<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q

            [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                For the quarterly period ended October 31, 1999


                                      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 0-14023

                               VIDEO CITY, INC.
            (Exact name of registrant as specified in its charter)

           Delaware                                         95-3897052
(State or other jurisdiction of                          (I.R.S. Employer
 incorporation or organization)                         Identification No.)

370 Amapola Avenue, Suite 208, Torrance, California           90501
      (Address of principal executive offices)             (Zip Code)


                                (310) 533-3900
             (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 such
filing requirements for the past 90 days.

Yes    X    No
      ---     ---

     Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

Yes    X    No
      ---     ---

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.

Class                                 Outstanding at December 17, 1999
-----                                 --------------------------------
Common Stock                                     15,215,255
<PAGE>

                                    PART I.

                             FINANCIAL INFORMATION

Item 1. Financial Statements

                               VIDEO CITY, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              October 31,
                                                                 1999                               January 31,
                                                              (Unaudited)                              1999
                                                          --------------------                  -------------------
<S>                                                       <C>                                   <C>
ASSETS

Current assets:

  Cash                                                             $    28,718                          $   172,043

  Customer receivables                                               3,134,354                            2,932,807

  Notes receivable                                                     926,209                               86,703

  Merchandise inventories                                            4,042,574                            2,026,628

  Other                                                                      -                               52,870
                                                          --------------------                  -------------------

Total current assets                                                 8,131,855                            5,271,051

Videocassette rental inventory, net of
    accumulated amortization                                        15,271,316                           21,119,897

Property and equipment, net                                          5,368,445                            4,525,986

Goodwill                                                             6,622,235                            5,176,850

Deferred tax asset                                                   1,235,139                              883,249

Other assets                                                         2,571,131                            1,275,847
                                                          --------------------                  -------------------

TOTAL ASSETS                                                       $39,200,121                          $38,252,880
                                                          ====================                  ===================
</TABLE>


         See accompanying notes to consolidated financial statements.
<PAGE>

                               VIDEO CITY, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             October 31,
                                                                                1999                        January 31,
                                                                             (Unaudited)                       1999
                                                                        ---------------------           -------------------
<S>                                                                     <C>                             <C>
LIABILITIES

Current liabilities:

  Accounts payable                                                               $ 20,859,006                   $ 9,328,556
  Short term portion of senior secured revolving credit facility                    9,959,112                             -
  Accrued expenses                                                                  2,666,966                     3,422,724
  Current portion of long-term debt                                                 4,117,352                     2,125,187
                                                                        ---------------------           -------------------

Total current liabilities                                                          37,602,436                    14,876,467

Long term senior secured revolving credit facility                                          -                    16,044,502

Long term debt, less current portion                                                1,303,861                     1,636,646

Other liabilities                                                                     163,859                       427,791
                                                                        ---------------------           -------------------

TOTAL LIABILITIES                                                                  39,070,156                    32,985,406

STOCKHOLDER'S EQUITY

Preferred stock                                                                     6,985,297                     3,763,963
Common Stock, $.01 par value per share, 30,000,000 shares
  Authorized; 14,994,593 shares issued and outstanding at
  October 31, 1999 and 13,498,715 shares issued and outstanding
  at January 31, 1999                                                                 149,946                       134,987
Additional paid-in capital                                                         11,542,965                     9,229,687
Accumulated deficit                                                               (18,548,243)                   (7,861,163)
                                                                        ---------------------           -------------------

TOTAL STOCKHOLDER'S EQUITY                                                            129,965                     5,267,474
                                                                        ---------------------           -------------------

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                                       $ 39,200,121                   $38,252,880
                                                                        =====================           ===================
</TABLE>

         See accompanying notes to consolidated financial statements.
<PAGE>

                               VIDEO CITY, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                Three Months Ended                          Nine Months Ended
                                                          October 31,        October 31,             October 31,        October 31,
                                                             1999               1998                    1999               1998
                                                          -----------        -----------            ------------        -----------
<S>                                                       <C>                <C>                    <C>                 <C>
Revenues
  Rental revenues and product sales                       $ 8,723,038        $ 4,773,102            $ 36,241,069        $14,174,164
  Management fee income                                             -             59,800                       -            116,133
                                                          -----------        -----------            ------------        -----------
Total Revenues                                              8,723,038          4,832,902              36,241,069         14,290,297
                                                          -----------        -----------            ------------        -----------
Operating costs and expenses
  Store operating expenses                                  5,849,472          3,086,513              22,905,007          7,517,466
  Amortization of videocassette rental inventory              928,953            642,278               4,434,986          1,805,657
  Cost of product sales                                     2,140,979            890,955               6,496,760          2,174,651
  Cost of leased product                                    1,562,097            585,968               3,713,689          1,292,854
  General and administrative expenses                       2,722,220          1,113,314               8,174,237          2,563,873
  Store closure expenses                                    1,345,400                  -               1,345,400                  -
                                                          -----------        -----------            ------------        -----------
Total operating costs and expenses                         14,549,121          6,319,028              47,070,079         15,354,501
                                                          -----------        -----------            ------------        -----------
Loss from operations                                       (5,826,083)        (1,486,126)            (10,829,010)        (1,064,204)

