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  September 29, 1996 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:  13,422,534  shares of Common
Stock as of November 8, 1996.




The exhibit index to this report appears at page 12 of 14  consecutively
numbered pages.

<PAGE>


                               Movie Gallery, Inc.

                                      Index



Part I.  Financial Information

Item 1.  Financial Statements (Unaudited)

Consolidated Balance Sheets - September 29, 1996 and December 31, 1995....1

Consolidated Statement of Operations - Quarter ended September 29,
1996 and September 30, 1995; Three quarters ended September 29,
1996 and September 30, 1995 ..............................................2

Consolidated Statements of Cash Flows - Three quarters ended
September 29, 1996 and September 30, 1995.................................3

Notes to Consolidated Financial Statements - September 29, 1996...........4

Item 2.  Management's Discussion and Analysis of Results of Operations
and Financial Condition...................................................8


Part II.  Other Information

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

<TABLE>
                              Movie Gallery, Inc.
                           Consolidated Balance Sheets
                                   (Unaudited)
                                 (in thousands)
<CAPTION>

                                                      September 29 December 31
                                                           1996        1995
                                                      ------------ -----------
<S>                                                    <C>         <C>                 
Current assets:
Cash and cash equivalents .........................    $  4,013    $  6,255
Recoverable income tax ............................       1,447       1,278
Merchandise inventory .............................      10,995      10,989
Accounts receivable ...............................       1,036       1,933
Prepaid expenses and other ........................       2,913       2,113
                                                       --------     -------
Total current assets                                     20,404      22,568


Videocassette rental inventory, net ...............      83,245      72,979
Property, furnishings and equipment, net ..........      49,445      41,437
Deferred charges, net .............................      12,060      12,567
Excess of cost over net assets acquired ...........      88,261      81,963
Deposits and other assets .........................       2,742       1,965
                                                       --------    --------
Total assets ......................................    $256,157    $233,479
                                                       ========    ========


Liabilities and stockholders' equity
Current liabilities:
Notes payable .....................................    $   --      $ 32,052
Accounts payable ..................................      18,942      15,575
Accrued liabilities ...............................       8,737      13,508
Current portion of long-term financing obligations        4,633       6,390
                                                       --------    --------
Total current liabilities .........................      32,312      67,525


Long-term financing obligations ...................      69,274      19,622
Other accrued liabilities .........................       2,425        --
Deferred income taxes .............................       9,117      10,193


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, 13,422,534 and 12,877,240 shares
   issued and outstanding, respectively ...........          13          13
Additional paid-in capital ........................     131,686     122,582
Retained earnings .................................      11,330      13,544
                                                       --------    --------
Total stockholders' equity ........................     143,029     136,139
                                                       --------    --------
Total liabilities and stockholders' equity ........    $256,157    $233,479
                                                       ========    ========

See accompanying notes
</TABLE>

                                       1
<PAGE>

<TABLE>

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

<CAPTION>

                                                           Quarter Ended           Three Quarters Ended
                                                    September 29  September 30  September 29  September 30
                                                          1996        1995          1996         1995
                                                    ------------------------------------------------------

<S>                                                   <C>          <C>          <C>          <C>    
Revenues:
   Rentals ........................................   $  54,009    $  36,463    $ 160,639    $  87,242
   Product sales ..................................       7,719        3,910       23,894       11,895
                                                       ---------    ---------    ---------    ----------
                                                      $  61,728    $  40,373    $ 184,533    $  99,137

Operating costs and expenses:
   Store operating expenses .......................      31,371       18,798       91,540       44,466
   Amortization of videocassette
    rental inventory ..............................      14,836        8,081       47,838       19,723
   Amortization of intangibles ....................       1,781        1,032        5,132        2,129
   Cost of sales ..................................       4,520        2,542       14,336        7,810
   General and administrative .....................       5,429        3,667       15,521        9,277
   Restructuring and other charges ................       9,595         --          9,595         --
                                                       ---------    ---------    ---------    ----------
Operating income (loss) ...........................      (5,804)       6,253          571       15,732
Interest expense, net .............................      (1,440)        (405)      (3,941)        (692)
                                                       ---------    ---------    ---------    ----------

