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  July 6, 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 August 11, 1997.

The exhibit index to this report appears at page 12 of 15 consecutively numbered
pages.


<PAGE>



                               Movie Gallery, Inc.

                                      Index



Part I.  Financial Information

Item 1.  Financial Statements (Unaudited)

Consolidated Balance Sheets - July 6, 1997 and January 5, 1997.................1

Consolidated Statements of Operations - Thirteen weeks ended
July 6, 1997 and June 30, 1996; Twenty-six weeks ended
July 6, 1997 and June 30, 1996.................................................2

Consolidated Statements of Cash Flows - Twenty-six weeks ended
July 6, 1997 and June 30, 1996.................................................3

Notes to Consolidated Financial Statements - July 6, 1997......................4

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

Part II.  Other Information

Item 1.  Legal Proceedings....................................................12

Item 4.  Submission of Matters to a Vote of Security Holders..................12

Item 6.  Exhibits and Reports on Form 8-K.....................................12

<PAGE>

<TABLE>


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

<CAPTION>                                                            
                                                             July 6    January 5
                                                              1997       1997
                                                          -----------------------
                                                           (Unaudited)
<S>                                                         <C>         <C>     
Assets
Current assets:
   Cash and cash equivalents                                $  1,050    $  3,982
   Merchandise inventory                                      10,296      10,737
   Store supplies and other                                    4,514       4,109
   Deferred income taxes                                         827         913
                                                            --------    --------
Total current assets                                          16,687      19,741

Videocassette rental inventory, net                           93,553      89,929
Property, furnishings and equipment, net                      53,008      50,196
Deferred charges, net                                          9,988      11,151
Excess of cost over net assets acquired, net                  85,711      87,822
Deposits and other assets                                      2,482       2,738
                                                            --------    --------
Total assets                                                $261,429    $261,577
                                                            ========    ========

Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                                         $ 18,032    $ 24,321
   Accrued liabilities                                         8,747       7,622
   Current portion of long-term debt                             372         374
                                                            --------    --------
Total current liabilities                                     27,151      32,317

Long-term debt                                                71,756      67,883
Other accrued liabilities                                      2,215       2,425
Deferred income taxes                                         12,790      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                                          15,818      15,025
                                                            --------    --------
Total stockholders' equity                                   147,517     146,724
                                                            --------    --------
Total liabilities and stockholders' equity                  $261,429    $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        Twenty-six weeks ended
                                                                      July 6          June 30      July 6           June 30
                                                                       1997             1996        1997             1996
                                                                    --------------------------------------------------------
<S>                                                                <C>             <C>            <C>            <C>      
Revenues:
   Rentals                                                         $   52,045      $   52,254     $  107,628     $  106,630
   Product sales                                                        9,283           8,051         19,378         16,175
                                                                   ----------      ----------     ----------     ----------
                                                                       61,328          60,305        127,006        122,805
                                                                                                              
Operating costs and expenses:                                                                                 
   Store operating expenses                                            32,860          30,790         66,014         60,169
   Amortization of videocassette rental inventory                      17,293          20,904         33,576         33,002
   Amortization of intangibles                                          1,762           1,725          3,536          3,351
   Cost of sales                                                        5,561           4,995         11,266          9,816
   General and administrative                                           4,085           4,991          8,131         10,092
                                                                   ----------      ----------     ----------     ----------
Operating income (loss)                                                  (233)         (3,100)         4,483          6,375
Interest expense, net                                                  (1,546)         (1,325)        (3,042)        (2,501)
                                                                   ----------      ----------     ----------     ----------
Income (loss) before income taxes                                      (1,779)         (4,425)         1,441          3,874
Income taxes                                                             (576)         (1,367)           648          1,851
                                                                   ----------      ----------     ----------     ----------
Net income (loss)                                                  $   (1,203)     $   (3,058)    $      793     $    2,023
                                                                   ==========      ==========     ==========     ==========
Net income (loss) per share                                        $     (.09)     $     (.23)    $      .06     $      .15
                                                                   ==========      ==========     ==========     ==========

Pro forma net income (loss) per share:
Income (loss) before income taxes                                                  $   (4,425)                   $    3,874
Pro forma income taxes                                                                 (1,663)                        1,476
                                                                                   ----------                    ----------
Pro forma net income (loss)                                                        $   (2,762)                   $    2,398
                                                                                   ==========                    ==========
Pro forma net income (loss) per share                                              $     (.21)                   $      .18
                                                                                   ==========                    ==========
Weighted average shares outstanding                                13,420,163      13,468,700     13,420,475     13,287,784
                                                                   ==========      ===========    ==========     ==========

See accompanying notes.