Other (income) expense:
  (Gain) loss on sale of assets                               383,384                  -              (1,529,794)                 -
  Interest expense, net                                       462,100            324,953               1,744,862            647,053
  Other                                                       (21,696)                 -                 (76,432)           (15,097)
                                                          -----------        -----------            ------------        -----------
Loss before taxes                                          (6,649,871)        (1,811,079)            (10,967,646)        (1,696,160)
Income tax benefit                                                  -           (647,263)               (546,603)        (2,477,132)
                                                          -----------        -----------            ------------        -----------
Net income (loss) before dividends                         (6,649,871)        (1,163,816)            (10,421,043)           780,972
                                                          ===========        ===========            ============        ===========
Dividends                                                    (152,000)                                  (266,037)
                                                          -----------        -----------            ------------        -----------
Net income (loss) after dividends                         $(6,801,871)       $(1,163,816)           $(10,687,080)       $   780,972
                                                          ===========        ===========            ============        ===========
Basic earnings (loss) per share                                ($0.46)            ($0.10)                 ($0.76)             $0.07
Diluted earnings (loss) per share                              ($0.46)            ($0.10)                 ($0.76)             $0.07

Weighted average number of common
   shares outstanding
  Basic                                                    14,823,823         12,140,497              14,152,717         11,419,984
  Diluted                                                  14,823,823         12,140,497              14,152,717         11,913,471
</TABLE>


         See accompanying notes to consolidated financial statements.
<PAGE>

                               VIDEO CITY, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                                    Nine Months Ended
                                                                         October 31,                  October 31,
                                                                            1999                         1998
                                                                        ------------                  -----------
<S>                                                                     <C>                           <C>
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss)                                                       $(10,421,043)                 $   780,972

Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
     Depreciation and amortization                                         5,974,897                    2,262,204
     Issuance of stock for services and inventory                          2,908,582                      141,067
     Gain on sale of assets                                               (1,529,802)                           -
     Decrease (increase) in deferred tax asset                              (546,603)                  (2,477,132)

Changes in assets and liabilities, net of effects from
acquisitions:
     Increase in customer receivable                                        (969,814)                    (296,819)
     Decrease (increase)  in notes receivable                                 (9,506)                     268,727
     Increase in merchandise inventories                                  (2,480,269)                    (623,902)
     Increase in other assets                                             (1,060,015)                    (884,265)
     Increase in accounts payable                                          8,629,521                    1,253,004
     Decrease in accrued expenses                                         (2,724,563)                    (159,060)
     Decrease in other liabilities                                          (263,934)                    (283,126)
                                                                        ------------                  -----------
Net cash used in operating activities                                     (2,492,549)                     (18,330)
                                                                        ------------                  -----------

Cash flows from investing activities:
     Purchases of videocassette rental inventory                          (6,217,385)                  (2,922,438)
     Purchases of fixed assets                                            (2,413,732)                    (606,489)
     Proceeds from sale of fixed assets                                   13,863,000                            -
     Proceeds from sale of film library                                                                   818,171
     Repayment on note receivable                                          1,228,000
     Store acquisitions                                                     (167,036)                    (713,743)
                                                                        ------------                  -----------
     Net cash provided by (used in) investing activities                   6,292,847                   (3,424,499)
                                                                        ------------                  -----------

Cash flows from financing activities:
     Principal payments on obligations under capital leases                        -                      (18,136)
     Repayment of long-term debt                                            (356,599)                  (3,641,078)
     Proceeds from issuance of long term debt                              2,015,979                    6,416,264
     Proceeds from borrowings (repayments) under revolving                                                      -
     credit facility                                                      (6,085,390)
     Proceeds from the issuance of preferred stock                           625,000                      700,000
     Cash payments made in conversion of preferred stock                    (188,325)
     Proceeds from exercising options and warrants                            45,712
                                                                        ------------                  -----------
Net cash provided by (used in) financing activities                       (3,943,623)                   3,457,050
                                                                        ------------                  -----------

Net increase (decrease) in cash                                             (143,325)                      14,221
Cash at beginning of the period                                              172,043                       28,127
                                                                        ------------                  -----------
Cash at end of the period                                               $     28,718                  $    42,348
                                                                        ============                  ===========
</TABLE>

         See accompanying notes to consolidated financial statements.
<PAGE>

                               VIDEO CITY, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                                  (continued)

<TABLE>
<CAPTION>
                                                                                   Nine Months Ended
                                                                        October 31,                  October 31,
                                                                           1999                         1998
                                                                        ----------                   ----------
<S>                                                                     <C>                          <C>
Supplementary disclosures of cash flow information
Cash paid during the year:
   Interest                                                             $ 1,174,777                  $   420,590
   Income taxes                                                              17,924                          800

Noncash investing and financing activities:
   Professional services and the purchase of inventory
     financed through issuance of stock                                   2,908,582                      141,067
   Liabilities converted to preferred stock                               1,187,334                            -
   Notes receivable from sale of assets                                     830,000                            -
   Preferred stock dividends                                                266,037                            -
</TABLE>

For acquisitions and divestiture consummated during the nine months ended
October 31, 1999 and October 31, 1998, (including post closing adjustments) the
Company paid $167,036 and $713,743, respectively, net of cash acquired.  In
conjunction with the acquisitions, liabilities were assumed as follows:

<TABLE>
<S>                                                                     <C>                          <C>
   Fair value of assets acquired                                        $ 1,614,929                  $ 5,587,502
   Cash paid                                                               (167,036)                    (713,743)
   Note payable issued                                                            -                   (2,765,159)
   Common stock issued                                                     (641,394)                  (1,895,755)
   Preferred stock issued                                                (1,251,174)                           -
   Goodwill                                                               4,172,469                    1,985,951
                                                                        -----------                  -----------
       Liabilities assumed                                              $ 3,727,794                  $ 2,198,796
                                                                        ===========                  ===========
</TABLE>

         See accompanying notes to consolidated financial statements.
<PAGE>

                               VIDEO CITY, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  Financial Statement Presentation

The accompanying consolidated financial statements include the accounts of Video
City, Inc. ("the Company") and all of its wholly owned subsidiaries.  These
subsidiaries include Old Republic Entertainment, Inc., Sulpizio One, Inc., Video
Tyme, Inc., Videoland, Inc., and Video Galaxy, Inc.  All material intercompany
transactions have been eliminated.  The financial statements include the
operations of companies acquired from the dates of acquisition.