Income (loss) before income taxes .................      (7,244)       5,848       (3,370)      15,040
Income taxes ......................................      (3,007)       2,318       (1,156)       6,335
                                                       ---------    ---------    ---------    ----------
Net income (loss) .................................   $  (4,237)   $   3,530    $  (2,214)   $   8,705
                                                       =========    =========    =========    ==========  
Net income (loss) per share .......................   $    (.32)   $     .27    $    (.17)   $     .73
                                                       =========    =========    =========    ==========

Supplemental pro forma net income (loss) per share:
Historical income (loss) before
  income taxes ....................................   $  (7,244)   $   5,848    $  (3,370)   $  15,040
Pro forma income taxes ............................      (2,757)       2,167       (1,281)       5,537
                                                       ---------    ---------    ---------    ----------
Pro forma net income (loss) .......................      (4,487)       3,681       (2,089)       9,503
                                                       =========    =========    =========    ==========
Supplemental pro forma net
  income (loss) per share .........................   $    (.33)   $     .28    $    (.16)   $     .80
                                                       =========    =========    =========    ==========


Weighted average shares
   outstanding ....................................      13,423       13,013       13,350       11,857
                                                       =========    =========    =========    ==========
See accompanying notes

</TABLE>



                                       2
<PAGE>

<TABLE>
                              Movie Gallery, Inc.
                      Consolidated Statements of Cash Flows
                                   (Unaudited)
                                 (in thousands)
                                       
<CAPTION>
                                                              Three Quarters Ended
                                                           September 29  September 30
                                                               1996         1995
                                                           --------------------------  
<S>                                                         <C>          <C>
OPERATING ACTIVITIES
Net income (loss) .......................................   $  (2,214)   $   8,705
Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
   Depreciation .........................................      54,235       22,004
   Amortization .........................................       5,132        2,129
   Deferred income taxes ................................      (1,375)       5,078
   Restructuring charge .................................       9,595         --
Changes in operating assets and liabilities:
   Recoverable income tax ...............................          49           (5)
   Merchandise inventory ................................         143         (933)
   Other current assets .................................         131         (710)
   Deposits and other ...................................        (733)      (1,121)
   Accounts payable .....................................       2,928        1,225
   Accrued liabilities ..................................      (7,741)       2,697
                                                             ---------    ---------
Net cash provided by operating activities ...............      60,150       39,069


INVESTING ACTIVITIES
Business acquisitions ...................................      (8,537)     (68,835)
Purchases of videocassette rental inventory, net ........     (55,690)     (33,797)
Purchases of property, furnishings and equipment ........     (14,508)     (14,490)
                                                             ---------    ---------
Net cash used in investing activities ...................     (78,735)    (117,122)


FINANCING ACTIVITIES
Proceeds from issuance of common stock ..................         524       64,323
Net (payments on) proceeds from notes payable ...........     (31,000)      10,500
Proceeds from issuance of long-term financing obligations      72,938        8,341
Principal payments on long-term financing obligations ...     (26,119)      (4,371)
Cash dividends and other ................................        --           (996)
                                                             ---------    ---------
Net cash provided by financing activities ...............      16,343       77,797
                                                             ---------    ---------
Decrease in cash and cash equivalents ...................      (2,242)        (256)
Cash and cash equivalents at beginning of period ........       6,255        3,723
                                                             ---------    ---------
Cash and cash equivalents at end of period ..............   $   4,013    $   3,467
                                                             =========    =========

See accompanying notes

</TABLE>



                                       3
<PAGE>


                               Movie Gallery, Inc.