</TABLE>



                                       2
<PAGE>

<TABLE>
                      
                               Movie Gallery, Inc.

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

<CAPTION>
                                                      Twenty-six weeks ended
                                                     July 6           June 30
                                                      1997              1996
                                                  ------------------------------
<S>                                                <C>              <C>  
Operating activities
Net income                                         $    793         $  2,023
Adjustments to reconcile net income to  net cash
  provided by operating activities:
   Depreciation and amortization                     42,399           40,462
   Deferred income taxes                                648            1,632
Changes in operating assets and liabilities:
   Merchandise inventory                                272              436
   Other current assets                                (405)             352
   Deposits and other assets                            256              398
   Accounts payable                                  (6,289)            (908)
   Accrued liabilities                                  915            1,081
                                                   --------         --------
Net cash provided by operating activities            38,589           45,476

Investing activities
Business acquisitions                                  (262)          (7,630)
Purchases of videocassette rental inventory, net    (37,031)         (37,560)
Purchases of property, furnishings and equipment     (8,099)         (10,067)
                                                   --------         --------
Net cash used in investing activities               (45,392)         (55,257)

Financing activities
Net proceeds from issuance of common stock             --                524
Net proceeds from issuance of notes payable            --             10,548
Proceeds from issuance of  long-term debt             4,000            5,938
Principal payments on long-term debt                   (129)          (6,891)
                                                   --------         --------
Net cash provided by financing activities             3,871           10,119
                                                   --------         --------
Increase (decrease) in cash and cash equivalents     (2,932)             338
Cash and cash equivalents at beginning of period      3,982            6,255
                                                   --------         --------
Cash and cash equivalents at end of period         $  1,050         $  6,593
                                                   ========         ========

See accompanying notes.
</TABLE>


                                       3
<PAGE>

                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (Unaudited)

                                  July 6, 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  twenty-six  week
period ended July 6, 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 and earnings per share
by $4.7 million and $0.36, respectively.


                                       4
<PAGE>

                              Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (Unaudited)(continued)

                                  July 6, 1997



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 $1.4
million of restructuring costs were paid and charged against the liability as of
July 6, 1997.  The stores  identified  for closure had  revenues  and  operating
losses of  approximately  $361,000 and $57,000,  respectively,  for the thirteen
weeks  ended  July  6,  1997;  $989,000  and  $232,000,  respectively,  for  the
twenty-six weeks ended July 6, 1997; $1,634,000 and $642,000,  respectively, for
the  thirteen   weeks  ended  June  30,  1996;   and  $3,453,000  and  $888,000,
respectively,  for the  twenty-six  weeks ended June 30, 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 July 6, 1997,  $71.0  million  was
outstanding and approximately $5.6 million was available for borrowing under the
Facility.

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)

                                  July 6, 1997

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                   Twenty-six weeks ended
                                          ---------------------------------------------------------------------------               
                                           July 6      June 30     Increase         July 6       June 30    Increase              
                                            1997         1996     (Decrease)         1997          1996    (Decrease)
                                          ----------------------------------     ------------------------------------ 
<S>                                         <C>           <C>         <C>            <C>          <C>         <C> 
Revenues:
 Rentals                                    84.9%         86.6%       (1.7)%         84.7%        86.8%       (2.1)%
 Product Sales                              15.1          13.4         1.7           15.3         13.2         2.1
                                           ------        ------      ------         ------       ------      ------
                                           100.0         100.0         -            100.0        100.0         -
Operating costs and expenses:
 Store operating expenses                   53.6          51.0         2.6           52.0         49.0         3.0
 Amortization of rental inventory           28.2          34.7        (6.5)          26.4         26.9        (0.5)
 Amortization of intangibles                 2.9           2.8         0.1            2.8          2.7         0.1
 Cost of sales                               9.0           8.3         0.7            8.9          8.0         0.9
 General and administrative                  6.7           8.3        (1.6)           6.4          8.2        (1.8)
                                           ------        ------      ------         ------       ------      ------
Total                                      100.4         105.1        (4.7)          96.5         94.8         1.7
                                           ------        ------      ------         ------       ------      ------
Operating income (loss)                     (0.4)         (5.1)        4.7            3.5          5.2        (1.7)
Interest expense, net                       (2.5)         (2.2)       (0.3)          (2.4)        (2.0)       (0.4)
                                           ------        ------      ------         ------       ------      ------
                                            (2.9)         (7.3)        4.4            1.1          3.2        (2.1)
Income Taxes                                (0.9)         (2.7)       (1.8)           0.5          1.2        (0.7)
                                           ------        ------      ------         ------       ------      ------
Net income (loss)                           (2.0)%        (4.6)%       2.6%           0.6%         2.0%       (1.4)%
                                           ======        ======      ======         ======       ======      ======

