SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q



[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
    ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED October 5, 1997 OR
[ ] TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15 (d) OF THE  SECURITIES
    EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD OF ________ 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 _______

Applicable only to corporate issuers:

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest  practicable  date:  13,418,885  shares of Common
Stock as of November 10,1997.





_______________________________________________________________________________

The exhibit index to this report appears at page 11 of 11 consecutively numbered
pages.


<PAGE>



                               Movie Gallery, Inc.

                                      Index



Part I.  Financial Information

Item 1.  Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets - October 5, 1997 and January 5, 1997.............1

Consolidated Statements of Operations - Thirteen weeks ended
October 5, 1997 and September 29, 1996; Thirty-nine weeks ended
October 5, 1997 and September 29, 1996........................................2

Consolidated Statements of Cash Flows - Thirty-nine weeks ended
October 5, 1997 and September 29, 1996........................................3

Notes to Consolidated Financial Statements - October 5, 1997..................4

Item 2.  Management's Discussion and Analysis of Results
of Operations and Financial Condition.........................................7

Part II.  Other Information

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




<PAGE>





<TABLE>

                               Movie Gallery, Inc.

                           Consolidated Balance Sheets
                             (dollars in thousands)
<CAPTION>

                                                           October 5   January 5
                                                              1997       1997
                                                           --------    ---------
                                                          (Unaudited)
<S>                                                        <C>          <C>
Assets
Current assets:
   Cash and cash equivalents                               $  1,137     $  3,982
   Merchandise inventory                                     13,409       10,737
   Store supplies and other                                   4,513        4,109
   Deferred income taxes                                        794          913
                                                           --------     --------
Total current assets                                         19,853       19,741

Videocassette rental inventory, net                          94,250       89,929
Property, furnishings and equipment, net                     52,727       50,196
Deferred charges, net                                         9,438       11,151
Excess of cost over net assets acquired, net                 84,522       87,822
Deposits and other assets                                     2,241        2,738
                                                           --------     --------
Total assets                                               $263,031     $261,577
                                                           ========     ========

Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                                        $ 22,334     $ 24,321
   Accrued liabilities                                        7,538        7,622
   Current portion of long-term debt                            372          374
                                                           --------     --------
Total current liabilities                                    30,244       32,317

Long-term debt                                               73,105       67,883
Other accrued liabilities                                     1,899        2,425
Deferred income taxes                                        11,935       12,228

Stockholders' equity:
   Preferred stock, $.10 par value; 2,000,000 shares
       authorized, no shares issued and outstanding              --           --
   Common stock, $.001 par value; 30,000,000
       shares authorized, 13,418,885 and 13,420,791
       shares issued and outstanding, respectively               13           13
   Additional paid-in capital                               131,686      131,686
   Retained earnings                                         14,149       15,025
                                                           --------     --------
Total stockholders' equity                                  145,848      146,724
                                                           --------     --------
Total liabilities and stockholders' equity                 $263,031     $261,577
                                                           ========     ========

See accompanying notes.
</TABLE>

                                       1
<PAGE>


<TABLE>

                               Movie Gallery, Inc.

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

<CAPTION>
                                                               Thirteen weeks ended          Thirty-nine weeks ended
                                                            October 5    September 29      October 5     September 29
                                                              1997            1996          1997             1996
                                                           ---------------------------------------------------------
<S>                                                        <C>            <C>             <C>             <C>
Revenues:
   Rentals                                                 $   53,776     $   54,009      $  161,404      $  160,639
   Product sales                                                8,784          7,719          28,162          23,894
                                                           ----------     ----------      ----------      ----------
                                                               62,560         61,728         189,566         184,533

