<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 July 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 September 20, 1999
-----                         ---------------------------------
Common Stock                              14,914,803
<PAGE>

                                    PART I.
                             FINANCIAL INFORMATION

Item 1.  Financial Statements

                               VIDEO CITY, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS

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

Current assets:
     Cash                                         $   127,207                 $   172,043

     Customer receivables                           3,347,864                   2,932,807

     Notes receivable (Note 3)                      2,144,703                      86,703

     Merchandise inventories                        4,114,836                   2,026,628

     Other                                            105,837                      52,870
                                                  -----------                 -----------

Total current assets                                9,840,447                   5,271,051

Videocassette rental inventory, net of
     accumulated amortization                      16,649,841                  21,119,897

Property and equipment, net                         5,376,042                   4,525,986

Goodwill                                            6,112,742                   5,176,850

Deferred tax asset                                  1,235,139                     883,249

Other assets                                        1,886,832                   1,275,847
                                                  -----------                 -----------

TOTAL ASSETS                                      $41,101,043                 $38,252,880
                                                  ===========                 ===========
</TABLE>

    See accompanying notes to condensed consolidated financial statements.
<PAGE>

                               VIDEO CITY, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS

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

Current liabilities:

     Accounts payable                                                   $ 15,550,775                 $ 9,328,556
     Accrued expenses                                                      3,430,187                   3,422,724
     Current portion of long-term debt                                     3,807,833                   2,125,187
                                                                        ------------                 -----------

Total current liabilities                                                 22,788,795                  14,876,467

Senior secured revolving credit facility                                   9,949,063                  16,044,502

Long-term debt, less current portion                                       1,368,408                   1,636,646

Other liabilities                                                            299,226                     427,791
                                                                        ------------                 -----------

TOTAL LIABILITIES                                                         34,405,492                  32,985,406
                                                                        ------------                 -----------

STOCKHOLDERS' EQUITY
Preferred stock (Note 4)                                                   7,779,297                   3,763,963
Common stock, $.01 par value per share, 30,000,000 shares
  Authorized;  14,184,090 shares issued and outstanding at
  July 31, 1999 and 13,498,715 shares issued and outstanding
  at January 31, 1999                                                        141,841                     134,987
Additional paid-in capital                                                10,520,785                   9,229,687
Accumulated deficit                                                      (11,746,372)                 (7,861,163)
                                                                        ------------                 -----------

TOTAL STOCKHOLDERS' EQUITY                                                 6,695,551                   5,267,474
                                                                        ------------                 -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                              $ 41,101,043                 $38,252,880
                                                                        ============                 ===========
</TABLE>

    See accompanying notes to condensed consolidated financial statements.
<PAGE>

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

<TABLE>
<CAPTION>
                                                       Three Months Ended                               Six Months Ended
                                                 July 31,               July 31,                 July 31,               July 31,
                                                   1999                   1998                     1999                   1998
                                               -----------            -----------              -----------            -----------
<S>                                            <C>                    <C>                      <C>                    <C>
REVENUES
     Rental revenues and product sales         $14,212,961            $ 6,009,738              $27,518,031            $ 9,401,061
     Management fee income                               -                 13,500                        -                 56,333
                                               -----------            -----------              -----------            -----------
TOTAL REVENUES                                  14,212,961              6,023,238               27,518,031              9,457,394
                                               -----------            -----------              -----------            -----------

OPERATING COSTS AND EXPENSES
     Store operating expenses                    9,151,708              2,715,555               17,055,535              4,430,824
     Amortization of videocassette rental
      inventory                                  1,733,543                710,143                3,506,033              1,163,380
     Cost of product sales                       2,395,466              1,070,747                4,355,781              1,283,696
     Cost of leased product                      1,651,808                469,794                2,151,592                706,885
     General and administrative expenses         3,371,466                771,818                5,452,017              1,450,559
                                               -----------            -----------              -----------            -----------
TOTAL OPERATING COSTS AND EXPENSES              18,303,991              5,738,057               32,520,958              9,035,344

INCOME (LOSS) FROM OPERATIONS                   (4,091,030)               285,181               (5,002,927)               422,050