Number of Stores open at end of period       862           859           3            862          859           3
                                           ======        ======      ======         ======       ======      ======
</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 twenty-six weeks ended July 6,
1997, revenues were $61.3 million and $127.0 million, respectively, increases of
1.7% and 3.4% over the same  periods in 1996.  The  increases  were  primarily a
result of an increase in the number of stores operated by the Company as well as
the net positive  effect of new store  additions  offset by the Company's  store
closings that resulted from a third quarter 1996  corporate  restructuring.  The
increases were partially offset by a decrease in same store revenues of 2.1% for
the second quarter and 3.9%  year-to-date  at stores operated by the Company for
at least 13 months.  The same store revenue  decrease for the second  quarter is
primarily the result of: (i) a significant  level of  competitive  openings over
the past year in the Company's more urban locations; (ii) the Company's decision
to implement aggressive  promotional responses in certain competitive markets to
preserve and build market share;  and (iii) a continuation  of overall  industry
softness that began in the first  quarter,  which resulted from a lack of strong
new release titles during that period.

Product  sales as a  percentage  of total  revenue  for the  thirteen  weeks and
twenty-six  weeks  ended  July 6,  1997  were  15.1%  and  15.3%,  respectively,
increases from 13.4% and 13.2% for the comparable  periods in 1996.  This change
is  primarily  the result of a general  increased  effort by the Company to sell
previously  viewed  videocassettes  as well as  general  softness  in the rental
market due to the factors discussed above.



                                       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 53.6%
for the thirteen weeks ended July 6, 1997 from 51.0% for the  comparable  fiscal
period in 1996. For the  twenty-six  weeks ended July 6, 1997,  store  operating
expenses as a percentage  of revenue was 52.0%,  an increase  from 49.0% for the
comparable  period  in 1996.  The  increase  in store  operating  expenses  as a
percentage of revenues is primarily  due to the  shortfall in revenue  resulting
from negative same-store revenues. Store operating expenses were also negatively
impacted  by  increases  in both  fixed  asset  depreciation  and rent and other
expenses in connection  with the normal renewal of leases in existing  stores as
well as the integration of developed stores into the Company's store base.

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.  Net  of  the   approximately   $7.7  million  charge   discussed   above,
videocassette  amortization  expense as a  percentage  of revenue  under the new
method was  approximately  22.0% for the thirteen  weeks ended June 30, 1996 and
20.6% for the  twenty-six  weeks ended June 30, 1996. For the second quarter and
the year-to-date  1997 periods,  amortization of videocassette  rental inventory
increased  as a  percentage  of revenue to 28.2% and  26.4%,  respectively.  The
increase in amortization of  videocassette  rental  inventory as a percentage of
revenue  is  primarily  the result of (i) higher  overall  videocassette  rental
inventory purchasing levels, which are based on revenue projections that were in
excess of actual  results  achieved and (ii) an effort on the Company's  part to
buy top new release titles in more volume in order to satisfy  customer  demand.
Such  increased  new  release  title  purchases  had the  effect  of  increasing
videocassette  amortization expense due to the policy's accelerated amortization
of copies four and above of any title within a given store.

Cost of sales  increased  with the  increased  revenue  from  product  sales and
decreased as a  percentage  of revenues  from  product  sales from 62.0% for the
thirteen weeks ended June 30, 1996 to 59.9% for the thirteen weeks ended July 6,
1997. For the twenty-six weeks ended July 6, 1997, cost of sales as a percentage
of  revenue  from  product  sales  was  58.1%,  a  decrease  from  60.7% for the
comparable  period in 1996. The increase in product sales gross margins resulted
primarily  from  (i) an  increase  in  the  sale  of  previously  viewed  rental
inventory,  the  unamortized  value of which is  expensed  to cost of sales  and
generally  generates  higher  margins than other product  categories,  and (ii)
higher margins on sell-through products introduced within the last year.

General and administrative expenses as a percentage of revenue decreased to 6.7%
for the thirteen weeks ended July 6, 1997 versus 8.3% for the comparable  period
in 1996. For the twenty-six weeks ended July 6, 1997, general and administrative
expenses  as a  percentage  of revenue  was 6.4%,  a decrease  from 8.2% for the
comparable  period in 1996.  The decrease is primarily  due to the  efficiencies
gained from the leveraging of overhead  associated with acquisition  activity in
1996, in particular the  acquisitions of Home Vision and Hollywood  Video, and a
reduction in corporate overhead over the past year.