Operating costs and expenses:
   Store operating expenses                                    33,939         31,371          99,953          91,540
   Amortization of videocassette rental inventory              17,593         14,836          51,169          47,838
   Amortization of intangibles                                  1,739          1,781           5,275           5,132
   Cost of sales                                                5,762          4,520          17,028          14,336
   General and administrative                                   4,428          5,429          12,559          15,521
   Restructuring and other charges                                 --          9,595              --           9,595
                                                           ----------     ----------      ----------      ----------
Operating income (loss)                                          (901)        (5,804)          3,582             571
Interest expense, net                                          (1,590)        (1,440)         (4,632)         (3,941)
                                                           ----------     ----------      ----------      ----------
Loss before income taxes                                       (2,491)        (7,244)         (1,050)         (3,370)
Income taxes                                                     (822)        (3,007)           (174)         (1,156)
                                                           ----------     ----------      ----------      ----------
Net loss                                                   $   (1,669)    $   (4,237)     $     (876)     $   (2,214)
                                                           ==========     ==========      ==========      ==========
Net loss per share                                         $     (.12)    $     (.32)     $     (.07)     $     (.17)
                                                           ==========     ==========      ==========      ==========

Pro forma net loss per share:
Loss before income taxes                                                  $   (7,244)                     $   (3,370)
Pro forma income taxes                                                        (2,757)                         (1,281)
                                                                          ----------                      ----------
Pro forma net  loss                                                       $   (4,487)                     $   (2,089)
                                                                          ==========                      ==========
Pro forma net loss per share                                              $     (.33)                     $    (0.16)
                                                                          ==========                      ==========
Weighted average shares outstanding                        13,418,885     13,422,534      13,419,939      13,350,124
                                                           ==========     ==========      ==========      ==========

See accompanying notes.
</TABLE>


                                       2
<PAGE>


<TABLE>

                               Movie Gallery, Inc.

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

<CAPTION>
                                                    Thirty-nine weeks ended
                                                   October 5   September 29
                                                     1997          1996
                                                  -------------------------
<S>                                                <C>           <C>
Operating activities
Net loss                                           $   (876)     $ (2,214)
Adjustments to reconcile net loss to  net cash
  provided by operating activities:
   Depreciation and amortization                     64,601        59,367
   Deferred income taxes                               (174)       (1,375)
   Restructuring and other charges                       --         9,595
Changes in operating assets and liabilities:
   Merchandise inventory                             (3,091)          471
   Other current assets                                (404)         (148)
   Deposits and other assets                            497          (733)
   Accounts payable                                  (1,987)        2,928
   Accrued liabilities                                 (610)       (7,741)
                                                   --------      --------
Net cash provided by operating activities            57,956        60,150

Investing activities
Business acquisitions                                  (262)       (8,537)
Purchases of videocassette rental inventory, net    (55,071)      (55,690)
Purchases of property, furnishings and equipment    (10,688)      (14,508)
                                                   --------      --------
Net cash used in investing activities               (66,021)      (78,735)

Financing activities
Net proceeds from issuance of common stock               --           524
Net payments on notes payable                            --       (31,000)
Proceeds from issuance of  long-term debt             5,400        72,938
Principal payments on long-term debt                   (180)      (26,119)
                                                   --------      --------
Net cash provided by financing activities             5,220        16,343
                                                   --------      --------
Decrease in cash and cash equivalents                (2,845)       (2,242)
Cash and cash equivalents at beginning of period      3,982         6,255
                                                   --------      --------
Cash and cash equivalents at end of period         $  1,137      $  4,013
                                                   ========      ========

See accompanying notes.

</TABLE>


                                       3
<PAGE>

                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (Unaudited)
 
                                 October 5, 1997

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  thirty-nine  week
period ended October 5, 1997 are not necessarily  indicative of the results that
may be  expected  for the  fiscal  year  ended  January  4,  1998.  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 5, 1997.

The Company's  historical  financial  statements for all periods  presented have
been restated to include the results of operations of Home Vision Entertainment,
Inc. ("Home Vision") and Hollywood Video, Inc. ("Hollywood Video"), acquisitions
consummated on July 1, 1996 and accounted for as poolings-of-interests.


2.  Videocassette Rental Inventory

Effective   April  1,  1996,  the  Company  changed  its  method  of  amortizing
videocassette  rental  inventory  (which  includes video games and audio books).
Under the new method,  videocassettes  considered to be base stock are amortized
over  thirty-six  months on a  straight-line  basis to a $5 salvage  value.  New
release  videocassettes  are  amortized  as  follows:  (i)  the  fourth  and any
succeeding copies of each title per store are amortized on a straight-line basis
over six months to an average net book value of $5 which is then  amortized on a
straight-line  basis over the next thirty months or until the  videocassette  is
sold, at which time the unamortized  book value is charged to cost of sales; and
(ii)  copies one  through  three of each title per store are  amortized  as base
stock.  Management  believes  the new  method  results in a better  matching  of
expenses with revenues in the Company's current  operating  environment and that
it is compatible with changes made by its primary competitors.