Other (Income) Expense:
     Gain on sale of assets (Note 3)            (1,913,178)                     -               (1,913,178)                     -
     Interest expense                              694,035                199,957                1,282,762                322,101
     Other                                         (31,418)               (15,097)                 (54,736)               (15,097)
                                               -----------            -----------              -----------            -----------
Income (Loss)  before taxes                     (2,840,469)               100,321               (4,317,775)               115,046
Income tax expense (benefit)                             -             (1,829,869)                (546,603)            (1,829,869)
                                               -----------            -----------              -----------            -----------
NET INCOME (LOSS)                              $(2,840,469)           $ 1,930,190              $(3,771,172)           $ 1,944,915
                                               ===========            ===========              ===========            ===========

Preferred stock dividends                          114,037                      -                  114,037                      -
                                               -----------            -----------              -----------            -----------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS                            $(2,954,506)           $ 1,930,190              $(3,885,209)           $ 1,944,915
                                               ===========            ===========              ===========            ===========

Basic Earnings (Loss) Per Share                     $(0.21)                 $0.17                   $(0.28)                 $0.18
Diluted Earnings (Loss) Per Share                   $(0.21)                 $0.16                   $(0.28)                 $0.17

Weighted average number of common shares
 outstanding
     Basic                                      13,978,010             11,605,716               13,811,603             11,053,757
     Diluted                                    13,978,010             12,220,067               13,811,603             11,626,322
</TABLE>

    See accompanying notes to condensed consolidated  financial statements.
<PAGE>

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


<TABLE>
<CAPTION>
                                                                                     Six Months Ended
                                                                           July 31,                     July 31,
                                                                             1999                         1998
                                                                         -----------                  -----------
<S>                                                                      <C>                          <C>
Increase (Decrease) in cash and cash equivalents

Cash flows from operating activities:

Net income (loss)                                                        $(3,771,172)                 $ 1,944,915

Adjustments to reconcile net income (loss) to net cash
 provided by (used in) operating activities:
     Depreciation and amortization                                         4,602,772                    1,308,495
     Issuance of stock for services and inventory                          2,681,682                      145,343
     Decrease (increase) in deferred tax asset                              (546,603)                  (1,610,781)
     Gain on sale of asset                                                (1,913,178)                           -

Changes in assets and liabilities, net of effects of
 acquisitions and disposition:
     Increase in customer receivable                                      (1,333,347)                    (561,472)
     Decrease in notes receivable                                                  -                      124,253
     Increase in merchandise inventories                                  (2,552,530)                    (558,030)
     Increase in other assets                                               (420,777)                    (946,154)
     Increase (decrease) in accounts payable                               3,321,290                     (664,812)
     Decrease in accrued expenses                                         (1,961,342)                    (133,080)
     Decrease in other liabilities                                          (128,565)                    (283,126)
                                                                         -----------                  -----------
Net cash provided by (used in) operating activities                       (2,021,771)                  (1,234,449)
                                                                         -----------                  -----------

Cash flows from investing activities:
     Purchases of videocassette rental inventory                          (5,591,490)                  (1,626,505)
     Purchases of fixed assets                                            (2,071,508)                    (455,096)
     Proceeds from sale of film library                                            -                      818,171
     Proceeds from the sale of fixed assets                               13,863,000                            -
     Store acquisitions                                                     (167,036)                    (177,632)
                                                                         -----------                  -----------
Net cash provided by (used in) investing activities                        6,032,966                   (1,441,062)
                                                                         -----------                  -----------

Cash flows from financing activities:
     Principal payments on obligations under capital leases                        -                      (18,136)
     Repayment of long-term debt                                            (285,592)                  (3,759,367)
     Proceeds from issuance of long-term debt                              1,700,000                            -
     Proceeds from the issuance of preferred stock                           625,000                      700,000
     Proceeds from borrowings (repayments) under credit
      facility                                                            (6,095,439)                   5,745,655
                                                                         -----------                  -----------
Net cash provided by (used in) financing activities                       (4,056,031)                   2,668,152
                                                                         -----------                  -----------