             Notes to Consolidated Financial Statements (Unaudited)


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,  they 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 thirteen week and  thirty-nine  week
periods ended September 29, 1996, are not necessarily  indicative of the results
that may be  expected  for the fiscal  year ended  January 5, 1997.  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
year ended December 31, 1995. 

The Company's  historical  financial  statements for all periods  presented have
been restated to include the results of operations of Home Vision Entertainment,
Inc, and Hollywood Video, Inc. (see note 5).

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

3.  Provision  for Business  Restructuring

During the third  quarter of 1996 the Company  began and  completed an extensive
analysis of both the store base performance and its organizational structure and
adopted a business  restructuring  plan to close  approximately 50 of its stores
and reduce the  corporate  organizational  staff by  approximately  15  percent.
Management  concluded that certain stores were under  performing and that it was
not prudent to continue to operate these  locations.  The expected  closings are
not  concentrated  in  a  particular  geographic  area.  The  principal  factors
considered  in  identifying  stores for  closure  included:  (i) whether a store
generated  sufficient  cash flow at the store  level to  provide  an  acceptable
return on current  investment;  (ii) whether the latest sales trends indicated a
likely improvement in the historical store results; (iii) whether the current or
future  competitive  climate would make sales improvements less likely; and (iv)
whether  a  store's  performance  warrants  lease  renewal  where  the lease was
scheduled to expire within the next year.

                                       4
<PAGE>
                              Movie Gallery, Inc.

       Notes to Consolidated Financial Statements (Unaudited)(Continued)

This  restructuring  plan has  resulted in the Company  recording a $9.6 million
pretax  restructuring charge in the third quarter of 1996. The components of the
restructuring  charge include  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
(see below). In some situations, the timing of store closures will depend on the
Company's  ability to negotiate  reasonable lease  termination  agreements.  The
lease commitments associated with the closing stores will be retired entirely or
materially diminished by one of three methods: (i) through the normal expiration
of the lease within the next year;  (ii) through the  subletting of the property
to  another  entity;  or  (iii)  through  a  negotiated  lease  buyout  with the
individual landlord.  The store closures are expected to be completed by the end
of fiscal year 1997.  The stores  identified  for closure had revenues and store
operating expenses of approximately $6.2 million and $5.3 million, respectively,
for the first three quarters of fiscal year 1996.

During the first  quarter of 1996,  the  Company  adopted  Financial  Accounting
Standards Board Statement No. 121,  "Accounting for the Impairment of Long-Lived
Assets and for  Long-Lived  Assets to Be Disposed  Of," issued in March 1995. In
conjunction  with  the  business   restructuring,   an  estimated  $4.2  million
impairment  loss was  incurred  for  those  stores  identified  to  close  where
projected operating  performance  indicated an impairment.  This impairment loss
related  primarily  to the  write-off of  leasehold  improvements,  fixtures and
intangibles  and  a  valuation  allowance  for  videocassette  rental  inventory
associated with the stores to be closed.

Included  within  the  "Restructuring  and  other  charges"  line  item  in  the
consolidated   statement  of  operations  is  $325,000  of  estimated   employee
termination  benefits  related to the elimination of  approximately 50 positions
within  the  corporate  organizational  staff  of  the  Company.  The  positions
terminated encompassed all aspects of the corporate staff of the Company.

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, provides borrowings for up
to $125 million and replaced the  Company's  previously  existing line of credit
agreement.

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 November 8, 1996,  $67 million was
outstanding and  approximately  $5.5 million of the $125 million  commitment was
available for borrowing under the Facility.

5.  Acquisitions

On July 1, 1996, the Company  acquired Home Vision  Entertainment,  Inc.  ("Home
Vision")  in a  merger  transaction  accounted  for  as a  pooling-of-interests,
pursuant to which the Company issued approximately  731,000 shares of its common
stock to Home Vision  shareholders  and assumed  approximately  $12.5 million in
liabilities.  At the time of the merger, Home Vision operated 55 video specialty
stores in Maine, New Hampshire and Massachusetts.