The consolidated balance sheet as of October 31, 1999, the consolidated
statement of operations for the three and nine months ended October 31, 1999 and
1998, and the consolidated statement of cash flows for the nine months ended
October 31, 1999 are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.  It is recommended that these financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the fiscal year ended
January 31, 1999.

The accompanying interim consolidated financial statements reflect all
adjustments that are, in the opinion of management, necessary to present fairly
the financial position as of October 31, 1999, the results of operations for the
three and nine months ended October 31, 1999 and 1998, and cash flows for the
nine months ended October 31, 1999 and 1998. All such adjustments are of a
normal and recurring nature. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for the
full year. Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation.

2.  Acquisitions

On March 26, 1999, the Company issued 112 shares of the Company's Series C
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to Box
Office, LLC as part of the consideration for the purchase of the assets of a
video store acquired from Box Office, LLC.  The Series C Convertible Redeemable
Preferred Stock is convertible into shares of the Company's Common Stock at a
conversion price of $2.00 per share.

On March 31, 1999, the Company acquired Video Galaxy, Inc. ("Video Galaxy") from
the shareholders of Video Galaxy, in a transaction structured as a reverse
triangular merger, with a newly formed subsidiary of Video City merging into
Video Galaxy.  Video Galaxy owned and operated 15 retail video stores in
Connecticut and Massachusetts.  The purchase price consisted of (i) 344,000
shares of  Video City Common Stock (subject to post-closing adjustments, if any)
and (ii) assumption and payment of indebtedness of Video Galaxy by the Company
in the amount of $4,833,000 (of which approximately $1,757,000 was paid off by
the Company at closing and $2,000,000 was converted into 2,000 shares of the
Company's Series D Convertible Redeemable Preferred Stock and 500,000 warrants
with an exercise price of $3.00 per share).  The payoff of indebtedness at
closing was provided by proceeds obtained from a note payable to an existing
creditor of the Company.
<PAGE>

3.  Divestiture of Stores

On July 26, 1999, the Company sold the assets of 49 of its Videoland retail
video stores located in the states of Washington and Oregon to Blockbuster, Inc
("Blockbuster"). The aggregate purchase price for the sale of the 49 stores was
approximately $14 million in cash, and approximately $2 million in notes
receivable which are subject to the transfer of assets of the four additional
Videoland stores and to certain post closing adjustments. The Company recognized
the gain on the sale of approximately $1.9 million on July 26, 1999, which
includes the four additional Videoland stores, which were transferred on August
30, 1999.

4.  Preferred Stock

On March 26, 1999, the Company issued 112 shares of the Company's Series C
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to Box
Office, LLC, as part of the consideration for the purchase of the assets of a
video store acquired from Box Office, LLC. Each share of Series C Convertible
Redeemable Preferred Stock is convertible into 500 shares of the Company's
Common Stock at a conversion price of $2.00 per share. The Series C Preferred
Stock was converted based on the market value of the Company's Common Stock on
the date of issuance. On June 30, 1999, Box Office LLC converted 112 shares of
the Company's Series C Convertible Redeemable Preferred Stock to 56,000 of the
Company's Common Stock.

On March 31, 1999, the Company issued 2,000 shares of the Company's Series D
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to
Mortco, Inc. (a subsidiary of Rentrak Corporation) in consideration for the
cancellation of indebtedness from Video Galaxy, Inc., to such parties in the
amount of $2,000,000. Each share of Series D Convertible Redeemable Preferred
Stock is convertible into 333.3 shares of the Company's Common Stock at a
conversion price of $3.00 per share.

On May 12, 1999, the Company sold 750 shares of the Company's series AA
Convertible Redeemable Preferred Stock, $100 stated value per share, to Mortco,
Inc. in consideration for cancellation of trade payables owed by the Company to
Rentrak Corporation in the amount of $75,000. The shares of Series AA Preferred
Stock are convertible into the Company's Common Stock at a conversion price of
$2.00 per share.

On June 2, 1999, the Company issued 303 shares of the Company's Series C
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to The
Value Group, LLC in consideration for cancellation of trade payables owed by the
Company to The Value Group, LLC in the amount of $303,000. On July 13, 1999, the
Company issued 100 shares of the Company's Series C Convertible Redeemable
Preferred Stock, $1,000 stated value per share, to DAZ Systems, Inc. in
consideration for the cancellation of trade payables owed by the Company to DAZ
Systems, Inc. in the amount of $100,000. The shares of Series C Preferred Stock
are convertible into the Company's Common Stock at a conversion price of $2.00
per share.

On June 11, 1999, the Company issued 2,000 shares of the Company's Series E
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to
International Video Distributors, LLC ("IVD") and Common Stock Purchase Warrants
to purchase 50,000 shares of the Company's Common Stock at an exercise price of
$2.00 per share. IVD cancelled outstanding trade payables in the amount of
$2,000,000 owed by the Company to IVD. Each share of Series E Preferred Stock is
convertible into a number of shares of Common Stock determined by dividing
$1,000 by the conversion price in effect on the conversion date. During certain
periods, the conversion price is equal to the market price of the Company's
Common Stock and ranges between $1.60 and $3.00; after such period, the
conversion price is equal to $3.00.

