UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q

(Mark One)
   [X]  QUARTERLY  REPORT  PURSUANT  TO  SECTION  13 OR 15(d) OF THE  SECURITIES
        EXCHANGE ACT OF 1934

        For The Quarterly Period Ended July 2, 2000

                                       OR

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

        For The Transition Period From___________ to__________



                         Commission file number 0-24548

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

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



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

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

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

The number of shares  outstanding of the registrant's  common stock as of August
9, 2000 was 11,136,167.


<PAGE>



                               Movie Gallery, Inc.

                                      Index



Part I.  Financial Information

Item 1.  Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets - July 2, 2000 and January 2, 2000.................1

Consolidated Statements of Income - Thirteen and twenty-six weeks
ended July 2, 2000 and July 4, 1999............................................2

Consolidated Statements of Cash Flows - Twenty-six weeks ended July 2, 2000
and July 4, 1999...............................................................3

Notes to Consolidated Financial Statements - July 2, 2000......................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...........10

Part II.  Other Information

Item 4.  Submission of Matters to a Vote of Security Holders..................10

Item 6.  Exhibits and Reports on Form 8-K.....................................10



<PAGE>



<TABLE>
                               Movie Gallery, Inc.

                           Consolidated Balance Sheets
                                 (in thousands)

<CAPTION>

                                                                 July 2,   January 2,
                                                                  2000         2000
                                                               ----------------------
                                                               (Unaudited)
<S>                                                            <C>          <C>
Assets
Current assets:
   Cash and cash equivalents                                   $   5,700    $   6,970
   Merchandise inventory                                           9,761       15,148
   Prepaid expenses                                                  952          814
   Store supplies and other                                        3,291        3,395
   Deferred income taxes                                             218          229
                                                               ---------    ---------
Total current assets                                              19,922       26,556

Rental inventory, net                                             56,270       52,357
Property, furnishings and equipment, net                          47,090       44,320
Goodwill and other intangibles, net                               80,189       83,539
Deposits and other assets                                          4,303        2,543
Deferred income taxes                                               --            212
                                                               ---------    ---------
Total assets                                                   $ 207,774    $ 209,527
                                                               =========    =========
Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                                            $  21,650    $  26,243
   Accrued liabilities                                            12,429       12,989
   Current portion of long-term debt                                 117          263
                                                               ---------    ---------
Total current liabilities                                         34,196       39,495

Long-term debt                                                    46,200       44,377
Other accrued liabilities                                            421          234
Deferred income taxes                                              1,399         --

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, 11,136,167 and 12,549,667
       shares issued and outstanding                                  11           13
   Additional paid-in capital                                    121,841      127,537
   Retained earnings (deficit)                                     3,706       (2,129)
                                                               ---------    ---------
Total stockholders' equity                                       125,558      125,421
                                                               ---------    ---------
Total liabilities and stockholders' equity                     $ 207,774    $ 209,527
                                                               =========    =========

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     Twenty-six weeks ended
                                                        July 2,    July 4,       July 2,      July 4,
                                                         2000       1999          2000         1999
                                                     ----------------------    ----------------------
<S>                                                  <C>          <C>          <C>          <C>
Revenues:
   Rentals                                           $  66,309    $  55,971    $ 136,086    $ 115,297
   Product sales                                        11,036        9,539       22,752       19,833
                                                     ---------    ---------    ---------    ---------
                                                        77,345       65,510      158,838      135,130
Cost of sales:
   Cost of rental revenues                              19,467       16,904       40,058       33,530
   Cost of product sales                                 7,127        6,067       14,317       12,951
                                                     ---------    ---------    ---------    ---------
Gross margin                                            50,751       42,539      104,463       88,649

Operating costs and expenses:
   Store operating expenses                             37,995       33,095       76,108       66,073
   Amortization of intangibles                           2,261        2,320        4,066        4,158
   General and administrative                            6,258        5,118       12,574       10,035
                                                     ---------    ---------    ---------    ---------
Operating income                                         4,237        2,006       11,715        8,383

Interest expense, net                                     (957)        (814)      (1,825)      (1,680)
                                                     ---------    ---------    ---------    ---------
Income before income taxes, extraordinary item
    and cumulative effect of accounting change           3,280        1,192        9,890        6,703