                                       8
<PAGE>

                              Movie Gallery, Inc.

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


Net interest expense as a percentage of revenue increased to 2.5% for the second
quarter of 1997 from 2.2% for the thirteen  weeks ended June 30,  1996.  For the
fiscal  year-to-date  period  ended  July 6,  1997,  net  interest  expense as a
percentage of revenue  increased to 2.4% from 2.0% for the comparable  period in
1996.  The increase  for these  periods is due to the  increased  amount of debt
financing that has been used to fund the Company's  growth during the first half
of 1996.

The  Company's  income  tax  provision  as a  percentage  of net  income for the
twenty-six  weeks  ended  July 6, 1997 was 45.0%.  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  twenty-six  weeks  ended  July  6,  1997,  the  Company   generated
approximately $9.9 million in Adjusted EBITDA versus  approximately $9.3 million
for the comparable period in 1996, an increase of approximately 6.5%.  "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 twenty-six weeks ended July 6, 1997 is approximately  $775,000
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 $38.6 million for the twenty-six
weeks ended July 6, 1997 as compared to $45.5 million for the comparable  period
of 1996.  The decrease was  primarily  due to lower net income and a substantial
decrease in accounts  payable  partially  offset by increased  depreciation  and
amortization expense.




                                       9
<PAGE>
                              Movie Gallery, Inc.

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


Net cash used in investing activities was $45.4 million for the twenty-six weeks
ended July 6, 1997 as compared to $55.3  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 $10.1 million in the
first and second  quarters of 1996 to $3.9 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
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 July 6, 1997, $71.0 million was outstanding under
the Facility with additional availability of approximately $5.6 million.

The Company  grows its store base  through  internally  developed  and  acquired
stores and  requires  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, or alternative financing arrangements such as funds raised in public or
private  debt or  equity  offerings.  However,  there can be no  assurance  that
financing will be available to the Company on terms which will be acceptable, if
at all.

At July 6, 1997, the Company had a working capital deficit of $10.5 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,  including its
anticipated new store openings.  However,  to fund a resumption of the Company's
acquisition  program  (which was  temporarily  suspended  in the latter  half of
1996),  to  provide  funds in the  event  that the  Company's  need for funds is
greater than expected,  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.



                                       10
<PAGE>

                             Movie Gallery, Inc.

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



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 5, 1997.



                                       11
<PAGE>






                           Part II - Other Information

Item 1.  Legal Proceedings

In June 1997,  certain former  shareholders of Home Vision  Entertainment,  Inc.
(the "Home Vision Shareholders") filed  a complaint  against the Company in  the
U. S. District Court for the District of Maine.  According to the complaint, the
Home  Vision  Shareholders  have  asserted  a claim for  breach of  contract  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.

In June 1997, the Company filed a complaint against certain former  shareholders
of Home Vision in the Circuit Court of Houston  County,  Alabama.  The complaint
alleges  breach of contract and fraud in connection  with the aforesaid  merger.
Movie Gallery seeks compensatory and punitive damages.

Investors  are  cautioned  that due to the  inherent  uncertainties  involved in
litigation,  the foregoing forward-looking statements concerning Movie Gallery's
belief with respect to the merits of the Home Vision shareholders' complaint and
its intentions with respect thereto could differ materially from actual results.

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 13, 1997. 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:
<TABLE>
<CAPTION>

        Name                           For                    Withheld
---------------------               ----------                --------
<S>                                 <C>                        <C>     
Joe Thomas Malugen                  11,913,004                 133,332  
H. Harrison Parrish                 11,913,704                 132,632
William B. Snow                     11,913,839                 132,497
Sanford C. Sigoloff                 11,913,504                 132,832
Phillip B. Smith                    11,914,139                 132,197
Joseph F. Troy                      11,914,139                 132,197
</TABLE>

2. A proposal to amend the Company's  1994 Stock Plan,  as amended,  to increase
the  number of shares  available  for grant  from  1,750,000  to  2,250,000  was
approved by a vote of 9,416,077 for versus 2,594,573  against.  There were 7,475
abstentions and 28,211 broker non-votes.

Item 6. Exhibits and Reports on Form 8-K

              a)       Exhibits
                                11  Computation of Earnings Per Share
                                27  Financial Data Schedule

              b)       Reports on Form 8-K
                                None.





                                       12
<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. 
                                              (Registrant)



 Date: August 20, 1997                     /s/ J. Steven Roy 
                                           ------------------------------------ 
                                           J. Steven Roy, Senior Vice President
                                           and Chief Financial Officer



                                       13