On July 19, 1999, the Company issued an aggregate of 625 shares of the Company's
Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share,
to eight accredited investors including an executive officer of the Company, for
cash in the amount of $625,000 in a private placement transaction. The shares of
Series C Preferred Stock are convertible into the Company's Common Stock at a
conversion price of $2.00 per share.

<PAGE>

On August 3, 1999, three of the Company's investors converted 2,500 shares of
the Company's Series AA Convertible Redeemable Preferred Stock, $100 stated
value per share, to Common Stock at a conversion rate of 50 shares of Common
Stock for one share of Series AA Preferred Stock.

On August 8, 1999, International Video Distributors, LLC, converted 400 shares
of the Company's Series E Convertible Redeemable Preferred Stock, $1,000 stated
value per share, to Common Stock at a conversion rate of 625 shares of Common
Stock for one share of Series E Preferred Stock.

On September 9, 1999, the Company issued 56 shares of the Company's Series E
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to
Interstate Personnel, Inc., in consideration for cancellation of trade payables
owed by the Company to Interstate Personnel, Inc., in the amount of $56,000.
Each share of Series E Preferred Stock is convertible into a number of shares of
Common Stock determined by dividing $1,000 by the conversion price in effect on
the conversion date.  During certain periods, the conversion price is equal to
the market price of the Company's Common Stock and ranges between $1.60 and
$3.00; after such period, the conversion price is equal to $3.00.

On September 17, 1999, International Video Distributors, LLC, converted 200
shares of the Company's Series E Convertible Redeemable Preferred Stock, $1,000
stated value per share, to Common Stock at a conversion rate of 625 shares of
Common Stock for 1 share of Series E Preferred Stock.

5.  Preferred Stock Dividends

On July 6, 1999, the Company issued 20,294 shares of the Company's Common Stock
to two holders of the Company's Series B Convertible Redeemable Preferred Stock
as stock dividends with respect to the Series B Preferred Stock.  In addition,
the Company issued 27,950 shares of the Company's Common Stock to various
shareholders as stock dividends with respect to the Company's Series AA
Convertible Redeemable Preferred Stock.

On August 3, 1999, September 1, 1999 and October 4, 1999 the Company issued
25,215, 46,216 and 48,944 shares of the Company's Common Stock, respectively, to
two holders of the Company's Series B Convertible Redeemable Preferred Stock as
stock dividends with respect to the Series B Preferred Stock.

6.  Earnings Per Share

Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period.  Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted from issuance of common stock that then share in
earnings.  The following table summarizes the calculation of the Company's basic
and diluted earnings per share for the periods presented:

<TABLE>
<CAPTION>
                                                               For the three months ended October 31,
                                         ------------------------------------------------------------------------------------
                                                          1999                                         1998
                                         --------------------------------------       ---------------------------------------
                                                                      Per-share                                     Per-share
                                            Income        Shares       amount           Income          Shares       amount
                                         -----------    ----------    ---------       -----------     ---------     ---------
<S>                                      <C>            <C>           <C>             <C>             <C>           <C>
Basic EPS
Income (loss) available to common
stockholders                             $(6,801,871)   14,823,823     $(0.46)        $(1,163,816)    12,140,487     $(0.10)
Effect of Dilutive Securities:
   Incremental shares from outstanding
   Common stock options, warrants, and
   Preferred stock                                 -             -          -                   -                         -
                                         -----------    ----------     ------         -----------     ----------     ------
Diluted EPS
Income (loss) available to common
stockholders                             $(6,801,871)   14,823,823     $ (.46)        $(1,163,816)    12,140,487     $(0.10)
                                         ===========    ==========     ======         ===========     ==========     ======
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                                               For the three months ended October 31,
                                         -----------------------------------------------------------------------------------
                                                          1999                                         1998
                                         --------------------------------------         ------------------------------------
                                                                      Per-share                                    Per-share
                                            Income         Shares       amount           Income        Shares        amount
                                         ------------    ----------   ---------         ---------    -----------   ---------
<S>                                      <C>            <C>           <C>               <C>          <C>           <C>
Basic EPS
Income (loss) available to common
stockholders                             $(10,687,080)   14,152,717     $(0.76)         $780,972     11,419,984      $0.07
Effect of Dilutive Securities:
   Incremental shares from outstanding
   Common stock options, warrants, and
   Preferred stock                                  -             -          -                 -        493,487          -
                                         ------------    ----------     ------          --------     ----------      -----
Diluted EPS
Income (loss) available to common
stockholders                              (10,687,080)   14,152,717     $(0.76)         $780,972     11,913,471      $0.07
                                         ============    ==========     ======          ========     ==========      =====
</TABLE>

All outstanding common stock options, warrants, and preferred stock were not
included in the computations of diluted earnings per share because the effect of
exercise and/or conversion would have an antidilutive effect on earnings per
share.

7.  Deferred Tax Assets

Statement of Financial Accounting Standards No. 109 requires a valuation
allowance to be recorded when it is more likely than not that some or all of the
deferred tax assets of a company will not be realized.  At January 31, 1999, no
valuation allowance was recorded against the deferred tax asset because the
Company determined from its projections that it is more likely than not that
future taxable income will be sufficient to realize the deferred tax asset.  Due
to the pending acquisitions, management cannot determine if it is more likely
than not that future taxable income will be sufficient to realize all of the
deferred tax asset generated in the last two current quarters.  Accordingly, a
valuation allowance has been established against losses generated in the last
two quarters.

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

Special Note Regarding Forward Looking Statements

Certain statements in this Quarterly Report on Form 10-Q, particularly under
this Item 2, may constitute  "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act").  Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements, expressed or implied by such forward-looking statements.  Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed herein and in the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1999.


Results of Operations

Three months and nine months ended October 31, 1999 compared to the three months
and nine months ended October 31, 1998.