Income taxes                                             1,345          513        4,055        2,662
                                                     ---------    ---------    ---------    ---------
Income before extraordinary item and cumulative
   effect of accounting change                           1,935          679        5,835        4,041
Extraordinary loss on early extinguishment of
   debt, net of tax                                       --           --           --           (682)
Cumulative effect of accounting change, net of tax        --           --           --           (699)
                                                     ---------    ---------    ---------    ---------
Net income                                           $   1,935    $     679    $   5,835    $   2,660
                                                     =========    =========    =========    =========

Basic and diluted earnings  per share:
Income before extraordinary item and cumulative
   effect of accounting change                       $    0.17    $    0.05    $    0.49    $    0.30
Extraordinary loss on early extinguishment of
   debt, net of tax                                       --           --           --          (0.05)
Cumulative effect of accounting change, net of tax        --           --           --          (0.05)
                                                     ---------    ---------    ---------    ---------
Net income                                           $    0.17    $    0.05    $    0.49    $    0.20
                                                     =========    =========    =========    =========

Weighted average shares outstanding:
   Basic                                                11,321       13,231       11,798       13,256
   Diluted                                              11,368       13,623       11,827       13,619

See accompanying notes.

</TABLE>


                                       2
<PAGE>

<TABLE>
                              Movie Gallery, Inc.

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

<CAPTION>

                                                                   Twenty-six weeks ended
                                                                     July 2,    July 4,
                                                                      2000       1999
                                                                   ----------------------
<S>
Operating activities                                                <C>         <C>
Net income                                                          $  5,835    $  2,660
Adjustments to reconcile net income to net cash
provided by operating activities:
   Extraordinary loss on early extinguishment of debt, net of tax       --           682
   Cumulative effect of accounting change, net of tax                   --           699
   Depreciation and amortization                                      37,477      36,424
   Deferred income taxes                                               1,622       1,326
Changes in operating assets and liabilities:
   Merchandise inventory                                               5,387       1,031
   Other current assets                                                  (34)        272
   Deposits and other assets                                          (1,760)     (1,030)
   Accounts payable                                                   (4,593)     (4,114)
   Accrued liabilities                                                  (373)         91
                                                                    --------    --------
Net cash provided by operating activities                             43,561      38,041

Investing activities
Business acquisitions                                                   (721)     (2,485)
Purchases of rental inventory, net                                   (29,991)    (25,843)
Purchases of property, furnishings and equipment                     (10,098)     (3,562)
                                                                    --------    --------
Net cash used in investing activities                                (40,810)    (31,890)

Financing activities
Net proceeds from issuance of common stock                              --             6
Purchases and retirement of common stock                              (5,698)       (402)
Proceeds from issuance of long-term debt                               1,823        --
Principal payments on long-term debt                                    (146)     (8,801)
                                                                    --------    --------
Net cash used in financing activities                                 (4,021)     (9,197)
                                                                    --------    --------
Decrease in cash and cash equivalents                                 (1,270)     (3,046)
Cash and cash equivalents at beginning of period                       6,970       6,983
                                                                    --------    --------
Cash and cash equivalents at end of period                          $  5,700    $  3,937
                                                                    ========    ========

See accompanying notes.
</TABLE>

                                       3
<PAGE>




                               Movie Gallery, Inc.


             Notes to Consolidated Financial Statements (Unaudited)

                                  July 2, 2000

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 2, 2000 are not necessarily indicative of the results that may
be  expected  for  the  fiscal  year  ending  December  31,  2000.  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 2, 2000.

2.  Financing Obligations

On January 7, 1999, the Company entered into a Credit Agreement with First Union
National Bank of North Carolina with respect to a revolving credit facility (the
"Facility").  The Facility  provides  for  borrowings  of up to $65 million,  is
unsecured and will mature in its entirety on January 7, 2002.  The interest rate
of the Facility is based on LIBOR plus an applicable  margin  percentage,  which
depends on the Company's cash flow  generation and borrowings  outstanding.  The
Company may repay the Facility at any time without penalty. The more restrictive
covenants of the Facility restrict borrowings based upon cash flow levels.