                                       5
<PAGE>




                              Movie Gallery, Inc.

       Notes to Consolidated Financial Statements (Unaudited)(Continued)

On July 1, 1996, the Company acquired Hollywood Video, Inc.  ("Hollywood Video")
in a merger  transaction  accounted for as a  pooling-of-interests,  pursuant to
which the Company  issued  approximately  38,000  shares of its common  stock to
Hollywood  Video  shareholders  and  assumed   approximately  $11.5  million  in
liabilities.  At the  time of the  merger,  Hollywood  Video  operated  43 video
specialty stores in Iowa, Wisconsin and Illinois.

The Company's  historical  financial  statements for all periods  presented have
been  restated to include the results of operations of Home Vision and Hollywood
Video.  The effects of conforming the accounting  policies of the Company,  Home
Vision and Hollywood Video were not material.

Prior to the merger,  Home Vision  reported on a fiscal year ending on September
30 and  Hollywood  Video  reported  on a calendar  year  basis.  The Home Vision
statement of operations  for the year ended  September 30, 1995 is combined with
the  statement of operations  for the Company and  Hollywood  Video for the year
ended  December 31, 1995.  The combined  balance sheet includes the December 31,
1995 balance sheet for the Company, Home Vision and Hollywood Video. In order to
conform with the Company's fiscal year end, Home Vision's net loss of $2,082,000
for the quarter ended  December 31, 1995 is reflected in the Company's  retained
earnings  balance at December 31, 1995.

Separate  results of operations of the merged  entities for the periods prior to
the merger date are as follows (dollars in thousands) (unaudited):
<TABLE>

                          Six Months  Three Months  Nine Months
                            Ended        Ended         Ended               
                           June 30    September 30  September 30
                            1996          1995         1995
                          -------------------------------------
<CAPTION>
<S>                       <C>          <C>          <C>   
Revenues
   Movie Gallery ......   $ 106,307    $  34,595    $  80,927
   Home Vision ........      11,191        3,732       12,530
   Hollywood Video ....       5,307        2,046        5,680
                          ---------    ---------    ---------
Combined ..............   $ 122,805    $  40,373    $  99,137
                          =========    =========    =========
 
Net income (loss)
   Movie Gallery ......   $   3,106    $   4,289    $  10,122
   Home Vision ........         (97)        (345)        (328)
   Hollywood Video ....        (986)        (414)      (1,089)
                          ---------    ---------    ---------
Combined ..............   $   2,023    $   3,530    $   8,705
                          =========    =========    =========

Other changes in 
stockholders' equity
   Movie Gallery ......   $   9,256    $   2,079    $  64,170
   Home Vision ........         (24)       3,049        4,638
   Hollywood Video ....        --           --           --
                          ---------    ---------    ---------
Combined ..............   $   9,232    $   5,128    $  68,808
                          =========    =========    =========
</TABLE>

Costs of approximately  $757,000 incurred by the Company in connection with
the Home Vision and  Hollywood  Video  mergers have been included in general and
administrative  expenses in the  consolidated  statement of  operations  for the
thirteen weeks ended September 29, 1996.

                                       6
<PAGE>


                              Movie Gallery, Inc.

       Notes to Consolidated Financial Statements (Unaudited)(Continued)


The following unaudited pro forma information presents the results of operations
as though other  acquisitions  accounted for as  purchases,  which have occurred
since January 1, 1995, had occurred as of the beginning of the year in which the
acquisition occurred and the beginning of the immediately preceding year.

