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 September 30, 2001

                                       OR

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

         For The Transition Period From___________ to__________



                         Commission file number 0-24548

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

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



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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required to file such reports),  and (2) has been subject to filing requirements
for the past 90 days. YES X NO ____


The number of shares outstanding of the registrant's common stock as of November
1, 2001 was 17,490,350.

<PAGE>

                               Movie Gallery, Inc.

                                      Index



Part I.  Financial Information

Item 1.  Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets - September 30, 2001 and December 31, 2000.........1

Consolidated Statements of Income - Thirteen weeks and thirty-nine weeks
ended September 30, 2001 and October 1, 2000...................................2

Consolidated Statements of Cash Flows - Thirty-nine weeks ended September 30,
2001 and October 1, 2000.......................................................3

Notes to Consolidated Financial Statements - September 30, 2001................4

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

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

Part II.  Other Information

Item 1.  Legal Proceedings....................................................11

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

<PAGE>


<TABLE>

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

<CAPTION>
                                                                 September 30,   December 31,
                                                                     2001            2000
                                                                 ------------    -----------
                                                                  (Unaudited)
<S>                                                                <C>             <C>
Assets
Current assets:
   Cash and cash equivalents                                       $  6,609        $  7,029
   Merchandise inventory                                              5,656           9,264
   Prepaid expenses                                                   2,190           1,000
   Notes receivable                                                  13,460              --
   Store supplies and other                                           4,301           3,852
   Deferred income taxes                                              1,179             502
                                                                   --------        --------
Total current assets                                                 33,395          21,647

Rental inventory, net                                                66,127          61,773
Property, furnishings and equipment, net                             57,283          53,124
Goodwill and other intangibles, net                                  77,158          77,926
Deposits and other assets                                             4,009           3,066
                                                                   --------        --------
Total assets                                                       $237,972        $217,536
                                                                   ========        ========
Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                                                $ 28,021        $ 31,111
   Accrued liabilities                                               12,808          11,631
                                                                   --------        --------
Total current liabilities                                            40,829          42,742

Long-term debt                                                       44,380          40,600
Other accrued liabilities                                               454             253
Deferred income taxes                                                 5,416           4,732

Stockholders' equity:
   Preferred stock, $.10 par value; 2,000,000 shares
       authorized, no shares issued or outstanding                       --              --
   Common stock, $.001 par value; 35,000,000
       shares authorized, 17,486,785 and 16,704,251
       shares issued and outstanding                                     11              11
   Additional paid-in capital                                       133,308         121,841
   Retained earnings                                                 13,574           7,357
                                                                   --------        --------
Total stockholders' equity                                          146,893         129,209
                                                                   --------        --------
Total liabilities and stockholders' equity                         $237,972        $217,536
                                                                   ========        ========
See accompanying notes.

</TABLE>

                                       1
<PAGE>

<TABLE>

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


<CAPTION>
                                             Thirteen Weeks Ended     Thirty-Nine Weeks Ended
                                            -----------------------   -----------------------

                                            September 30, October 1,  September 30, October 1,
                                                 2001       2000          2001         2000
                                            ------------  ---------   ------------  ---------
<S>                                          <C>          <C>          <C>          <C>
Revenues:
   Rentals                                   $  74,334    $  64,527    $ 223,185    $ 200,613
   Product sales                                12,133       10,823       37,840       33,575
                                             ---------    ---------    ---------    ---------
Total revenues                                  86,467       75,350      261,025      234,188

Cost of sales:
   Cost of rental revenues                      22,074       20,065       66,708       60,123
   Cost of product sales                         7,291        6,879       23,742       21,196
                                             ---------    ---------    ---------    ---------
Gross margin                                    57,102       48,406      170,575      152,869
Operating costs and expenses:
   Store operating expenses                     42,810       38,375      124,681      114,483
   General and administrative                    7,531        6,464       22,272       19,038
   Amortization of intangibles                   1,568        1,674        5,072        5,740
   Stock option compensation                     2,443           --        5,787           --
                                             ---------    ---------    ---------    ---------
Operating income                                 2,750        1,893       12,763       13,608

Interest expense, net                             (666)        (942)      (2,121)      (2,767)
                                             ---------    ---------    ---------    ---------
Income before income taxes and
   extraordinary item                            2,084          951       10,642       10,841