Net decrease in cash                                                         (44,836)                      (7,359)
Cash at beginning of the period                                              172,043                       28,127
                                                                         -----------                  -----------
Cash at end of the period                                                $   127,207                  $    20,768
                                                                         ===========                  ===========
</TABLE>

    See accompanying notes to condensed  consolidated financial statements.
<PAGE>

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

<TABLE>
<CAPTION>
                                                                         Six Months Ended
                                                                    July 31,           July 31,
                                                                      1999               1998
                                                                  -----------        -----------
<S>                                                               <C>                <C>
Supplementary disclosures of cash flow information
Cash paid during the year:
   Interest                                                       $   890,304        $   255,903
   Income taxes                                                        17,924                800

Noncash investing and financing activities:
   Professional services and the purchase of inventory financed
     Through issuance of common stock                                 278,682            145,343
   Liabilities converted to preferred stock                         4,000,000                  -
   Note receivable from sale of assets                              2,058,000                  -
   Preferred stock dividends                                          114,037                  -
</TABLE>

For acquisitions consummated during the six months ended July 31, 1999 and July
31, 1998, the Company paid $167,036 and $177,632, respectively, net of cash
acquired.  In conjunction with the acquisitions, liabilities were assumed as
follows:

<TABLE>
<S>                                                               <C>                <C>
   Fair value of assets acquired                                  $ 2,156,998        $ 3,826,781
   Cash paid                                                         (167,036)          (177,632)
   Note payable issued                                                      -         (2,155,370)
   Common stock issued                                               (641,394)        (1,458,679)
   Preferred stock issued                                          (1,251,230)                 -
   Goodwill                                                         3,630,456          2,052,419
                                                                  -----------        -----------
     Liabilities assumed                                          $ 3,727,794        $ 2,087,519
                                                                  ===========        ===========
</TABLE>

    See accompanying notes to condensed consolidated financial statements.
<PAGE>

                                VIDEO CITY, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.  Financial Statement Presentation

The accompanying condensed 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 condensed consolidated balance sheet as of July 31, 1999, the condensed
consolidated statement of operations for the three and six months ended July 31,
1999 and 1998, and the condensed consolidated statement of cash flows for the
six months ended July 31, 1999 and 1998 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 condensed consolidated financial statements reflect all
adjustments that are, in the opinion of management, necessary to present fairly
the financial position as of July 31, 1999, the results of operations for the
three and six months ended July 31, 1999 and 1998, and cash flows for the six
months ended July 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 owns and operates 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.

3.  Disposition of Assets

On July 26, 1999, the Company sold the assets of 45 of its Videoland retail
video stores located in the states of Washington and Oregon to Blockbuster, Inc
("Blockbuster").  The Company sold the assets of four additional
<PAGE>

Videoland stores to Blockbuster on August 30, 1999. 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 sale 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 sold 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 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 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.

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.

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 will
consequently share in earnings.  The following table summarizes the calculation
of the Company's basic and diluted earnings per share for the periods presented:
<PAGE>

<TABLE>
<CAPTION>
                                                                      For the three months ended July 31,
                                          ------------------------------------------------------------------------------------------
                                                              1999                                              1998
                                          ---------------------------------------------     ----------------------------------------
                                                                            Per-share                                      Per-share
                                              Income          Shares          amount           Income         Shares        amount
                                          ------------     ------------     ---------       ------------    ------------    -------
<S>                                       <C>              <C>              <C>             <C>             <C>            <C>
Basic EPS
Net income (loss) available to common
shareholders                              $(2,954,506)      13,978,010       $(0.21)         $1,930,190      11,605,716       $0.17
Effect of Dilutive Securities:
   Incremental shares from outstanding
   Common stock options, warrants, and
   Preferred stock                                 -                -            -                   -          614,351        (.01)
                                          ------------     ------------     ---------       ------------    ------------     -------
Diluted EPS
Net income (loss) available to common
shareholders                              $(2,954,506)      13,978,010       $(0.21)         $1,930,190      12,220,067       $0.16
                                          ============     ============     =========       ============    ============     =======
</TABLE>