<TABLE>
                                        Quarter Ended            Three Quarters Ended
                                 September 29   September 30  September 29   September 30
                                     1966            1995          1996           1995
                                 --------------------------------------------------------
                                            (in thousands, except per share data)
<CAPTION>

<S>                             <C>             <C>           <C>           <C>      
Revenues ..................     $   61,728      $  58,144     $ 191,361     $ 176,492
Net income (loss) .........         (4,487)         5,135        (1,174)       16,227
Net income (loss) per share     $     (.33)     $     .38     $    (.09)    $    1.21

</TABLE>


6.  Supplemental 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  acquisitions of Home Vision
and Hollywood Video had been consummated prior to January 1, 1995. Home Vision's
historical  operating results for the 1995 fiscal year include a $400,000 charge
to recognize deferred taxes in accordance with Statement of Financial Accounting
Standards No. 109,  "Accounting for Income Taxes," upon Home Vision's conversion
from an S  Corporation  to a C  Corporation  for  federal  and state  income tax
purposes.  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.  Historical  operating results for the thirteen
weeks ended  September  29, 1996  include a $250,000  income tax benefit for the
conversion of Hollywood Video from an S Corporation to a C Corporation.


                                       7
<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>
                                             Quarter Ended                   Three Quarters Ended
                                        September 29 September 30         September 29   September 30   
                                      -------------------------------------------------------------------------
                                                                  Increase                            Increase
                                            1996       1995      (Decrease)    1996        1995      (Decrease)
                                      -------------------------------------------------------------------------
<CAPTION>
<S>                                       <C>         <C>         <C>         <C>         <C>         <C>  
Revenues:
   Rentals ...........................     87.5%       90.3%       (2.8)%      87.1%       88.0%       (0.9)%
   Product sales .....................     12.5         9.7         2.8        12.9        12.0         0.9
                                          ------      ------       ------     ------      ------       ------
                                          100.0       100.0          --       100.0       100.0          --
Operating costs and expenses:
   Store operating expenses ..........     50.9        46.5         4.4        49.6        44.8         4.8
   Amortization of rental inventory ..     24.0        20.0         4.0        25.9        19.9         6.0
   Amortization of intangibles .......      2.9         2.6         0.3         2.8         2.1         0.7
   Cost of sales .....................      7.3         6.3         1.0         7.8         7.9        (0.1)
   General and administrative ........      8.8         9.1        (0.3)        8.4         9.4        (1.0)
   Restructuring and other charges....     15.5          --        15.5         5.2          --         5.2
                                          ------      ------       ------     ------      ------       ------
Total ................................    109.4        84.5        24.9        99.7        84.1        15.6
                                          ------      ------       ------     ------      ------       ------
Operating income (loss) ..............     (9.4)       15.5       (24.9)        0.3        15.9       (15.6)

Interest expense, net ................     (2.3)       (1.0)       (1.3)       (2.1)       (0.7)       (1.4)
                                          ------      ------       ------     ------      ------       ------
Income (loss) before income taxes ....    (11.7)       14.5       (26.2)       (1.8)       15.2       (17.0)
Income taxes .........................     (4.9)        5.8       (10.7)       (0.6)        6.4        (7.0)
                                          ------      ------       ------     ------      ------       ------
Net income (loss) ....................     (6.8)%       8.7%      (15.5)%      (1.2)%       8.8%      (10.0)%
                                          ======      ======       ======     ======      ======       ======

Number of stores open at end of period      870         629         241         870         629         241
                                          ======      =======     ======       ======      ======      ======
</TABLE>


The results of operations for all periods presented include the combined results
of the Company,  Home Vision  Entertainment,  Inc. ("Home Vision") and Hollywood
Video, Inc.  ("Hollywood  Video"). The acquisitions of Home Vision and Hollywood
Video   were  both   consummated   on  July  1,  1996  and   accounted   for  as
poolings-of-interests.  For the  thirteen  weeks  and  thirty-nine  weeks  ended
September 29, 1996, revenues were $61.7 million and $184.5 million, increases of
52.9% and 86.1%, respectively, over the same periods in 1995. The increases were
a result of an increase in the number of stores  operated by the  Company.  Same
store  sales  decreased  2.4% for the third  quarter  and were down 1.2% for the
thirty-nine  weeks ended  September 29, 1996, at stores  operated by the Company
for at least 13 months.  The same store sales  decrease for the third quarter is
primarily  the result of the Summer  Olympics,  one of the most heavily  watched
events in television history,  which took place during what is traditionally one
of the busiest  periods of the year for the Company.  Same store sales were also
negatively  impacted by a reduction of approximately 15% in the Company's budget
for new release videocassette rental inventory over prior year levels.  Although
efficiencies  were achieved from the  implementation  of a new buying program in
January 1996,  certain  stores'  revenue  production  did not meet  management's
expectations.