Income taxes                                       813          390        4,248        4,445
                                             ---------    ---------    ---------    ---------
Income before extraordinary item                 1,271          561        6,394        6,396
Extraordinary loss on early extinguishment
   of debt                                          --           --         (177)          --
                                             ---------    ---------    ---------    ---------
Net income                                   $   1,271    $     561    $   6,217    $   6,396
                                             =========    =========    =========    =========

Basic earnings  per share:
Income before extraordinary item             $    0.07    $    0.03    $    0.38    $    0.37
Extraordinary loss on early extinguishment
   of debt                                          --           --        (0.01)          --
                                             ---------    ---------    ---------    ---------
Net income per share - basic                 $    0.07    $    0.03    $    0.37    $    0.37
                                             =========    =========    =========    =========

Diluted earnings per share:
Income before extraordinary item             $    0.07    $    0.03    $    0.36    $    0.37
Extraordinary loss on early extinguishment
   of debt                                          --           --        (0.01)          --
                                             ---------    ---------    ---------    ---------
Net income per share - diluted               $    0.07    $    0.03    $    0.35    $    0.37
                                             =========    =========    =========    =========

Weighted average shares outstanding:
   Basic                                        17,381       16,704       17,013       17,367
   Diluted                                      18,613       16,779       17,813       17,412

See accompanying notes.

</TABLE>

                                       2
<PAGE>

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


<CAPTION>
                                                                   Thirty-Nine Weeks Ended
                                                             ----------------------------------
                                                             September 30,            October 1,
                                                                 2001                    2000
                                                             ------------             ---------
<S>                                                             <C>                     <C>
Operating activities:
Net income                                                      $ 6,217                 $ 6,396
Adjustments to reconcile net income to net cash
 provided by operating activities:
   Extraordinary loss on early extinguishment of debt               177                      --
   Depreciation and amortization                                 62,767                  56,014
   Stock option compensation                                      5,787                      --
   Deferred income taxes                                          2,211                   2,012
Changes in operating assets and liabilities:
   Merchandise inventory                                          3,627                   6,489
   Notes receivable                                             (13,460)                     --
   Other current assets                                          (1,639)                   (236)
   Deposits and other assets                                     (1,321)                     75
   Accounts payable                                              (3,295)                 (7,310)
   Accrued liabilities                                            1,460                  (2,650)
                                                                -------                 -------
Net cash provided by operating activities                        62,531                  60,790

Investing activities:
Business acquisitions                                            (5,718)                 (1,257)
Purchases of rental inventory, net                              (49,227)                (44,149)
Purchases of property, furnishings and equipment                (15,375)                (17,685)
                                                                -------                 -------
Net cash used in investing activities                           (70,320)                (63,091)

Financing activities:
Purchases and retirement of common stock                             --                  (5,698)
Proceeds from issuance of long-term debt                          3,780                   5,873
Proceeds from exercise of stock options                           3,589                      --
Principal payments on long-term debt                                 --                    (204)
                                                                -------                 -------
Net cash provided by (used in) financing activities               7,369                     (29)
                                                                -------                 -------
Decrease in cash and cash equivalents                              (420)                 (2,330)
Cash and cash equivalents at beginning of period                  7,029                   6,970
                                                                -------                 -------
Cash and cash equivalents at end of period                      $ 6,609                 $ 4,640
                                                                =======                 =======
See accompanying notes.

</TABLE>

                                       3
<PAGE>

                                Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (Unaudited)

                               September 30, 2001

1.  Basis of Presentation

The accompanying  unaudited 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  September 30, 2001 are not  necessarily  indicative of the results
that may be expected for the fiscal year ending January 6, 2002 ("Fiscal 2001").
For further  information,  refer to the  consolidated  financial  statements and
footnotes  thereto included in Movie Gallery,  Inc.'s annual report on Form 10-K
for the fiscal year ended December 31, 2000 ("Fiscal 2000").