Revenues

Rental revenue and product sales for the three months and the nine months ended
October 31, 1999 totaled  $8,723,038 and  $36,241,069, compared to $4,832,902
and $14,290,297 for the three months and nine months ended October 31, 1998.
The increase in revenue for the three months and nine months ended October 31,
1999 was $3,890,136 or 80% and $21,950,772 or 154% compared to the corresponding
periods ending October 31, 1998.
<PAGE>

Of the 92 stores, 76 stores were acquired on December 28, 1998, one store was
acquired on March 26, 1999, and 15 stores were acquired on March 31, 1999. As of
October 31, 1999, the Company was operating 77 stores after selling 49 stores to
Blockbuster on July 26, 1999, and closing 13 under-performing stores during
September and October of 1999. Same store revenues for the three months and nine
months ended October 31, 1999 increased by approximately 4.84% and 5.08%,
compared to the same periods ending October 31, 1998. At October 31, 1999 the
Company operated 77 stores in 10 states compared to 52 stores in 4 states at
October 31, 1998. The Company had no management fee income for the three months
and nine months ended October 31, 1999, compared to $59,800 and $116,133 for the
three months and nine months ended October 31, 1998. The decrease resulted from
the reduction in the number of managed stores from two to none.

Store Operating Expenses

Store operating expenses for the three months and the nine months ended October
31, 1999 totaled $5,849,472 and $22,905,007, as compared to $3,086,513 and
$7,517,466 for the three months and nine months ended October 31, 1998.  Store
operating expenses increased by $2,762,959 or 90% and $15,387,541 or 205% for
the three months and nine months ended October 31, 1999 as compared to the
corresponding periods ending October 31, 1998.  The increase in store operating
expenses was primarily due to the acquisition of 92 stores since October 31,
1998, partially offset by the disposition of 49 stores since July 26, 1999.
Store operating expenses as a percentage of total revenue for the three months
and nine months ended October 31, 1999 were 67% and 63% compared to 64% and 53%
for the corresponding periods ending October 31, 1998.  The increase in store
operating expenses as a percentage of revenue for the nine months ended October
31, 1999 compared to the nine months ended October 31, 1998 was primarily due to
assimilation, payroll, training, and occupancy costs associated with the 76
stores acquired on December 28, 1998 and the 15 stores acquired on March 31,
1999.

Amortization of Videocassette Rental Inventory

Amortization of videocassette rental inventory for the three months and nine
months ended October 31, 1999 totaled $928,953 and $4,434,986, compared to
$642,278 and $1,805,657 for the three months and nine months ended October 31,
1998. Amortization of videocassette rental inventory increased by $286,657 or
45% and $2,629,329 or 146% for the three months and nine months ended October
31, 1999 as compared to the corresponding periods ended October 31, 1998. The
primary reason for the increase in the amortization of videocassette rental
inventory was the increase in inventory due to the acquisition of 92 stores
since October, 1998, partially offset by the decrease in inventory after the
sale of 49 stores to Blockbuster, Inc. on July 26, 1999. Amortization of
videocassette rental inventory as a percentage of revenue for the three months
and nine months ended October 31, 1999 were 10.6% and 12.2%, compared to 13.3%
and 12.6% for the corresponding periods ended October 31, 1998.

Cost of Product Sales

Cost of product sales for the three months and nine months ended October 31,
1999 totaled $2,140,979 and $6,496,760 compared to $890,955 and $2,174,651 for
the three months and nine months ended October 31, 1998. Cost of product sales
increased by $1,250,024 or 140% and $4,322,109 or 199% for the three months and
nine months ended October 31, 1999 as compared to the corresponding periods
ended October 31, 1998. The increase in the cost of product sales for the three
months and nine months ended October 31, 1999 was primarily due to aggregate
growth in videocassette, concession, and accessory sales of 43% and 72% as
compared to the corresponding periods ended October 31, 1998.

Cost of Leased Product

Cost of leased product for the three months and nine months ended October 31,
1999 totaled $1,562,097 and $3,713,689, compared to $585,968 and $1,292,854 for
the three months and nine months ended October 31, 1998. Cost of leased product
increased by $976,129 or 167% and $2,420,835 or 187% for the three months and
nine months ended October 31, 1999 as compared to the corresponding periods
ended October 31, 1998. The increase to cost of leased product was primarily
attributable to the acquisition of 92 stores since October 31, 1998, partially
offset by the sale of 49 stores to Blockbuster, Inc. on July 26, 1999. Cost of
leased product as a percentage of total revenue was 17.9% and 10.2% for the
three months and nine months ended October 31, 1999
<PAGE>

compared to 12.1% and 9% for the corresponding periods ended October 31, 1998.
Cost of leased products as a percentage of total revenue for the three months
ended October 31, 1999 increased due to a greater number of stores participating
in the revenue sharing (the Company and its suppliers share in the revenue
generated from the leased products) arrangement. Cost of leased product as a
percentage of revenue remained fairly constant for the nine months ending
October 31, 1999 as compared to the corresponding period ended October 31, 1998.

General and Administrative Expenses

General and administrative expenses for the three months and nine months ended
October 31, 1999 totaled $2,722,220 and $8,174,237, compared to $1,113,314 and
$2,563,873 for the three months and nine months ended October 31, 1998. General
and administrative expenses increased by $1,608,906 or 145% and $5,610,364 or
219% for the three months and nine months ended October 31, 1999 as compared to
the corresponding periods ended October 31, 1999.  The increase for the three
months and nine months ended October 31, 1999 was primarily due to additional
costs incurred to support the 92 stores acquired since October 31, 1999,
partially offset by the sale of 49 stores to Blockbuster, Inc. on July 26, 1999.
General and administrative expenses as a percentage of revenues were 31.2% and
22.6% for the three months and nine months ended October 31, 1999 compared to
23% and 17.9% for the corresponding period ended October 31, 1998. The increase
in general and administrative expenses as a percentage of revenue was
attributable to the Company's anticipation of a potential merger with West Coast
Entertainment Corporation, and the additional resources that will be required to
complete the acquisition.