Concurrent  with the Facility,  the Company  amended its then existing  interest
rate swap to coincide  with the maturity of the Facility.  The amended  interest
rate swap agreement  effectively  fixes the Company's  interest rate exposure on
$37  million  of the  amount  outstanding  under  the  Facility  at 5.8% plus an
applicable  margin  percentage.  The  interest  rate  swap  reduces  the risk of
increases  in  interest  rates  during  the life of the  Facility.  The  Company
accounts  for its  interest  rate  swap as a hedge of its debt  obligation.  The
Company pays a fixed rate of interest and receives  payment  based on a variable
rate of interest. The difference in amounts paid and received under the contract
is accrued and  recognized  as an  adjustment  to interest  expense on the debt.
There  are no  termination  penalties  associated  with the  interest  rate swap
agreement;  however,  if the swap  agreement  was  terminated  at the  Company's
option,  the  Company  would  either pay or  receive  the  present  value of the
remaining hedge payments at the then  prevailing  interest rates for the time to
maturity of the swap agreement.  The interest rate swap agreement  terminates at
the time the Facility matures.

As a result of the Facility and the amended  interest rate swap  agreement,  the
Company recognized an extraordinary loss on the early  extinguishment of debt of
$682,000  (net of taxes of  $359,000),  or $0.05  per  share,  during  the first
quarter of 1999. The extraordinary  loss was comprised  primarily of unamortized
debt issue costs associated with the Company's  previous credit facility and the
negative value of the previous interest rate swap at January 7, 1999.

3.  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  (47,000 and 392,000 for the thirteen  weeks ended July 2, 2000 and July
4, 1999, respectively; 29,000 and 363,000 for the twenty-six weeks ended July 2,
2000 and July 4, 1999, 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)


4.  Cumulative Effect of a Change in Accounting Principle

In April 1998, the American  Institute of Certified  Public  Accountants  issued
Statement of Position("SOP") 98-5, "Reporting the Costs of Start-Up Activities,"
which requires that certain costs related to start-up  activities be expensed as
incurred.  Prior to January 4,  1999,  the  Company  capitalized  certain  costs
incurred  in  connection  with  site  selection  for new video  specialty  store
locations.  The  Company  adopted  the  provisions  of the SOP in its  financial
statements for the first quarter of 1999. The effect of the adoption of SOP 98-5
was to record a charge  for the  cumulative  effect of an  accounting  change of
$699,000  (net of taxes of  $368,000),  or  $0.05  per  share,  to  expense  the
unamortized costs that had been capitalized prior to January 4, 1999. The impact
of adoption on income from  continuing  operations  for the thirteen weeks ended
April 4, 1999 was not material.


                                       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,  statements  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 2,      July 4,      Increase     July 2,       July 4,      Increase
                                                          2000         1999       (Decrease)     2000          1999       (Decrease)
                                                        --------     --------     --------     ---------     ---------     --------
<S>                                                     <C>          <C>          <C>          <C>           <C>           <C>
Revenues:
   Rentals                                                  85.7%        85.4%         0.3%         85.7%         85.3%         0.4%
   Product sales                                            14.3         14.6         (0.3)         14.3          14.7         (0.4)
                                                        --------     --------     --------     ---------     ---------     --------
                                                           100.0        100.0         --           100.0         100.0         --

Cost of sales:
   Cost of rental revenues                                  25.2         25.8         (0.6)         25.2          24.8          0.4
   Cost of product sales                                     9.2          9.3         (0.1)          9.0           9.6         (0.6)
                                                        --------     --------     --------     ---------     ---------     --------
Gross margin                                                65.6         64.9          0.7          65.8          65.6          0.2

Operating costs and expenses:
   Store operating expenses                                 49.2         50.5         (1.3)         47.9          48.9         (1.0)
   Amortization of intangibles                               2.9          3.5         (0.6)          2.6           3.1         (0.5)
   General and administrative                                8.1          7.8          0.3           7.9           7.4          0.5
                                                        --------     --------     --------     ---------     ---------     --------
Operating income                                             5.4          3.1          2.3           7.4           6.2          1.2

Interest expense, net                                       (1.2)        (1.3)         0.1          (1.2)         (1.2)        --
                                                        --------     ---------     ---------     --------     --------     --------
Income before income taxes,  extraordinary item
  and cumulative effect of accounting                        4.2          1.8          2.4           6.2           5.0          1.2