2.  Notes Receivable

In May 2001, the Company  purchased 92% of the senior secured bank debt of Video
Update,  Inc.  ("Video  Update"),  which had a total face value of $121 million,
from a syndication of financial  institutions led by BNP Paribas.  The Company's
portion of the bank debt was  purchased  for  approximately  $8.5  million.  The
remaining  8% of the bank debt was retired by Video  Update in October 2001 at a
significant  discount from face value. The Company subsequently made advances to
Video Update under a revolving  credit agreement of $5.0 million through the end
of the third  quarter.  An  additional  $1.5  million  has been  advanced  since
September 30, 2001. Video Update,  which is currently operating under Chapter 11
of the United States Bankruptcy Code, owns and operates over 350 video specialty
retail  stores in the United  States and Canada.  A plan of  reorganization  was
filed  with the United  States  Bankruptcy  Court on July 31,  2001,  which,  if
approved,  would result in Video Update's  emergence from bankruptcy as a wholly
owned  subsidiary of the Company.  A hearing on the  confirmation of the plan of
reorganization is currently scheduled for November 30, 2001.

3.  Financing Obligations

On June 27, 2001, the Company  entered into a credit  agreement with  SouthTrust
Bank with respect to a new  revolving  credit  facility (the  "Facility").  This
Facility  replaces a similar revolving credit facility with First Union National
Bank of North  Carolina  dated  January 7, 1999,  and which was due to expire on
January 7, 2002. The new Facility is unsecured and provides for borrowings of up
to $65.0 million  through July 6, 2002,  $55.0 million  through July 5, 2003 and
$45.0  million  until final  maturity on July 4, 2004.  The interest rate on the
Facility is based on LIBOR plus an applicable margin  percentage,  which depends
on the Company's cash flow generation and borrowings  outstanding.  The terms of
the  Facility  require  the  Company  to enter  into a new  interest  rate  swap
agreement no later than December 1, 2001.

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

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  (1,232,000 and 75,000 for the thirteen  weeks ended  September 30, 2001
and October 1, 2000, respectively;  800,000 and 45,000 for the thirty-nine weeks
ended September 30, 2001 and October 1, 2000, respectively). No adjustments were
made to net income in the computation of basic or diluted earnings per share.


                                       4
<PAGE>

                               Movie Gallery, Inc.

       Notes to Consolidated Financial Statements (Unaudited) (continued)

5.  Stock Option Repricing

In March 2000, the FASB issued  Interpretation  No. 44,  "Accounting for Certain
Transactions involving Stock Compensation,  an interpretation of APB Opinion No.
25." The  Interpretation  requires that stock options that have been modified to
reduce the exercise  price be accounted  for as variable.  The Company  repriced
576,000 stock options in March 2001, and reduced the exercise price to $2.67 per
share. Under the Interpretation, the repriced stock options are accounted for as
variable until the stock options are exercised, forfeited or expire unexercised.

6.  Supply Contract

In March 2001, the Company and Rentrak Corporation ("Rentrak") amended the terms
of  the  Company's   existing   supply   contract  with  Rentrak.   General  and
administrative  expenses for the  thirty-nine  weeks ended  September  30, 2001,
include a nonrecurring  charge of $1.6 million  ($0.05 per diluted share,  after
tax)  paid  to  Rentrak  in  connection  with  the  amendment  to the  contract.
Additionally,  the Company prepaid  approximately  $900,000 to be applied over a
three-year period against future amounts due under the contract.

7.  Recently Issued Accounting Pronouncements

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

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

8.  Stock Split

In July 2001, the Company's Board of Directors  approved a  three-for-two  stock
split,  which  was  effected  on  August  31,  2001,  in the form of a 50% stock
dividend  to  stockholders  of record as of the close of  business on August 17,
2001. The stock split increased the number of shares of common stock outstanding
by 5,823,071  shares.  All prior periods have been restated to reflect the stock
split.


                                       5
<PAGE>

                               Movie Gallery, Inc.