The new method of  amortization  was applied to all  inventory  held at April 1,
1996.  The adoption of the new method of  amortization  was  accounted  for as a
change in accounting estimate effected by a change in accounting principle.  The
application  of the new  method of  amortizing  videocassette  rental  inventory
increased  depreciation expense and cost of sales for the quarter ended June 30,
1996 by  approximately  $7.7  million and  reduced  net income by $4.7  million.
Earnings  per share for the  thirty-nine  weeks  ended  September  29,  1996 was
reduced by $0.36 as a result of this charge.


                                       4
<PAGE>

                              Movie Gallery, Inc.

        Notes to Consolidated Financial Statements (Unaudited)(continued)


3.  Provision for Business Restructuring

During the third quarter of 1996 the Company completed an extensive  analysis of
both its store base  performance  and  organizational  structure  and  adopted a
business  restructuring  plan to  close  approximately  50 of its  stores.  This
analysis resulted in the Company  recording a $9.6 million pretax  restructuring
charge in the third quarter of 1996. The components of the restructuring  charge
included  approximately  $5.4  million in reserves  for future cash  outlays for
lease terminations,  miscellaneous closing costs and legal and accounting costs,
as well as  approximately  $4.2 million in asset write downs. The store closures
are expected to be completed by the end of fiscal year 1997.  Approximately $1.7
million of restructuring costs were paid and charged against the liability as of
October 5, 1997.  The stores  identified  for closure had revenues and operating
losses of approximately:  $301,000 and $50,000,  respectively,  for the thirteen
weeks ended  October 5, 1997;  $1,290,000  and $304,000,  respectively,  for the
thirty-nine weeks ended October 5, 1997; $1,543,000 and $224,000,  respectively,
for the thirteen weeks ended  September 29, 1996; and $4,995,000 and $1,113,000,
respectively,  for the thirty-nine  weeks ended September 29, 1996.  Results for
1996 include all stores  identified  for closure  under the  restructuring  plan
while  results for 1997  include  only those stores under the plan which had not
been closed as of the beginning of the period.

4.  Financing Obligations

On July 10, 1996, the Company  entered into a Credit  Agreement with First Union
National  Bank of North  Carolina  with respect to a reducing  revolving  credit
facility  (the  "Facility").  The  Facility is  unsecured,  originally  provided
borrowings for up to $125 million and replaced the Company's previously existing
line of credit  agreement.  During  1997,  the Company  voluntarily  reduced the
commitment to $90 million.

The available  amount of the Facility will reduce  quarterly  beginning on March
31,  1998 with a final  maturity  of June 30,  2000.  The  interest  rate of the
Facility  is  LIBOR-based  and 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.  At October 5, 1997,  $72.4 million was
outstanding under the Facility. Currently, the Company is in default of its most
restrictive  covenant.  However, the Company anticipates gaining approval for an
amendment  to the  Facility  that will enable the  Company to further  draw down
funds under the Facility.

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 the  applicable
interest rate credit spread. The interest rate swap agreement  terminates at the
time the Facility matures.


5.  Pro Forma Earnings Per Share

Pro forma  income  taxes  reflect  income  tax  expense  which  would  have been
recognized  by the  Company  as a C  corporation  if  the  1996  acquisition  of
Hollywood Video had been consummated prior to January 1, 1996. Hollywood Video's
historical  operating  results do not include any  provision for income taxes as
Hollywood  Video  was taxed as an S  corporation  for all  periods  prior to the
merger.


                                       5
<PAGE>

                              Movie Gallery, Inc.

