of the Company's
point of sale system and management  information systems. 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  5,  1998,  the  Company   generated
approximately  $19.4  million in  Adjusted  EBITDA  versus  approximately  $10.6
million for the comparable  period in 1997, an increase of approximately  82.5%.
The increase in Adjusted EBITDA is attributable primarily to both the same-store
sales  increase  of 6.0%  and  the  Company's  leveraging  of  rental  inventory
purchases in the first and second quarters of 1998 versus the comparable periods
in 1997. "Adjusted EBITDA" is earnings before interest,  taxes, depreciation and
amortization,  less the Company's  purchase of  videocassette  rental  inventory
which excludes inventory purchases specifically for new store openings. Adjusted
EBITDA does not take into account capital expenditures,  other than purchases of
videocassette  rental  inventory,  and does not represent  cash  generated  from
operating activities in accordance with generally accepted accounting principles
("GAAP"),  is not to be considered as an  alternative to net income or any other
GAAP measurements as a measure of operating performance and is not indicative of
cash available to fund cash needs.  The Company's  definition of Adjusted EBITDA
may not be  identical  to  similarly  titled  measures of other  companies.  The
Company believes that in addition to cash flows and net income,  Adjusted EBITDA
is a useful  financial  performance  measurement  for  assessing  the  operating
performance  of the Company  because,  together  with net income and cash flows,
Adjusted EBITDA is widely used in the videocassette specialty retailing industry
to provide  investors  with an  additional  basis to evaluate the ability of the
Company to incur and service its debt and to fund growth.


                                       7
<PAGE>

                              Movie Gallery, Inc.

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


Net cash provided by operating  activities  was $39.4 million for the twenty-six
weeks ended July 5, 1998 as compared to $38.6 million for the comparable  period
in 1997.  The  increase was  primarily  due to an increase in  depreciation  and
amortization, offset in part by a decrease in accounts payable and other accrued
liabilities,  as well as a decrease in merchandise inventory.  Over the past two
quarters,  the Company's  merchandise  inventory and accounts  payable have been
reduced by 27.8% and 40.4%, respectively. Some of these decreases are associated
with seasonal changes;  however,  much of the merchandise inventory reduction is
attributable  to the Company  attempting  to reduce and refine its  sell-through
inventory presentation by selling older,  less-attractive titles to consumers at
a discount and replacing this  merchandise with fewer,  more attractive  product
offerings.  The accounts  payable decrease is due both to seasonality as well as
the fact that the Company has lowered its overall tape  purchases  versus a year
ago through copy depth  initiatives and revenue  sharing,  which has lowered its
outstanding payables amount at quarter end.

Net cash used in investing activities was $33.4 million for the twenty-six weeks
ended July 5, 1998 as compared to $45.4  million  for the  comparable  period in
1997,  primarily  as a result of a decrease in the  expenditures  of capital for
both videocassette rental inventory and property, furnishings and equipment.

Net cash used in financing  activities was $9.2 million for the twenty-six weeks
ended July 5, 1998 as compared to net cash  provided by financing  activities of
$3.9 million for the comparable  period in 1997. This change  resulted  directly
from the Company's  improved Adjusted EBITDA performance and allowed the Company
to decrease its debt outstanding during the first two quarters of 1998 versus an
increase in debt in the comparable period of the prior year.

The  Company has a Credit  Agreement  with First  Union  National  Bank of North
Carolina with respect to a reducing  revolving credit facility (the "Facility").
At July 5, 1998,  $58.3 million was  outstanding and $18.2 million was available
for borrowing under the Facility.  The available  amount of the Facility reduces
quarterly  with a final  maturity of June 30,  2000.  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. 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 that will be acceptable, if at all.

At July 5, 1998, the Company had a working capital deficit of $3.6 million,  due
to the accounting treatment of its videocassette rental inventory. Videocassette
rental  inventory  is treated as a  noncurrent  asset under  generally  accepted
accounting  principles because it is not an asset that 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.


                                       8
<PAGE>

                              Movie Gallery, Inc.

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


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 1998,  including its
anticipated new store openings.  However,  to fund a resumption of the Company's
acquisition  program,  or to provide funds in the event that the Company's  need
for funds is greater  than  expected,  or if certain  of the  financing  sources
identified  above are not available to the extent  anticipated or if the Company
increases  its  growth  plan,  the  Company  will  need  to seek  additional  or
alternative  sources of financing.  This financing may not be available on terms
satisfactory to the Company.  Failure to obtain  financing to fund the Company's
expansion  plans or for other purposes  could have a material  adverse effect on
the Company.

OTHER MATTERS

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,  and the Company does not
believe  that  there  will  be  any  material  exposure  related  to  year  2000
compatibility.

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 Hollywood 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 4, 1998.



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<PAGE>

                           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 3, 1998. 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          10,660,348         31,335
      H. Harrison Parrish         10,660,548         31,135
      William B. Snow             10,660,468         31,215
      Sanford C. Sigoloff         10,646,798         44,885
      Phillip  B. Smith           10,660,298         31,385
      Joseph F. Troy              10,657,548         34,135

   2. A  proposal  to amend the  Company's  1994 Stock  Plan,  as
      amended,  to increase  the number of shares  available  for
      grant from 2,250,000 to 2,600,000 was approved by a vote of
      8,238,915 for versus 2,384,268  against.  There were 23,500
      abstentions and 45,000 broker non-votes.

Item 6. Exhibits and Reports on Form 8-K

        a)  Exhibits

            27    Financial Data Schedule   
            27.1  Financial Data Schedule - Restated for July 6, 1997

        b)  Reports on Form 8-K
            
            None.

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<PAGE>
                                   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.
                                       -----------------------------------------


Date:   August 18, 1998                /s/ J. Steven Roy
                                       -----------------------------------------
                                       J. Steven Roy, Executive Vice President
                                       and Chief Financial Officer 



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