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

Results of Operations

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

<TABLE>
<CAPTION>
                                             Thirteen Weeks Ended                   Thirty-Nine Weeks Ended
                                       ---------------------------------       ----------------------------------
                                     September 30, October 1,   Increase     September 30,  October 1,   Increase
                                        2001          2000     (Decrease)       2001           2000     (Decrease)
                                       -------      -------      ------        -------       -------     -------
<S>                                    <C>          <C>         <C>            <C>           <C>         <C>
Revenues:
   Rentals                                86.0%        85.6%        0.4%          85.5%         85.7%       (0.2)%
   Product sales                          14.0         14.4        (0.4)          14.5          14.3         0.2
                                       -------      -------     -------        -------       -------     -------
Total revenues                           100.0        100.0          --          100.0         100.0          --
Cost of sales:
   Cost of rental revenues                25.6         26.7        (1.1)          25.6          25.7        (0.1)
   Cost of product sales                   8.4          9.1        (0.7)           9.1           9.0         0.1
                                       -------      -------     -------        -------       -------     -------
Gross margin                              66.0         64.2         1.8           65.3          65.3          --
Operating costs and expenses:
   Store operating expenses               49.5         50.9        (1.4)          47.8          48.9        (1.1)
   General and administrative              8.7          8.6         0.1            8.5           8.1         0.4
   Amortization of intangibles             1.8          2.2        (0.4)           1.9           2.5        (0.6)
   Stock option compensation               2.8           --         2.8            2.2            --         2.2
                                       -------      -------     -------        -------       -------     -------
Operating income                           3.2          2.5         0.7            4.9           5.8        (0.9)

Interest expense, net                     (0.8)        (1.3)        0.5           (0.8)         (1.2)        0.4
                                       -------      -------     -------        -------       -------     -------
Income before income taxes and
   extraordinary item                      2.4          1.2         1.2            4.1           4.6        (0.5)

Income taxes                               0.9          0.5         0.4            1.6           1.9        (0.3)
                                       -------      -------     -------        -------       -------     -------
Income before extraordinary item           1.5          0.7         0.8            2.5           2.7        (0.2)
Extraordinary loss on early
   extinguishment of debt                   --           --          --           (0.1)           --        (0.1)
                                       -------      -------     -------        -------       -------     -------
Net income                                 1.5%         0.7%        0.8%           2.4%          2.7%       (0.3)%
                                       =======      =======     =======        =======       =======     =======

Adjusted EBITDA (in thousands)         $ 9,572      $ 7,620     $ 1,952        $38,420       $29,717     $ 8,703
                                       =======      =======     =======        =======       =======     =======
Number of stores open at end of period   1,082          976         106          1,082           976         106
                                       =======      =======     =======        =======       =======     =======
</TABLE>

Revenue.  For the thirteen weeks and thirty-nine weeks ended September 30, 2001,
total revenues were $86.5 million and $261.0 million, respectively, increases of
14.8%  and  11.5%  over the  comparable  periods  in Fiscal  2000.  The  revenue
increases  were driven by an 8.9% increase in the average  number of stores open
in  Fiscal  2001 as well as a 5.6%  increase  for the third  quarter  and a 2.8%
increase for the year-to-date  period in same-store  revenues.  The increases in
same-store  revenues  were the  result of (i)  successful,  chain-wide  internal
marketing programs designed to generate more consumer  excitement and traffic in
the Company's base of stores; (ii) an increase in the sales of previously viewed
movies and previously played games; (iii) significant  increases in DVD (digital
versatile  disk) rental  revenue;  (iv) a favorable new release  schedule in the
third  quarter of 2001 versus the third  quarter of 2000;  and (v) the favorable


                                       6
<PAGE>

                              Movie Gallery, Inc.

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


impact in the third quarter of not competing with the Summer  Olympics that were
held in the third quarter of Fiscal 2000. These revenue increases were partially
offset by soft game rentals due to consumer  anticipation  of new game platforms
being introduced late in the year.

Cost of Sales.  The gross  margin on rental  revenue  for the third  quarter and
year-to-date  periods of Fiscal 2001 was 70.3% and 70.1%,  respectively,  versus
68.9% and 70.0% for the comparable  quarter and  year-to-date  periods of Fiscal
2000,  respectively.  The cost of rental revenues includes both the amortization
of rental  inventory and revenue sharing expenses  incurred by the Company.  The
improvement in the gross margin on rental revenue for the third quarter reflects
the impact of the 5.6% increase in same-store  revenues and stronger  margins on
DVD rentals versus VHS rentals.