Income taxes                                                 1.7          0.8          0.9           2.5           2.0          0.5
`                                                        --------     --------     ---------     ---------     --------    --------
Income before extraordinary item and cumulative
  effect of accounting change                                2.5          1.0          1.5           3.7           3.0          0.7
Extraordinary loss on early extinguishment of
  debt, net of tax                                          --           --           --            --            (0.5)         0.5
Cumulative effect of accounting change, net of tax          --           --           --            --            (0.5)         0.5
                                                        --------     --------     --------     ---------     ---------     --------
Net income                                                   2.5%         1.0%         1.5%          3.7%          2.0%         1.7%
                                                        ========     ========     ========     =========     =========     ========

Adjusted EBITDA (in thousands)                          $  9,433     $  7,915     $  1,518     $  22,097     $  19,424     $  2,673
                                                        ========     ========     ========     =========     =========     ========
Cash earnings (in thousands)                            $  4,196     $  2,999     $  1,197     $   9,901     $   8,199     $  1,702
                                                        ========     ========     ========     =========     =========     ========
Number of stores open at end of period                       959          903           56           959           903           56
                                                        ========     ========     ========     =========     =========     ========

</TABLE>


Revenue.  For the thirteen weeks and twenty-six  weeks ended July 2, 2000, total
revenues were $77.3 million and $158.8 million, respectively, increases of 18.1%
and 17.5% over the  comparable  periods in 1999.  Revenues for the first half of
2000 were driven by a record 8.5% increase in same-store  revenues in the second
quarter,  following a 3.1% increase in the first quarter.  The 12.6% increase in
the  average  number of stores  open has also  contributed  to the  increase  in
revenues this year. The increase in same-store  revenues was the result of (i) a
favorable new release  schedule in the second  quarter of 2000 versus the second
quarter  of  1999;  (ii)  successful,  chain-wide  internal  marketing  programs
designed to generate more consumer  excitement and traffic in the Company's base
of stores, such as the Company's $15 million 15th Anniversary Movie Trivia Game;
(iii) the change in the Easter  weekend to late  April;  and (iv) an increase in
the sales of previously  viewed movies and previously  played games. The revenue
increase  was  partially  offset by a decline in new movie  sales as a result of
fewer titles being released at sell-through price points and a deemphasis on the
sale of new movies in certain stores.

                                       6
<PAGE>
                              Movie Gallery, Inc.

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

Cost of Sales.  Rental revenue costs as a percentage of rental  revenues for the
thirteen week period ended July 2, 2000 was 29.4%, a decrease from 30.2% for the
comparable fiscal 1999 period, and was 29.4% for the twenty-six weeks ended July
2, 2000,  consistent  with 29.1% in the prior year. The cost of rental  revenues
includes both the  amortization of rental inventory and revenue sharing expenses
incurred  by the  Company.  The  decrease  in the  second  quarter is due to the
significant increase in same-store revenues.

Cost of product sales  includes the costs of new  videocassettes,  confectionery
items and other goods,  as well as the  unamortized  value of previously  viewed
rental  inventory sold. The gross margin on product sales for the thirteen weeks
ended  July 2, 2000 was 35.4%,  a slight  decline  from 36.4% in the  comparable
period of 1999.  For the  year-to-date  period  ended July 2, 2000,  the product
sales  margin  increased  to 37.1% from 34.7% in 1999.  The overall  increase in
profitability  of  product  sales  for the year is  primarily  the  result of an
increase in  previously  viewed movie sales and a decrease in new movie sales as
previously  discussed.  Previously  viewed  movies carry gross  margins that are
substantially  higher than the average gross margins for new movie sales and the
Company's  participation  in various copy depth  programs  provides  significant
resources to achieve larger levels of previously viewed movie sales.

Operating  Costs and Expenses.  Store  operating  expenses  include  store-level
expenses such as lease payments and in-store payroll.  Store operating  expenses
as a  percentage  of  revenues  was 49.2% and 47.9% for the  thirteen  weeks and
twenty-six  weeks  ended July 2, 2000,  respectively,  as  compared to 50.5% and
48.9% in 1999.  The  decrease in store  operating  expenses as a  percentage  of
revenue is primarily due to the same-store  revenue  increases  during the first
half of the  year as well as the  centralization  of  certain  functions  at the
general  and  administrative  level which have  resulted in store level  expense
savings.

Amortization  of  intangibles  as a percentage of total revenue for the thirteen
weeks and twenty-six  weeks ended July 2, 2000 was 2.9% and 2.6%,  respectively,
decreases from 3.5% and 3.1% for the comparable  periods in 1999.  This decrease
is primarily due to the increase in revenue.