Product  sales as a percentage  of total  revenue for the  thirteen  weeks ended
September 29, 1996 was 12.5%, an increase from 9.7% for the comparable period in
1996.  This  increase  is  primarily  the result of an  increased  effort by the
Company to sell  previously  viewed  videocassettes.  For the  thirty-nine  week
period ended  September  29, 1996 product  sales as a percentage  of revenue was
12.9%, a slight increase from 12.0% for the comparable 1995 period.


                                       8
<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 50.9% for
the thirteen weeks ended September 29, 1996 from 46.5% for the comparable fiscal
period in 1995.  The increase in store  operating  expenses as a  percentage  of
revenues is  primarily  due to (i) the  shortfall  in revenue as a result of the
above-mentioned items; (ii) an increase in rent and other expenses in connection
with the  integration of developed and acquired  stores into the Company's store
base; and (iii)  marketing  expenditures  equal to  approximately  1% of revenue
during the quarter which were not incurred in the prior year.

For the third quarter of 1996,  amortization of  videocassette  rental inventory
increased as a percentage  of revenue to 24.0% from 20.0% for the same period in
1995.  During the second quarter of 1996,  the Company  adopted a new policy for
amortizing  videocassette  rental inventory which has the effect of accelerating
the Company's rate of amortization of its inventory.

Amortization of intangibles increased as a percentage of revenue to 2.9% for the
quarter ended  September 29, 1996 from 2.6% for the quarter ended  September 30,
1995 due to the effect of acquisitions  which occurred  subsequent to the second
quarter  of 1995 and which  were  accounted  for under  the  purchase  method of
accounting.

Cost of sales  increased  with the  increased  revenue  from  product  sales and
decreased as a percentage of revenues from product sales from 65.7% for the nine
months  ended  September  30,  1995 to 60.0%  for the  thirty-nine  weeks  ended
September  29,  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.

General and administrative expenses as a percentage of revenue decreased to 8.8%
for the thirteen  weeks ended  September 29, 1996 versus 9.1% for the comparable
period in 1995.  Excluding  $757,000 in merger related expenses  associated with
the  acquisitions  of Home  Vision and  Hollywood,  general  and  administrative
expenses  were 7.6% of revenues for the third  quarter of 1996.  The decrease is
primarily due to operating efficiencies attained through a larger revenue base.

Net interest expense as a percentage of revenues increased to 2.3% for the third
quarter of 1996 from 1.0% for the three months ended September 30, 1995. For the
thirty-nine  week period ended  September  29, 1996,  net interest  expense as a
percentage  of revenues  increased  to 2.1% from 0.7% for the nine months  ended
September  30, 1995.  The increase for these periods is due to the increased use
of debt  financing to fund the  Company's  growth in 1996 versus 1995, a year in
which the Company completed a secondary offering of its common stock.

During the third  quarter of 1996,  the Company began and completed an extensive
analysis of both the store base performance and its organizational structure and
adopted a business  restructuring  plan to close  approximately 50 of its stores
and reduce the corporate  organizational  staff by approximately 15%. Management
concluded that certain stores were under  performing and that it was not prudent
to  continue  to  operate  these  locations.   The  expected  closings  are  not
concentrated in a particular geographic area.
                                       9
<PAGE>



                              Movie Gallery, Inc.