Cost of  product  sales  includes  the costs of new  videocassettes  and  DVD's,
confectionery  items  and  other  goods,  as well as the  unamortized  value  of
previously  viewed rental inventory sold during the period.  The gross margin on
product sales  increased to 39.9% in the third quarter of Fiscal 2001 from 36.4%
in the third quarter of Fiscal 2000, and to 37.3% for the year-to-date period of
Fiscal  2001  versus  36.9% in the  comparable  period  of the prior  year.  The
increase in  profitability  of product sales for the third quarter  reflects the
impact of the continuing  promotion and availability of previously viewed movies
with only limited levels of new sell-through  titles in inventory.  The marginal
increase in profitability  for the year-to-date  period was primarily the result
of the margins achieved through the increased sale of previously  viewed product
offset by the significant  discounting associated with the continued liquidation
of older  sell-through  titles and other slow moving inventory in certain stores
concentrated in the first quarter.

Operating  Costs  and  Expenses.   Store  operating   expenses,   which  include
store-level  expenses such as lease payments and in-store payroll,  decreased to
49.5% and 47.8% of total revenue for the third quarter and year-to-date  periods
of Fiscal 2001,  respectively.  This  reflects a decline from 50.9% and 48.9% in
the  comparable  periods of Fiscal  2000,  respectively.  The  decrease in store
operating expenses was primarily due to the same-store revenues increase of 2.8%
during the first nine  months of the year and  continued  initiatives  to reduce
operating costs, as well as strong performance of new stores complemented by the
closure of under-performing units.

General and administrative  expenses as a percentage of revenue was 8.7% for the
third quarter of Fiscal 2001,  consistent with 8.6% in the comparable  period of
the prior year. General and administrative  expenses for the year-to-date period
include a  nonrecurring  charge of $1.6  million  related to an amendment of the
Company's   supply  agreement  with  Rentrak  (see  Note  6  of  the  "Notes  to
Consolidated  Financial   Statements").   Excluding  this  charge,  general  and
administrative  expenses as a  percentage  of revenue  decreased to 7.9% for the
year-to-date period of Fiscal 2001 from 8.1% for the comparable period of Fiscal
2000.  The decrease was primarily due to increased  revenue  levels with minimal
increases to administrative staffing levels.

Amortization  of  intangibles  as a percentage of total revenue for the thirteen
weeks  and  thirty-nine  weeks  ended  September  30,  2001 was  1.8% and  1.9%,
respectively,  decreases from 2.2% and 2.5% for the comparable periods in Fiscal
2000.  This  decrease  is  primarily  due to the  increase  in  revenue  and the
expiration of certain non-compete agreements throughout Fiscal 2000.

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

                                       7
<PAGE>
                              Movie Gallery, Inc.

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

As a result of the above  factors  and  excluding  the  nonrecurring  charge and
non-cash  compensation  expense,  operating income increased by 174.3% and 48.1%
for the third  quarter and  year-to-date  periods of Fiscal 2001 to $5.2 million
and $20.2 million, respectively.

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

Liquidity and Capital Resources

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

During the  thirty-nine  weeks ended  September  30, 2001 the Company  generated
approximately  $38.4  million in Adjusted  EBITDA,  a 29.3%  increase over $29.7
million for the comparable  period in the prior year. The increase was primarily
driven by the 11.5%  increase  in total  revenue  while  leveraging  expenses as
discussed above. Adjusted EBITDA is defined as earnings before interest,  taxes,
depreciation and  amortization,  non-cash  compensation and nonrecurring  items,
less the Company's  purchase of rental inventory which excludes rental inventory
purchases specifically for new store openings.  Adjusted EBITDA is presented not
as an alternative  measure of operating results or cash flow from operations (as
determined in accordance with generally  accepted  accounting  principles),  but
because it is a widely  accepted  financial  indicator,  in the video  specialty
retail industry, of a company's ability to service debt.

Net cash provided by operating  activities was $62.5 million for the thirty-nine
weeks ended  September 30, 2001 as compared to $60.8 million for the thirty-nine
weeks ended  October 1, 2000.  The  increase in net cash  provided by  operating
activities  was  primarily  due to  improved  operating  results  offset  by the
purchase of the bank debt of Video Update and subsequent operating advances made
to Video  Update.  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 $70.3  million  for the first  nine
months of Fiscal 2001,  versus $63.1 million for the comparable period in Fiscal
2000. The increase is primarily due to more significant  acquisition activity in
Fiscal 2001 versus  Fiscal 2000 and  increased  rental  inventory  purchases  in
Fiscal 2001 to support an 8.9% larger average store base.