        Notes to Consolidated Financial Statements (Unaudited)(continued)


6.  Recently Issued Accounting Standard

In February  1997, the Financial  Accounting  Standards  Board issued  Statement
No.128, "Earnings per Share", which  revises the  disclosure  requirements  and
increases the comparability of EPS data on an international basis by simplifying
the existing computational  guidelines in APB Opinion No. 15. The pronouncement,
effective for the final quarter of the fiscal year ending January 4, 1998,  will
require the Company to change the method  currently used to compute earnings per
share  and to  restate  all  prior  periods.  Under  the  new  requirements  for
calculating  primary  earnings per share,  the dilutive  effect of stock options
will be  excluded.  The  impact  of  adopting  the  pronouncement  has not  been
determined,  however, the Company believes it will not have a material impact on
its primary or fully diluted earnings per share.


7.  Contingencies

The Company is currently  engaged in litigation  proceedings with certain former
shareholders  of Home  Vision in  connection  with the merger of the Company and
Home  Vision in July 1996.  These  shareholders  seek  damages in excess of $7.5
million  plus  costs.  The  Company  believes  that the  claims set forth in the
complaint are without merit and intends to vigorously defend such claims.



                                       6
<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                      Thirty-nine weeks ended
                                         -------------------------------------     ---------------------------------------
                                         October 5    September 29    Increase     October 5     September 29    Increase
                                           1997          1996        (Decrease)      1997           1996        (Decrease)
                                          ------        ------         ------       ------         ------         ------

<S>                                        <C>           <C>            <C>          <C>            <C>            <C>
Revenues:
   Rentals                                 86.0%         87.5%          (1.5)%       85.1%          87.1%          (2.0)%
   Product sales                           14.0          12.5            1.5         14.9           12.9            2.0
                                          -----         -----          -----        -----          -----           ----
                                          100.0         100.0             --        100.0          100.0             --
Operating costs and expenses:
   Store operating expenses                54.2          50.9            3.3         52.7           49.6            3.1
   Amortization of rental inventory        28.1          24.0            4.1         27.0           25.9            1.1
   Amortization of intangibles              2.8           2.9           (0.1)         2.8            2.8             --
   Cost of sales                            9.2           7.3            1.9          9.0            7.8            1.2
   General and administrative               7.1           8.8           (1.7)         6.6            8.4           (1.8)
   Restructuring and other charges           --          15.5          (15.5)          --            5.2           (5.2)
                                          -----         -----          -----        -----          -----           ----
Total                                     101.4         109.4           (8.0)        98.1           99.7           (1.6)
                                          -----         -----          -----        -----          -----           ----
Operating  income (loss)                   (1.4)         (9.4)           8.0          1.9            0.3            1.6
Interest expense, net                      (2.6)         (2.3)          (0.3)        (2.5)          (2.1)          (0.4)
                                          -----         -----          -----        -----          -----           ----
Loss before income taxes                   (4.0)        (11.7)           7.7         (0.6)          (1.8)           1.2
Income taxes                               (1.3)         (4.9)           3.6         (0.1)          (0.6)           0.5
                                          -----         -----          -----        -----          -----           ----
Net loss                                   (2.7)%        (6.8)%          4.1%        (0.5)%         (1.2)%          0.7%
                                          =====         =====          =====        =====          =====          =====

Number of stores open at end of period     856           870            (14)         856            870            (14)
                                          =====         =====          =====        =====          =====          =====


</TABLE>

The results of operations for all periods presented include the combined results
of the Company, Home Vision and Hollywood Video. The acquisitions of Home Vision
and Hollywood  Video were both  consummated on July 1, 1996 and accounted for as
poolings-of-interests.  For the  thirteen  weeks  and  thirty-nine  weeks  ended
October 5, 1997,  revenues were $62.6 million and $189.6 million,  respectively,
increases of 1.3% and 2.7% over the same  periods in 1996.  The  increases  were
primarily a result of the net positive effect of new store additions  offset, in
part,  by the  Company's  normal  store  closings  and the store  closings  that
resulted from a third quarter 1996  corporate  restructuring.  The third quarter
increase was partially aided by an increase in same-store  sales of 1.8%,  while
the  year-to-date  increase in revenues  was  partially  offset by a decrease in
same-store  sales of 1.8% for the  year-to-date  period.  The  same-store  sales
increase for the third quarter was primarily the result of: (i) the  comparative
sales  increase  related to the 1996 Summer  Olympics,  one of the most  heavily
watched  events in television  history;  and (ii) an increase in the game rental
business due to the advent and consumer  acceptance  of the Nintendo 64 and Sony
Playstation game platforms.