Store Closure Expenses

During September and October of 1999, the Company closed 13 under-performing
stores and incurred $1,345,400 of store closure expenses. The majority of
expenses associated with the closure of these stores included rent, utilities,
field management, inventory transfer and payroll expenses.

Gain on Sale of Assets

Gain on sale of assets for the three months and nine months ended October 31,
1999, resulted from the sale of 49 stores sold to Blockbuster, Inc. on July 26,
1999. The Company reported a $1.5 million gain for the nine months ended October
31, 1999, which included a $1.9 million gain recognized during the quarter ended
July 31, 1999, and a $.383 million loss which resulted from the disposal of
leased inventory associated with the sold stores.

Interest Expense

Interest expense for the three months and nine months ended October 31, 1999
totaled $462,100 and $1,744,862, compared to $324,953 and $647,053 for the three
months and nine months ended October 31, 1998. Interest expense increased by
$137,147 or 42% and $1,097,809 or 170%, for the three months and nine months
ended October 31, 1999 as compared to the corresponding periods ended October
31, 1998. The increase in interest expense was primarily due to the increased
level of borrowings under the Company's credit facility.

Income Taxes

Statement of Financial Accounting Standards No. 109 requires a valuation
allowance to be recorded when it is more likely than not that some or all of the
deferred tax assets of a company will not be realized. At January 31, 1999, no
valuation allowance was recorded against the deferred tax asset because the
Company determined from its projections that it is more likely than not that
future taxable income will be sufficient to realize the deferred tax asset. Due
to the pending acquisitions, management cannot determine if it is more likely
than not that future taxable income will be sufficient to realize all of the
deferred tax asset generated in the last two current quarters. Accordingly, a
valuation allowance has been established against losses generated in the last
two quarters.

Liquidity and Capital Resources

The Company funds its short-term working capital needs, including the purchase
of videocassettes and other inventory, primarily through cash from operations.
The Company expects that cash from operations and extended
<PAGE>

vendor terms will be sufficient to fund future videocassette and other inventory
purchases and other working capital needs for its existing stores. As part of
its aggressive growth strategy, the Company requires greater working capital to
sustain its current level of growth. There can be no assurance, however, that
cash from operations and extended vendor terms will be sufficient to fund future
videocassette and inventory purchases and other working capital to sustain the
continued aggressive growth of the Company. In the event the Company is unable
to obtain equity financing and/or debt financing, the Company may not have the
liquidity to sustain its current rate of growth.

Videocassette rental inventory is accounted for as a non-current asset under
generally accepted accounting principles because it is not an asset that is
reasonably expected to be completely realized in cash or sold in the normal
business cycle. Although the rental of this inventory generates a substantial
portion of the Company's revenue, the classification of this asset as non-
current excludes it from the computation of working capital. The acquisition
cost of videocassette rental inventory, however, is reported as a current
liability until paid and, accordingly, included in the computation of working
capital. Consequently, the Company believes working capital is not as
significant a measure of financial condition for companies in the video retail
industry as it is for companies in other industries. Because of the accounting
treatment of videocassette rental inventory as a non-current asset, the Company
anticipates that it will operate with a working capital deficit during the
fiscal year ending January 31, 2000.

The Company's primary long-term capital needs are for opening and acquiring new
stores. The Company expects to fund such needs through cash flows from
operations, the net proceeds from the possible sale of debt or equity
securities, bank credit facilities, trade credit, and equipment leases. On
December 28, 1998, the Company and its subsidiaries entered into a Loan and
Security agreement with BankBoston providing for a $30 million revolving credit
facility secured by all of the assets of Video City and its subsidiaries. The
BankBoston credit facility replaced the Company's previous loan facility. The
loan agreement provides for a maturity date of December 29, 2001 and a per annum
interest rate equal to either (a) the base rate announced from time to time by
BankBoston, N.A. plus 0.5 percent or (b) LIBOR plus 3.0 percent, at Video City's
election. In addition, the Company is obligated to pay various fees in
connection with the credit facility. The amount available for borrowing under
the line of credit is determined by deducting the Company's principal balance of
the line of credit from its borrowing base. The borrowing base is determined by
multiplying the applicable inventory advance rate by the number of units of the
acceptable inventory, net of reserves. The agreement provides for various
financial reporting and financial performance covenants that require the Company
to meet or exceed certain financial ratios on a monthly basis. Due to the
Company not meeting some of the financial covenants as required, the Company
requested and has been granted waivers by BankBoston for the quarters ended
April 30, 1999 and July 31, 1999. On September 23, 1999, the Company entered
into a forebearance agreement with BankBoston that amended the terms of the Loan
Agreement and revised the financial performance covenants of the Loan Agreement
and contained weekly covenant requirements. From November 17, 1999 through
November 30, 1999, the Company did not meet the financial performance covenants
as set forth in the forebearance agreement. As a result of not meeting the
financial covenants, the interest rate on the loan was increased from .5% plus
prime to the default rate of interest of 3% plus prime. The forbearance
agreement also provides that the aggregate balance of the loan shall be
temporarily limited to $10,500,000. The Company has reclassified the senior
secured revolving credit facility to current liability. BankBoston, at its
discretion, is continuing to make advances in accordance with the Loan Agreement
despite the default of the aforementioned forebearance agreement. There can be
no assurance, however, that BankBoston will continue to make advances in the
future under the terms of the Loan Agreement.