Net cash  provided by financing  activities  was $7.4 million for the first nine
months of Fiscal 2001 and resulted from increases in long-term debt and proceeds
from the exercise of stock  options.  In the  comparable  period of Fiscal 2000,
cash provided  through a net increase in long-term  debt was offset by purchases
and  retirement  of  common  stock,  resulting  in net  cash  used in  financing
activities of $29,000.

On June 27, 2001, the Company  entered into a credit  agreement with  SouthTrust
Bank with respect to a new  revolving  credit  facility (the  "Facility").  This
Facility  replaces a similar revolving credit facility with First Union National
Bank of North  Carolina  dated  January 7, 1999,  and which was due to expire on
January 7, 2002. The new Facility is unsecured and provides for borrowings of up
to $65.0 million  through July 6, 2002,  $55.0 million  through July 5, 2003 and
$45.0  million  until final  maturity on July 4, 2004.  The interest rate on the
Facility is based on LIBOR plus an applicable margin  percentage,  which depends


                                       8
<PAGE>
                              Movie Gallery, Inc.

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



on the Company's cash flow generation and borrowings  outstanding.  The terms of
the  Facility  require  the  Company  to enter  into a new  interest  rate  swap
agreement no later than December 1, 2001.

The Company  grows its store base  through  internally  developed  and  acquired
stores. The Company opened 66 internally developed stores and acquired 27 stores
during the first nine months of Fiscal 2001 and expects to open approximately 75
new stores  during  the year.  To the  extent  available,  new stores and future
acquisitions  may  be  completed  using  funds  available  under  the  Facility,
financing provided by sellers,  alternative financing arrangements such as funds
raised in public or private debt or equity  offerings or shares of the Company's
stock issued to sellers.  However, there can be no assurance that financing will
be available to the Company on terms which will be acceptable, if at all.

In May 2001, the Company  purchased 92% of the senior secured bank debt of Video
Update,  which had a total face value of $121  million,  from a  syndication  of
financial  institutions  led by BNP Paribas.  The Company's  portion of the bank
debt was purchased for approximately $8.5 million.  The remaining 8% of the bank
debt was retired by Video Update in October 2001 at a significant  discount from
face value.  The Company  subsequently  made  advances to Video  Update  under a
revolving credit agreement of $5.0 million through the end of the third quarter.
An additional  $1.5 million has been advanced  since  September 30, 2001.  Video
Update,  which is  currently  operating  under  Chapter 11 of the United  States
Bankruptcy Code, owns and operates over 350 video specialty retail stores in the
United  States and Canada.  A plan of  reorganization  was filed with the United
States  Bankruptcy Court on July 31, 2001,  which, if approved,  would result in
Video  Update's  emergence from  bankruptcy as a wholly owned  subsidiary of the
Company.  A  hearing  on the  confirmation  of the  plan  of  reorganization  is
currently scheduled for November 30, 2001.

At  September  30,  2001,  the  Company  had a working  capital  deficit of $7.4
million,  due to  the  accounting  treatment  of its  rental  inventory.  Rental
inventory is treated as a noncurrent asset under generally  accepted  accounting
principles  because  it is a  depreciable  asset  and is not an  asset  which is
reasonably  expected  to be  completely  realized  in cash or sold in the normal
business  cycle.  Although  the  rental of this  inventory  generates  the major
portion of the Company's revenue, the classification of this asset as noncurrent
results in its exclusion from working capital.  The aggregate amount payable for
this  inventory,  however,  is reported as a current  liability  until paid and,
accordingly, is included in working capital.  Consequently, the Company believes
that  working  capital is not an  appropriate  measure of its  liquidity  and it
anticipates that it will continue to operate with a working capital deficit.

The Company believes its projected cash flow from operations, borrowing capacity
under the  Facility,  cash on hand and trade credit will  provide the  necessary
capital to fund its current plan of operations for the remainder of Fiscal 2001,
including its anticipated new store openings and acquisition  program.  However,
to fund a major acquisition, or to provide funds in the event that the Company's
need for funds is greater than expected,  or if certain of the financing sources
identified  above are not available to the extent  anticipated or if the Company
increases  its  growth  plan,  the  Company  may  need  to  seek  additional  or
alternative  sources of financing.  This financing may not be available on terms
satisfactory to the Company.  Failure to obtain  financing to fund the Company's
expansion  plans or for other purposes  could have a material  adverse effect on
the Company.