Product  sales as a  percentage  of total  revenue  for the  thirteen  weeks and
thirty-nine  weeks  ended  October 5, 1997 were  14.0% and 14.9%,  respectively,
increases from 12.5% and 12.9% for the comparable  periods in 1996.  This change
was  primarily the result of a general  increased  effort by the Company to sell
previously viewed videocassettes, as well as the Company's implementation of new
sell-through products within its store base.


                                       7
<PAGE>



                            Movie Gallery, Inc.

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


Store  operating  expenses,  which reflect  direct store  expenses such as lease
payments and in-store  payroll,  increased as a percentage  of revenues to 54.2%
for the  thirteen  weeks  ended  October 5, 1997 from  50.9% for the  comparable
fiscal period in 1996. For the  thirty-nine  weeks ended October 5, 1997,  store
operating expenses as a percentage of revenue were 52.7%, an increase from 49.6%
for the comparable period in 1996. The increase in store operating expenses as a
percentage of revenues was primarily due to strategic responses in the Company's
most competitive  markets.  This increase was also due, in part, to the national
minimum wage increases that were  implemented on September 1, 1996 and September
1, 1997. In addition,  store operating expenses were also negatively impacted by
increases in rent and other  expenses in connection  with the normal  renewal of
leases in existing stores.

During the second quarter of fiscal year 1996, the Company changed its method of
amortizing  videocassette rental inventory (which includes video games and audio
books). The new amortization policy has the effect of accelerating the Company's
rate of amortization of its inventory.  The application of the new  amortization
policy, accounted for as a change in accounting estimate effected by a change in
accounting  principle,  resulted  in a  one-time  increase  in  amortization  of
videocassette  rental  inventory  by $7.7 million  during the second  quarter of
1996.  Videocassette  amortization  expense as a percentage of revenue under the
new method was 24.0% for the  thirteen  weeks ended  September  29, 1996 and was
approximately  21.8% for the thirty-nine  weeks ended September 29, 1996, net of
the approximately $7.7 million charge discussed above. For the third quarter and
the year-to-date  1997 periods,  amortization of videocassette  rental inventory
increased  as a  percentage  of revenue to 28.1% and  27.0%,  respectively.  The
increase in amortization of  videocassette  rental  inventory as a percentage of
revenue was  primarily  the result of (i) a decision  by the Company  during the
fourth quarter of 1996 to increase its level of expenditures on rental inventory
in response to industry-wide  competitive  issues, (ii) an increase in the depth
of hit new release titles purchased during the year, which results in more tapes
being  amortized  at the  Company's  most  aggressive  rate,  and (iii) a marked
increase in the  quantity  of new game  release  purchases,  which is due to the
buildup of inventory  related to the consumer  acceptance of new game  platforms
(i.e. Nintendo 64).

Cost of sales  increased  with the  increased  revenue  from  product  sales and
increased as a  percentage  of revenues  from  product  sales from 58.6% for the
thirteen  weeks ended  September 29, 1996 to 65.6% for the thirteen  weeks ended
October 5, 1997. For the thirty-nine  weeks ended October 5, 1997, cost of sales
as a percentage of revenue from product sales was 60.5%,  an increase from 60.0%
for the  comparable  period in 1996. The decrease in product sales gross margins
during the third quarter  resulted  primarily from an increase in new tape sales
which carry lower margins than other sell-through component items.

General and administrative expenses as a percentage of revenue decreased to 7.1%
for the  thirteen  weeks ended  October 5, 1997  versus 8.8% for the  comparable
period in 1996.  For the  thirty-nine  weeks ended October 5, 1997,  general and
administrative  expenses as a percentage  of revenue were 6.6%, a decrease  from
8.4% for the  comparable  period in 1996.  The decrease was  primarily  due to a
reduction in overhead that was effected over the past year in  conjunction  with
the Company's third quarter 1996 restructuring.

Net interest expense as a percentage of revenue  increased to 2.6% for the third
quarter of 1997 from 2.3% for the thirteen  weeks ended  September 29, 1996. For
the fiscal  year-to-date period ended October 5, 1997, net interest expense as a
percentage of revenue  increased to 2.5% from 2.1% for the comparable  period in
1996.  The increase for these  periods was due to the  increased  amount of debt
financing over the past year.