As of October 31, 1999 the total outstanding balance under the BankBoston credit
facility was $9,959,112 and the availability on the credit facility was
approximately $12,106. As of December 15, 1999, the total outstanding balance
under the BankBoston credit facility was $10,242,404 and the availability on the
credit facility was approximately $144,904. The Company currently intends to
finance future acquisitions with funds from borrowings, through assumption of
liabilities by the Company and net proceeds from possible debt or equity
financing. There can be no assurance that such financing will be available to
the Company.

The Company has outstanding indebtedness in the aggregate amount of $3,105,141
with certain of the Company's key suppliers that reached maturity in July 1999
and are now overdue. The debt agreements with the key suppliers provide for
increased interest rates and penalty payment of 8% during the periods of
default. Although there can be no assurances, the Company anticipates that it
will be able to extend the maturity dates of such indebtedness. The Company has
outstanding indebtedness in the aggregate amount of $1,681,468 with one of the
Company's key suppliers and several other affiliates that reach maturity in
January and February 2000. The Company has defaulted on the monthly payments and
will be subject to increased interest rates. Although
<PAGE>

there can be no assurances, the Company anticipates that it will be able renew
the agreement with the key supplier on favorable terms before the maturity and
repay the outstanding balance to the affiliates before the maturity date.

On June 14, 1999, the Company issued an aggregate of 2,000 shares of the
Company's Series E Convertible Preferred Stock, $1,000 stated value per share,
to International Video Distributors, and Common Stock purchase warrants to
purchase 50,000 shares of the Company's Common Stock at an exercise price of
$2.00 per share. International Video Distributors agreed to cancel outstanding
trade payables in the amount of $2,000,000 owed by the Company to International
Video Distributors.

On July 19, 1999, the Company issued an aggregate of 625 shares of the Company's
Series C Convertible Redeemable Preferred Stock, $1,000 stated value per share
to various shareholders for $625,000 cash in the form of a private placement.
Each share of Series C Convertible Redeemable Preferred Stock is convertible
into 500 shares of the Company's Common Stock at a conversion price of $2.00 per
share.

On July 26, 1999, the Company sold the assets of 49 of its Videoland retail
video stores located in the states of Washington and Oregon to Blockbuster, Inc.
The aggregate purchase price for the sale of the 49 stores is approximately $16
million in cash, of which $15.3 million was received as of August 30, 1999. The
net proceeds from the sale of assets were utilized to pay down the Company's
Senior Credit Facility.

On August 1, 1999, the Company and West Coast Entertainment Corporation ("West
Coast") entered into an Agreement and Plan of Merger (the "Merger Agreement"),
pursuant to which a wholly-owned subsidiary of the Company will merge with and
into West Coast such that West Coast will become a wholly-owned subsidiary of
the Company (the "Merger"). Pursuant to the Merger Agreement, upon the
effectiveness of the Merger, each outstanding share of Common Stock of West
Coast will be converted into the right to receive (i) a number of shares of
Common Stock of the Company, as is calculated pursuant to the Common Stock
Exchange Ratio (as defined in the Merger Agreement), subject to a maximum of
 .333 shares and a minimum of .250 shares, and (ii) 0.05 shares of the Company's
Series F Convertible Redeemable Preferred Stock, having a liquidation preference
of $25.00 per share.

The consummation of the Merger is subject to certain terms and conditions set
forth in the Merger Agreement, including the obtaining or arranging of
financing, the approval by the stockholders of the Company and West Coast,
certain regulatory approvals and the approval by creditors and other third
parties. There can be no assurance that the Merger with West Coast will be
consummated. In the event that the financing is not obtained and the merger is
not consummated the Company may restructure its operations and consider future
divestitures.

The Company has retained the services of R.W. Pressprich & Co. to act as the
Company's private placement agent in connection with the financing of the West
Coast Merger. The Company intends to use the net proceeds of the debt financing
to refinance certain of the creditors and vendors of the Company and West Coast,
and to pay the costs and expenses of the Merger. There can be no assurances that
the Company will be successful in obtaining such financing.

Quantitative and Qualitative Disclosure About Market Risk

The Company's market risk sensitive instruments do not subject it to material
market risk exposures, except for such risks related to interest rate
fluctuations. The carrying value of the Company's bank debt approximates fair
value at October 31, 1999 and 1998 since the note related thereto substantially
bears interest at a floating rate based upon the lenders' "prime" rate. The
carrying value of the notes receivable approximate fair market value.

Cash Flows

Nine Months Ended October 31, 1999 Compared to the Nine Months Ended October 31,
1998

The increase in net cash used in operating activities of $2,510,879 for the nine
months ended October 31, 1999 compared to the nine months ended October 31, 1998
was primarily due to the decrease accrued expenses partially offset the increase
in merchandise inventories, accounts receivable and accounts payable. Net cash
provided by investing activities increased by $9,717,346 for the nine months
ended October 31, 1999 compared
<PAGE>

to the nine months ended October 31, 1998, primarily due to the increase in the
proceeds from the sale of fixed assets, partially offset by the increase in the
purchases of videocassette rental inventory and fixed assets. Net cash used in
financing activities increased $7,400,673 for the nine months ended October 31,
1999 compared to the nine months ended October 31, 1998 primarily due to the
increase in the repayment of the revolving credit facility, partially offset by
the proceeds from the issuance of debt.

Year 2000

The year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer systems that uses time-sensitive software programming may recognize a
date using "00" as the year 1900 rather than the year 2000, which could result
in miscalculation or system failures.