Stock Option Repricing

In March 2000, the FASB issued  Interpretation  No. 44,  "Accounting for Certain
Transactions involving Stock Compensation,  an interpretation of APB Opinion No.
25." The  Interpretation  requires that stock options that have been modified to
reduce the exercise  price be accounted  for as variable.  The Company  repriced
576,000 stock options in March 2001, and reduced the exercise price to $2.67 per
share. Under the Interpretation, the repriced stock options are accounted for as
variable until the stock options are exercised, forfeited or expire unexercised.



                                       9
<PAGE>

                             Movie Gallery, Inc.

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


Recently Issued Accounting Pronouncements

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

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

Forward Looking Statements

This report contains certain  forward-looking  statements regarding the Company.
The Company  desires to take  advantage of the "safe  harbor"  provisions of the
Private  Securities  Litigation  Reform  Act of  1995  and  in  that  regard  is
cautioning  the readers of this report that a number of  important  risk factors
could affect the Company's actual results of operations and may cause changes in
the Company's strategy with the result that the Company's operations and results
may differ  materially  from those expressed in any  forward-looking  statements
made by, or on behalf of, the Company.  These risk factors include,  but are not
limited to, the Company's ability to achieve its financial  estimates for Fiscal
2001 and beyond,  the  Company's  ability to continue to expand,  including  its
ability to successfully execute its new store opening program and the successful
reorganization of Video Update,  adequate movie and game product availability at
acceptable overall per unit costs,  continued growth of DVD, consumer acceptance
of new game platforms,  competitive  factors and weather  conditions  within the
Company's  geographic  markets,  and the risk  factors that are  discussed  from
time-to-time  in the Company's SEC reports,  including,  but not limited to, the
report on Form 10-K for the fiscal year ended  December 31, 2000.  Additionally,
if  the  plan  of  reorganization  for  Video  Update  is not  confirmed  by the
bankruptcy  court in its present  form and in a timely  manner,  it could have a
material adverse impact on the value of our note receivable from Video Update.


                                       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  December  31, 2000 in the  Company's  annual
report on Form 10-K.

                           Part II - Other Information

Item 1.  Legal Proceedings

     We are a defendant in two putative class action  lawsuits in Alabama (Sable
Denise Mack, et. al. v. M.G.A., Inc., in the Circuit Court of Tuscaloosa County,
Alabama,  and Laura F. Hicks,  et. al. v. M.G.A.,  Inc., in the Circuit Court of
Mobile  County, Alabama)  filed by  customers on December 8, 2000 and August 21,
2001, respectively, and one class action lawsuit filed on August 17, 2001 in the
71st Judicial District Court, Harrison County, Texas (Shannon Thompson,  et. al.
v. M.G.A.,  Inc.). Each of these lawsuits alleges that the extended viewing fees
we charge our  customers  for  keeping  our rental  products  beyond the initial
rental period are  penalities  in violation of certain  common law and equitable
claims.  The dollar  amounts that  plaintiffs  seek as damages to themselves and
those  similarly  situated are not set forth in the  complaints.  Similar  class
action  lawsuits  have been filed  against  our two major  competitors.  Without
admitting any fault, one of our competitors  recently publicly announced that it
had reached a proposed settlement of some of these class action lawsuits.  Under
the  publicly   announced   pending   settlement,   our  competitor  would  make
certificates available to class members for rentals and cash discounts and would
pay the attorney's fees in connection with the settlement.  Our competitor would
not be  required  to make any change to its  extended  viewing  fee  policy.  We
believe that our extended viewing fees do not violate any laws, and we intend to
vigorously defend these lawsuits.

     Although we believe that the foregoing  claims  against us are  unwarranted
and without  merit,  we cannot  provide any assurance as to the outcome of these
proceedings.  We cannot  estimate  the  possible  loss or range of loss that may
result from these claims and therefore have not recorded any related accruals.

     In addition,  we are involved in litigation  in the ordinary  course of our
business,  none of which,  if decided  adversely to us,  individually  or in the
aggregate, is material to our business or results of operations.

Item 6.  Exhibits and Reports on Form 8-K

         a) Exhibits

         None.

         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 6, 2001                  /s/ J. Steven Roy
                                        ---------------------------------------
                                        J. Steven Roy, Executive Vice President
                                        and Chief Financial Officer


                                       11