General and administrative expenses as a percentage of revenue increased to 8.1%
and 7.9%, respectively,  for the second quarter and year-to-date periods of 2000
from 7.8% and 7.4% for the comparable periods in 1999. The increase is primarily
due to  increased  staffing  and  travel  costs  associated  with the  Company's
increased new store  development which began in the latter half of 1999, as well
as incremental  expenses from the operation of the Company's  e-commerce  effort
which was launched in September 1999.

As a result of the above factors,  operating  income increased by 111.2% for the
second quarter and 39.7%  year-to-date  in fiscal 2000 to $4.2 million and $11.7
million, respectively.

Extraordinary  Loss.  During the first quarter of 1999, the Company  incurred an
extraordinary loss on the early extinguishment of debt of $682,000 (net of taxes
of $359,000), or $0.05 per share. The extraordinary loss was comprised primarily
of the write off of both the unamortized debt issue costs and the negative value
of an interest rate swap agreement in association with the  restructuring of the
Company's debt obligations discussed below in "Liquidity and Capital Resources."

Cumulative  Effect  Accounting  Change.  Effective  January 4, 1999, the Company
adopted the provisions of the American Institute of Certified Public Accountants
Statement of Position("SOP") 98-5, "Reporting the Costs of Start-up Activities."
As a result,  the  Company  recorded  a charge for the  cumulative  effect of an
accounting change of $699,000 (net of taxes of $368,000), or $0.05 per share, to
expense  the  unamortized  portion  of  certain  start-up  costs  that  had been
capitalized prior to January 4, 1999, discussed fully in Note 4 of the "Notes to
Consolidated Financial Statements."

                                       7
<PAGE>
                              Movie Gallery, Inc.

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

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  refurbishment,  remodeling and relocation of existing
stores,  as well as common stock  repurchases  within the past year. The Company
has funded inventory purchases,  remodeling and relocation  programs,  new store
opening costs,  acquisitions and stock repurchases 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  2,  2000  the  Company   generated
approximately  $22.1  million in Adjusted  EBITDA,  a 13.8%  increase over $19.4
million for the comparable  period in 1999. The increase was primarily driven by
the 17.5%  increase  in total  revenue.  Adjusted  EBITDA is defined as earnings
before  interest,  taxes,  depreciation  and  amortization,  less the  Company's
purchase  of  rental  inventory  which  excludes  rental   inventory   purchases
specifically  for new store  openings.  Adjusted  EBITDA should be considered in
addition to, but not as a substitute for or superior to, operating  income,  net
income,  cash flow and other  measures  of  financial  performance  prepared  in
accordance with generally accepted accounting principles.

Cash  earnings per diluted share for the first half of 2000  increased  40.0% to
$0.84 from $0.60 in the first half of 1999.  Contributing to this increase was a
13.2%  decline  in  weighted  average  shares  outstanding  as a result of share
repurchases.  Cash earnings is defined as net income before extraordinary items,
cumulative  effect  accounting  changes and  amortization of  intangibles.  Cash
earnings  should be  considered  in addition to, but not as a substitute  for or
superior  to,  operating  income,  net income,  cash flow and other  measures of
financial  performance prepared in accordance with generally accepted accounting
principles.

Net cash provided by operating  activities  was $43.6 million for the twenty-six
weeks ended July 2, 2000 as compared to $38.0 million for the  twenty-six  weeks
ended July 4, 1999.  The increase in net cash  provided by operating  activities
was primarily  the result of decreased  levels of  merchandise  inventory due to
fewer titles being released at sell-through price points and a deemphasis on the
sale of new movies in certain stores. 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 $40.8  million for the first half of
2000 as  compared  to $31.9  million  for the  comparable  period of 1999.  This
increase  in funds used for  investing  activities  is  primarily  the result of
increases in capital  expenditures  related to rental  inventory  and  property,
furnishings and equipment purchased to support the Company's increased new store
development plan.

Net cash used in  financing  activities  was $4.0  million for the first half of
2000 as  compared  to $9.2  million  for the  comparable  period  of 1999.  This
decrease  in funds used for  financing  activities  is due to a net  increase in
long-term  debt  during  2000 to fund new store  growth  and stock  repurchases,
versus a significant  decrease in long-term  debt for the  comparable  period of
1999.