The Company has completed its assessment of all its information technology
systems, related computer applications, and any embedded systems contained in
the Company's buildings, equipment, and other infrastructure and has determined
that it is ready for the Year 2000. Substantially all of the Company's hardware
and software systems have been verified as being Year 2000 compliant.

The Company has important and material relationships with a number of its
vendors and suppliers and has obtained written verification from these third
parties that they expect to be Year 2000 compliant in time. However, if the
Company's vendors and suppliers are unable to resolve such processing issues in
a timely manner, it could result in material financial risk to the Company.

Management has determined that the costs of addressing potential problems are
not expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. The estimated
total costs to address the Company's Year 2000 issues is approximately $25,000
which includes the cost of upgrading software and hardware systems.

The worst case scenario for the Company would be the failure of its video
stores' point of sale system. The Company is in the process of developing back-
up systems that do not rely on computers in response to this unlikely event.
<PAGE>

                                    PART II.
                               OTHER INFORMATION

Item 1.   Legal Proceedings

On October 4, 1999, TLA Entertainment Group, Inc. and the six stockholders of
TLA filed a complaint against the Company in the United States District Court in
the Eastern District of Pennsylvania. The complaint asserts a cause of action
for breach of a merger agreement entered into by TLA and the Company in June
1999 and seeks unspecified compensatory damages including lost profits and costs
and expenses. By written notice provided to the Company, TLA terminated the
merger agreement on October 1, 1999. TLA owns and operates six retail video
stores in Pennsylvania and New York. The Company is vigorously contesting this
matter and is unable to predict the likelihood of an unfavorable outcome or a
range of potential loss, if any, at this time.

Item 2.   Changes in Securities and Use of Proceeds

On August 3, 1999, the Company issued 70,000 shares of the Company's Common
Stock to a former employee of Videoland, Inc. in consideration for certain
services provided by the former employee of Videoland, Inc.

On August 8, 1999, the Company issued 30,800 shares of the Company's Common
Stock to a vendor, in consideration for fixed assets acquired by the Company.

On September 9, 1999, the Company issued 56 shares of the Company's Series E
Convertible Redeemable Preferred Stock, $1,000 stated value per share, to
Interstate Personnel, Inc., in consideration for cancellation of trade payables
owed by the Company to Interstate Personnel, Inc., in the amount of $56,000.
Each share of Series E Preferred Stock is convertible into a number of shares of
Common Stock determined by dividing $1,000 by the conversion price in effect on
the conversion date. During certain periods, the conversion price is equal to
the market price of the Company's Common Stock and ranges between $1.60 and
$3.00; after such period, the conversion price is equal to $3.00. The Company
also issued warrants to purchase 5,000 shares of Common Stock at an exercise
price of $2.00 per share to Interstate Personnel, Inc.

On September 24, 1999, the Company issued 5,000 shares of the Company's Common
Stock to the property owner of one of the Company's rental properties in
consideration of accrued occupancy costs. The Company also issued warrants to
purchase 50,000 shares of Common Stock at an exercise price of $2.00 per share
to another property owner in consideration of accrued occupancy costs.

On October 27, 1999, the Company issued 1,750 shares of the Company's Common
Stock to a vendor in consideration for product purchased.

Item 3.   Default Upon Senior Securities

In December 1998, the Company and its Subsidiaries established a $30 million
revolving credit facility with BankBoston Retail Finance Inc., pursuant to a
loan and security agreement. On September 10, 1999, the Company entered into a
forebearance agreement with BankBoston that amended the terms of the loan
agreement and revised the financial performance covenants of the Loan Agreement
and contained weekly covenant requirements. From November 17, 1999 through
November 30, 1999, the Company did not meet the financial performance covenants
as set forth in the forebearance agreement. BankBoston, at its discretion, is
continuing to make advances in accordance with the Loan Agreement despite the
default of the aforementioned forebearance agreement. There can be no assurance,
however, that BankBoston will continue to make advances in the future under the
terms of the Loan Agreement.

As of October 31, 1999 the total outstanding balance under the BankBoston credit
facility was $9,959,112 and the availability on the credit facility was
approximately $12,106. As of December 15, 1999, the total outstanding balance
under the BankBoston credit facility was $10,242,404 and the availability on the
credit facility was approximately $144,904.

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

(a)  Exhibits:

Numbers                   Description
-------                   -----------

10.1       Forbearance Agreement, dated September 10, 1999, by and between the
           Company and BankBoston Retail Finance, Inc.

27         Financial Data Schedule
<PAGE>

(b)  Reports on Form 8-K:
     -------------------

On August 10, 1999, the Company filed a Current Report on Form 8-K, dated July
26, 1999, to report under Item 2 the disposition of 49 of the Company's stores
to Blockbuster, Inc., to report under Item 5 the merger agreement entered into
with West Coast Entertainment Corporation, and to report under Item 7 the pro
forma financial information of the disposition of the 49 stores sold to
Blockbuster, Inc.

On August 11, 1999, the Company filed a Current Report on Form 8-K, dated August
6, 1999,describing terms of the Common Stock of the Company, so that it may be
incorporated by reference into other filings that the Company may make,
including but not limited to, registration statements on Forms S-3 and S-8.
<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.

                                          VIDEO CITY, INC.

Date:  December 20, 1999                  /s/ Robert Y. Lee
                                          -----------------
                                          Robert Y. Lee
                                          Chief Executive Officer
                                          (Principal Executive Officer)

Date:  December 20, 1999                  /s/ Timothy J. Denari
                                          ---------------------
                                          Timothy J. Denari
                                          Chief Financial Officer
                                          (Principal Financial Officer)