<TABLE>
<CAPTION>
                                                                       For the six months ended July 31,
                                          ------------------------------------------------------------------------------------------
                                                              1999                                              1998
                                          ---------------------------------------------     ----------------------------------------
                                                                            Per-share                                      Per-share
                                              Income          Shares          amount           Income         Shares        amount
                                          ------------     ------------     ---------       ------------    ------------    -------
<S>                                       <C>              <C>              <C>             <C>             <C>            <C>
Basic EPS
Net income (loss) available to common
shareholders                              $(3,885,209)      13,811,603       $(0.28)         $1,944,915      11,053,757       $0.18
Effect of Dilutive Securities:
   Incremental shares from outstanding
   Common stock options, warrants, and
   Preferred stock                                 -                -            -                   -          527,566        (.01)
                                          ------------     ------------     ---------       ------------    ------------    -------
Diluted EPS
Net income (loss) available to common
shareholders                              $(3,885,209)      13,811,603       $(0.28)         $1,944,915      11,626,566       $0.17
                                          ============     ============     =========       ============    ============    =======
</TABLE>

All outstanding common stock options, warrants, and preferred stock for the
three months and six months ended July 31, 1999, 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 current quarter.  Accordingly, a valuation
allowance has been established against the current quarter's losses.


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
<PAGE>

Three months and six months ended July 31, 1999 compared to the three months and
six months ended July 31, 1998.

Revenues

Rental revenue and product sales for the three months and the six months ended
July 31, 1999 totaled $14,212,887 and $27,518,031, compared to $6,009,738 and
$9,401,061 for the three months and six months ended July 31, 1998. The
increases in revenue for the three months and six months ended July 31, 1999
were $8,203,223 or 136% and $18,116,970 or 193%. The increase in revenue was
primarily attributable to the acquisition of 101 stores since July 31, 1998. Of
the 101 stores, 9 stores were acquired on September 30, 1998, 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. Although 49 stores were sold to
Blockbuster on July 26, 1999, the effect on revenue was minimal for the three
months and six months ended July 31, 1999. Same store revenues for the three
months and six months ended July 31, 1999 increased by approximately 1.65% and
 .60%, compared to the same periods of the previous year. At July 31, 1999 the
Company operated 95 stores in twelve states compared to 47 stores in 3 states at
July 31, 1998. The Company had no management fee income for the quarter ended
July 31, 1999, compared to $56,333 for the quarter ended July 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 six months ended July 31,
1999 totaled $9,151,708 and $17,055,535, as compared to $2,715,555 and
$4,430,824 for the three months and six months ended July 31, 1998. Store
operating expenses increased by $6,436,153 or 237% and $12,624,711 or 285% for
the three months and six months ended July 31, 1999 as compared to the
corresponding periods of the previous year. The increase in store operating
expenses was primarily due to the acquisition of 101 stores since July 31, 1998.
Store operating expenses as a percentage of total revenue for the three months
and six months ended July 31, 1999 were 64% and 62% compared to 45% and 47% for
the corresponding period of 1998. The increase in store expenses as a percentage
of total revenue for the three months and six months ended July 31, 1999
compared to the corresponding periods of 1998 was primarily due to assimilation,
payroll, training, and occupancy costs for the 76 stores acquired on December
28, 1998 and the 15 stores acquired on March 31, 1999. In addition, store
operating expenses increased by approximately $290,000 due to one time store
closure expenses for 7 stores, which included rent, utilities, field management
and payroll expenses.

Amortization of Videocassette Rental Inventory

Amortization of videocassette rental inventory for the three months and six
months ended July 31, 1999 totaled $1,733,543 and $3,506,033, compared to
$710,143 and $1,163,380 for the three months and six months ended July 31, 1998.
Amortization of videocassette rental inventory increased by $1,023,400 or 144%
and $2,342,653 or 201% for the three months and six months ended July 31, 1999
as compared to the corresponding periods of the previous year. The primary
reason for the increase in the amortization of videocassette rental inventory
was the acquisition of 101 stores since July 31, 1998. Amortization of
videocassette rental inventory as a percentage of revenue for the three months
and six months ended July 31, 1999 were 12.1% and 12.7%, compared to 11.8% and
12.3% for the corresponding periods in 1998.