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

This  restructuring  plan has  resulted in the Company  recording a $9.6 million
pretax  restructuring charge in the third quarter of 1996. The components of the
restructuring  charge include  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. In
some  situations,  the timing of store  closures  will  depend on the  Company's
ability to negotiate reasonable lease termination  agreements.  These stores had
year-to-date revenues and store operating expenses of approximately $6.2 million
and $5.3  million,  respectively,  for the first  three  quarters of fiscal year
1996.  If these  stores had been  closed on January  1,  1996,  store  operating
expenses as a percentage  of total revenue  would have  decreased  from 49.6% to
48.4% for the thirty-nine  week period ended  September 29, 1996.

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,  relocation of existing
stores,   and  the  continued   upgrading  and  installation  of  the  Company's
point-of-sale and management  information  systems.  Typically,  the Company has
funded its inventory  purchases,  its remodeling and relocation  program,  and a
majority  of its new store  opening  costs from cash flow from  operations.  The
Company  has  funded  the  balance  of its  capital  needs,  primarily  for  the
acquisition  of  additional  video  stores,  from  the  proceeds  of two  public
offerings, loans under revolving credit facilities and seller financing.

Net cash provided by operating  activities was $60.2 million for the thirty-nine
weeks ended  September 29, 1996 as compared to $39.1 million for the  comparable
period of 1995.  The  increase  was  primarily  due to higher net income  before
depreciation,   amortization,   deferred  taxes  and  the  restructuring  charge
discussed above.

Net cash used in  investing  activities  was $78.7  million for the  thirty-nine
weeks ended September 29, 1996 as compared to $117.1 million for the nine months
ended September 30, 1995,  primarily as a result of a decrease in the total cash
expended for stores  acquired  during the first nine months of 1996 versus 1995,
offset by a net  increase in the  purchase  of  videocassette  rental  inventory
resulting from the Company's growth.

Net cash provided by financing  activities  decreased  from $77.8 million in the
first nine  months of 1995 to $16.3  million in the  comparable  period in 1996.
This decrease was primarily the result of a secondary  common stock  offering in
1995,  offset  partially by a net increase in debt  balances of $15.8 million in
1996.

On July 10, 1996, the Company replaced its existing $60 million revolving credit
facility  with a new,  $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 more  restrictive  covenants  of the  Facility
restrict  borrowings  based upon cash flow  levels.  At  November  8, 1996,  $67
million was  outstanding  under the Facility  with  additional  availability  of
approximately $5.5 million.


                                       10
<PAGE>

                              Movie Gallery, Inc.

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

The Company plans to focus on internal store growth,  customer service and sales
through  mid-1997  at which  time it will  determine  whether to  recommence  an
aggressive  acquisition  strategy,  and it anticipates that funds generated from
operations  and available  under its credit  facility will be sufficient to meet
operational  requirements  during 1997.  However,  if the Company  determines to
recommence  an  aggressive  acquisitions  strategy,  additional  capital  may be
required. To the extent available,  future acquisitions would be completed using
funds  available  under its credit  facility,  financing  provided  by  sellers,
alternative  financing  arrangements such as capital raised in public or private
debt or equity  offerings and the use of the Company's common stock. The Company
currently  has  registered  and  available for issuance over $100 million of its
common  stock  which  could be used in future  acquisitions.  Since  the  fourth
quarter of 1995, the Company has issued an aggregate of 1,278,571  shares of its
common stock in connection with the acquisition of 154 additional stores,  which
includes the acquisitions of Home Vision and Hollywood Video.

At  September  29,  1996,  the  Company had a working  capital  deficit of $11.9
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.



                                       11
<PAGE>

                           Part II - Other Information

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
               A Form 8-K  reporting on Items 2, 5, and 8 was  filed on July 15,
               1996.
               A Form  8-K/A  reporting  on  Items 5 and 7 was  filed  on
               September 16, 1996.

                                   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 13, 1996                  /S/ J. Steven Roy
                                            ___________________________________ 
                                            J. Steven Roy, Senior Vice President
                                            and Chief Financial Officer


                                       12
<PAGE>