                                       8
<PAGE>

                            Movie Gallery, Inc.

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


The  Company's  income  tax  provision  as a  percentage  of net  income for the
thirty-nine  weeks ended October 5, 1997 was 16.6%.  The difference  between the
Company's  effective  rate and the blended  federal and state  statutory rate of
38.0% is due to the  non-deductibility  of certain goodwill associated with past
tax-free acquisitions made by the Company.

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  upgrading and  installation of the Company's
POS 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  thirty-nine  weeks  ended  October 5, 1997,  the  Company  generated
approximately  $13.1  million in  Adjusted  EBITDA  versus  approximately  $14.6
million for the comparable  period in 1996, a decrease of  approximately  10.3%.
"Adjusted  EBITDA"  is  earnings  before  interest,   taxes,   depreciation  and
amortization, excluding non-recurring charges and less the Company's purchase of
videocassette rental inventory.  Included in the Company's  videocassette rental
inventory  purchases  for  the  thirty-nine  weeks  ended  October  5,  1997  is
approximately $1.1 million associated with 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.

Net cash provided by operating  activities was $58.0 million for the thirty-nine
weeks  ended  October 5, 1997 as compared  to $60.2  million for the  comparable
period of 1996.  The  decrease  was  primarily  due to a decrease  in  operating
income,  exclusive  of the  effects of the 1996  restructuring,  an  increase in
merchandise  inventory  and  a  corresponding   decrease  in  accounts  payable,
partially offset by increased depreciation and amortization expense.

Net cash used in  investing  activities  was $66.0  million for the  thirty-nine
weeks  ended  October 5, 1997 as compared  to $78.7  million for the  comparable
period in 1996,  primarily as a result of a decrease in the total cash  expended
both for stores acquired and for property, furnishings and equipment.

Net cash provided by financing  activities  decreased  from $16.3 million in the
thirty-nine  weeks ended  September  29, 1996 to $5.2 million in the  comparable
period in 1997. This decrease was primarily the result of a diminished  level of
acquisition activity discussed above.

During  Fiscal 1996,  the Company  replaced  its existing $60 million  revolving
credit  facility with a $125 million  reducing  revolving  credit  facility (the
"Facility").  The  Facility has a maturity  date of June 30, 2000.  The interest


                                       9
<PAGE>

                            Movie Gallery, Inc.

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


rate of the  Facility is  LIBOR-based  and the Company may repay the Facility at
any time without  penalty.  The Facility has covenants  that restrict  borrowing
based upon cash flow levels.  During 1997, the Company  voluntarily  reduced the
commitment to $90 million.  At October 5, 1997,  $72.4  million was  outstanding
under the Facility. Currently, the Company is in default of its most restrictive
covenant.  However, the Company anticipates gaining approval for an amendment to
the  Facility  that will enable the Company to further draw down funds under the
Facility.

At October 5, 1997, the Company had a working  capital deficit of $10.4 million,
due to the accounting  treatment of its inventory.  Videocassette and video game
rental  inventory are treated as  non-current  assets under  generally  accepted
accounting  principles because they are not assets which are 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 these  assets as  noncurrent  results in their
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 1997 and Fiscal 1998,
including its anticipated new store openings.  However,  to fund a resumption of
the  Company's  acquisition  program  (which was suspended in the latter half of
1996),  to  provide  funds in the  event  that the  Company's  need for funds is
greater than expected 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,  the Company's  ability to amend its bank
facility to provide for increased  borrowing  capacity 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 5, 1997.



                                       10
<PAGE>




                           Part II - Other Information


Item 6. Exhibits and Reports on Form 8-K

        a)   Exhibits

             10   Agreement  dated  August  15,  1997  between  Major  Video
                  Concepts, Inc. and Movie Gallery, Inc. (portions have been
                  omitted pursuant to a request for confidential treatment)
             11   Computation of Earnings Per Share
             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: November 19, 1997                     /s/ J. Steven Roy
                                            ------------------------------------
                                            J. Steven Roy, Senior Vice President
                                            and Chief Financial Officer


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