Cost of Product Sales

Cost of product sales for the three months and six months ended July 31, 1999
was $2,395,466 and $4,355,781, compared to $1,070,747 and $1,283,696 for the
three months and six months ended July 31, 1998. Cost of product sales increased
by $1,324,719 or 124% and $3,072,085 or 239% for the three and months and six
months ended July 31, 1999 as compared to the corresponding periods of the
previous year. The increase in the cost of product sales for the three months
and six months ended July 31, 1999 was primarily due to aggregate growth in
videocassette, concession, and accessory sales of 47% and 148% as compared to
the corresponding periods of the previous year, resulting from the acquisition
of 101 stores since July 31, 1998.
<PAGE>

Cost of Leased Product

Cost of leased product for the three months and six months ended July 31, 1999
totaled $1,651,808 and $2,151,592, compared to $469,794 and $706,885 for the
three months and six months ended July 31, 1998. Cost of leased product
increased by $1,182,014 or 252% and $1,444,707 or 204% for the three months and
six months ended July 31, 1999 as compared to the corresponding periods of the
previous year. The increase to cost of leased product was primarily attributable
to the acquisition of 101 stores since July, 31 1998. Cost of leased product as
a percentage of total revenue was 11.6% and 7.8% for the three months and six
months ended July 31, 1999 compared to 7.8% and 7.5% for the corresponding
period in 1998. The cost of leased products as a percentage of total revenue for
the three months ended July 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 six months ending
July 31, 1999 as compared to the corresponding period of July 31, 1998.

General and Administrative Expenses

General and administrative expenses for the three months and six months ended
July 31, 1999 totaled $3,371,466 and $5,452,017, compared to $771,818 and
$1,450,559 for the three months and six months ended July 31, 1998. General and
administrative expenses increased by $2,599,648 or 337% and $4,001,458 or 276%
for the three months and six months ended July 31, 1999 as compared to the
corresponding periods of the previous year. The increase for the three months
and six months ended July 31, 1999 was primarily due to additional costs
incurred to support the 76 stores purchased on December 28, 1998, the 15 stores
purchased on March 31, 1999 and the additional 10 stores that were either
acquired or newly opened since August 1, 1998. General and administrative
expenses as a percentage of revenues were 23.7% and 19.8% for the three months
and six months ended July 31, 1999 compared to 12.8% and 15.3% for the
corresponding period of 1998. The increase in general and administrative
expenses is attributable to the Company's anticipation of the up-coming merger
with West Coast Entertainment Corporation, and the additional resources that
will be required to complete the acquisition.

Gain on Sale of Assets

Gain on sale of assets of $1,913,178 was realized, for the three months and six
months ended July 31, 1999, resulted from the sale of 49 stores to Blockbuster,
Inc. on July 26, 1999. The Company recognized the gain on the sale on July 26,
1999, which included the sale of assets of the four additional Videoland stores
on August 30, 1999.

Interest Expense

Interest expense for the three months and six months ended July 31, 1999 totaled
$694,035 and $1,282,762, compared to $199,957 and $322,101 for the three months
and six months ended July 31, 1998. Interest expense increased by $494,078 or
247% and $960,661 or 298%, for the three months and six months ended July 31,
1999 as compared to the corresponding periods of the previous year. 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 current quarter.  Accordingly, a valuation
allowance has been established against the current quarter's losses.
<PAGE>

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 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 noncurrent 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 has
requested and been granted a waiver by BankBoston.

As of July 31, 1999 the total outstanding balance under the BankBoston credit
facility was $9,949,065 and the availability on the credit facility was
approximately $779,406. As of September 18, 1999, the total outstanding balance
under the BankBoston credit facility was $9,479,458 and the availability on the
credit facility was approximately $21,915. 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 is 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 $1,660,142 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 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.
<PAGE>

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 45 of its Videoland retail
video stores located in the states of Washington and Oregon to Blockbuster, Inc.
The Company sold the assets of four additional Videoland stores to Blockbuster
on August 30, 1999. 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.