On January 7, 1999, the Company  entered into a new Credit  Agreement with First
Union  National  Bank of North  Carolina  with  respect  to a  revolving  credit
facility (the  "Facility").  The Facility  provides for  borrowings of up to $65
million,  is unsecured  and will mature in its entirety on January 7, 2002.  The
interest  rate of the  Facility  is  based on LIBOR  plus an  applicable  margin
percentage,  which depends on the Company's cash flow  generation and borrowings
outstanding. The Company may repay the Facility at any time without penalty. The
more restrictive  covenants of the Facility restrict  borrowings based upon cash
flow levels.

                                       8
<PAGE>
                              Movie Gallery, Inc.

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

The Company  grows its store base  through  internally  developed  and  acquired
stores and may require  capital in excess of internally  generated  cash flow to
achieve its desired growth.  The Company opened 48  internally-developed  stores
during the first half of 2000 and  remains on target to open  approximately  100
new stores during the year.  The Company will  entertain  potential  acquisition
transactions;  however,  the number of acquired stores in 2000 is expected to be
less than the number of internally  developed  stores.  To the extent available,
future  acquisitions  may be completed using funds available under the Facility,
financing provided by sellers,  alternative financing arrangements such as funds
raised in public or private debt or equity  offerings or shares of the Company's
stock issued to sellers.  However, there can be no assurance that financing will
be available to the Company on terms which will be acceptable, if at all.

During the first quarter of 2000, the Company completed its previously announced
$5  million  stock  repurchase  plan and  announced  a second $5  million  stock
repurchase  plan which was  completed in May 2000.  During the first half of the
year, the Company  repurchased  1.4 million  shares for $5.7 million,  which has
been funded primarily through cash flow from operations.

At July 2, 2000, the Company had a working  capital deficit of $14.3 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
with 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 year
2000,  including  its  anticipated  new store  openings  and a modest  potential
acquisition program. However, to fund a major acquisition program, or to provide
funds in the event that the Company's  need for funds is greater than  expected,
or if certain of the financing sources identified above are not available to the
extent anticipated or if the Company increases its growth plan, the Company will
need to seek additional or alternative sources of financing.  This financing may
not be  available  on terms  satisfactory  to the  Company.  Failure  to  obtain
financing to fund the Company's expansion plans or for other purposes could have
a material adverse effect on the Company.

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,  competitive  factors and weather  conditions  within the  Company's
geographic  markets,  adequate  product  availability  from movie  studios,  the
Company's  ability to continue to expand,  including its ability to successfully
execute its new store opening  program,  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 2, 2000.


                                       9
<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 January 2, 2000 in the Company's annual report
on Form 10-K.

                           Part II - Other Information

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

     The Company's  Annual Meeting of  Stockholders  (the "Annual  Meeting") was
held on June 13, 2000. The following  actions were taken at the Annual  Meeting,
for which proxies were solicited  pursuant to Regulation 14 under the Securities
Exchange Act of 1934, as amended:

     1.   The six nominees  proposed by the Board of  Directors  were elected as
          directors by the following votes:

          Name                           For                 Withheld
          ----                           ---                 --------
          Thomas Malugen              9,813,308             1,054,668
          H. Harrison Parrish         9,813,308             1,054,668
          William B. Snow             9,813,303             1,054,673
          Sanford C. Sigoloff         9,813,308             1,054,668
          Philip B. Smith             9,813,308             1,054,668
          Joe F. Troy                 9,813,308             1,054,668

     2.   A proposal  to amend the  Company's  1994 Stock Plan,  as amended,  to
          increase the number of shares  available  for grant from  2,600,000 to
          3,000,000  was  approved by a vote of 9,194,510  for versus  1,669,266
          against. There were 4,200 abstentions and no broker non-votes.

Item 6.  Exhibits and Reports on Form 8-K

         a) Exhibits

            27  Financial Data Schedule

         b) Reports on Form 8-K

            None.

                                   Signatures

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                                              Movie Gallery, Inc.
                                    -------------------------------------------
                                               (Registrant)



Date:  August 15, 2000              /s/ J. Steven Roy
                                    -------------------------------------------
                                    J. Steven Roy, Executive Vice President
                                    and Chief Financial Officer



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