The Company has retained the services of R.W. Pressprich & Co. to provide
general advisory services and to act as the Company's private placement agent in
connection with the financing of the West Coast Merger. The Company intends to
used 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 July 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

Six Months Ended July 31, 1999 Compared to the Six Months Ended July 31, 1998
<PAGE>

The increase in net cash used in operating activities of $787,322 for the six
months ended July 31, 1999 compared to the six months ended July 31, 1998 was
primarily due to the decrease in accrued expenses and an increase in merchandise
inventories and accounts payable, partially offset by an increase in other
assets. Net cash provided by investing activities increased by $7,474,028 for
the six months ended July 31, 1999 compared to the six months ended July 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 $6,724,183 for the six months ended July 31, 1999 compared to the six
months ended July 31, 1998 primarily due to the increase in the repayment of the
revolving credit facility, partially offset by the decrease in repayments of
long-term 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.

                                    PART II.
                               OTHER INFORMATION

Item 2.    Changes in Securities and Use of Proceeds

On May 12, 1999, the Company sold 750 shares of the Company's Series AA
Convertible Redeemable Preferred Stock, $100 stated value per share and warrants
to purchase 37,500 shares of the Company's Common Stock at an exercise price of
$2.00 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 11, 1999, the Company issued 2,000 shares of the Company's Series E
Convertible 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.
<PAGE>

On June 1, 1999 the Company issued 78,750 shares of the Company's Common Stock
to Nordic Information Systems Inc. in consideration for certain software
services provided to the Company by Nordic Information Systems Inc.  In June
1999, the Company also issued 25,000 shares of the Company's Common Stock to an
employee of the Company as compensation pursuant to an employment agreement.

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 and
warrants to purchase 57,312 shares of the Company's Common Stock at an exercise
price of $2.00 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 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 July 1, 1999, the Company issued warrants to purchase 1,048,451 shares of the
Company's Common Stock at an exercise price of $2.00 per share to Ingram
Entertainment Inc.  These warrants include the warrants to purchase 404,225
shares of Common Stock previously issued by the Company in connection with the
acquisition of Videoland, Inc. in December 1998, and were payable in the event
the Company was unable to pay in full by June 30, 1999, approximately $3,600,000
owed to Ingram Entertainment Inc. by the Company.

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.

The Company believes that the issuance of securities in each of the foregoing
transactions were exempt from registration in reliance on Section 4(2) of the
Securities Act of 1933, as amended, as a transaction not involving a public
offering.

On August 11, 1999, the Company filed a Current Report on Form 8-K, dated August
6, 1999, to report under Item 5 the description of the Company's Common Stock.

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

(a)  Exhibits:
     --------

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

10.1  Stock Purchase Agreement, dated June 2, 1999, by and between the Company
      and The Value Group, LLC.

10.2  Common Stock Purchase Warrant, dated May 11, 1999, by and between the
      Company and The Value Group, LLC.

10.3  Stock Purchase Agreement, dated June 11, 1999, by and between the Company
      and International Video Distributors, LLC.

10.4  Common Stock Purchase Warrant, dated June 11, 1999, by and between the
      Company and International Video Distributors, LLC.

10.5  Agreement and Plan of Merger, dated August 1, 1999, by and among the
      Company, Key Stone Merger Corp. and West Coast Entertainment Corporation
      (previously filed).

10.6  Employment Agreement, dated June 16, 1999, between the Company and Richard
      T. Gibson

10.7  Amendment to Loan Documents, dated as of December 31, 1998, by and among
      the Company, Ingram Entertainment Inc. and the debtors named therein.

10.8  Warrant to Purchase Common Stock, dated December 31, 1998, executed by the
      Company for Ingram Entertainment Inc.

27    Financial Data Schedule


(b)  Reports on Form 8-K:
     -------------------
<PAGE>

On April 15, 1999, the Company filed a Current Report on Form 8-K, dated March
31, 1999, to report under Item 2 the acquisition of Video Galaxy, Inc.  On June
14, 1999, the Company filed an amendment to such Current Report to report under
Item 7 that the transaction was not considered significant to file financial
statements and exhibits.

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

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