<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 April 30, 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 June 18, 1999
-----                                  ----------------------------
Common Stock                                    13,925,842
<PAGE>

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                                VIDEO CITY, INC.
                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                     April 30,
                                                                       1999                    January 31,
                                                                    (Unaudited)                    1999
                                                               ---------------------       ---------------------
<S>                                                            <C>                         <C>
ASSETS

Current assets:
     Cash                                                                $    85,211                 $   172,043

     Customer receivables                                                  3,499,623                   2,932,807

     Notes receivable                                                         86,703                      86,703

     Merchandise inventories                                               3,908,093                   2,026,628

     Other                                                                   170,097                      52,870
                                                               ---------------------       ---------------------

Total current assets                                                       7,749,727                   5,271,051

Videocassette rental inventory, net of
     accumulated amortization                                             24,364,804                  21,119,897

Property and equipment, net                                                6,160,947                   4,525,986

Goodwill                                                                   8,321,923                   5,176,850

Deferred tax asset                                                         1,236,020                     883,249

Other assets                                                               1,968,170                   1,275,847
                                                               ---------------------       ---------------------

TOTAL ASSETS                                                             $49,801,591                 $38,252,880
                                                               =====================       =====================
</TABLE>



         See accompanying notes to consolidated financial statements.
<PAGE>

                                VIDEO CITY, INC.
                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                     April 30,
                                                                       1999                     January 31,
                                                                    (Unaudited)                    1999
                                                               ---------------------       ---------------------
<S>                                                            <C>                          <C>
LIABILITIES

Current liabilities:
     Accounts payable                                                    $12,481,195                 $ 9,328,556
     Accrued expenses                                                      1,919,603                   3,422,724
     Current portion of long-term debt                                     3,795,664                   2,125,187
                                                               ---------------------       ---------------------

Total current liabilities                                                 18,196,462                  14,876,467

Senior secured revolving credit facility                                  23,243,514                  16,044,502

Long-term debt, less current portion                                       1,508,319                   1,636,646

Other liabilities                                                            589,791                     427,791
                                                               ---------------------       ---------------------

TOTAL LIABILITIES                                                         43,538,086                  32,985,406
                                                               ---------------------       ---------------------


STOCKHOLDERS' EQUITY
Preferred stock                                                            5,015,192                   3,763,963
Common stock, $.01 par value per share, 30,000,000 shares
  authorized;  13,885,688 shares issued and outstanding at
  April  30, 1999 and 13,498,715 shares issued and outstanding
  at January 31, 1999                                                        138,856                     134,987
Additional paid-in capital                                                 9,901,323                   9,229,687
Accumulated deficit                                                       (8,791,866)                 (7,861,163)
                                                               ---------------------       ---------------------

TOTAL STOCKHOLDERS' EQUITY                                                 6,263,505                   5,267,474
                                                               ---------------------       ---------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $49,801,591                 $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
                                                                       April 30,                   April 30,
                                                                         1999                         1998
                                                               ---------------------        ---------------------
<S>                                                            <C>                          <C>
Revenue
     Rental revenues and product sales                                   $13,305,070                  $ 3,391,323
     Management Fee Income                                                         -                       42,833
Total revenues                                                            13,305,070                    3,434,156
                                                               ---------------------        ---------------------

Operating costs and expenses
     Store operating expenses                                              7,903,827                    1,715,269
     Amortization of videocassette rental inventory                        1,772,490                      453,237
     Cost of product sales                                                 1,960,315                      212,949
     Cost of leased product                                                  499,784                      237,091
     General and administrative expenses                                   2,080,551                      678,741
                                                               ---------------------        ---------------------
Total operating costs and expenses                                        14,216,967                    3,297,287
                                                               ---------------------        ---------------------

Income (loss) from operations                                               (911,897)                     136,869

Other (income) expense
     Interest expense, net                                                   588,727                      122,143
     Other                                                                   (23,318)                           -
                                                               ---------------------        ---------------------

Income (loss) before taxes                                                (1,477,306)                      14,726
Income tax expense (benefit)                                                (546,603)                           -
                                                               ---------------------        ---------------------

Net income (loss)                                                        $  (930,703)                 $    14,726
                                                               =====================        =====================

Basic Earnings (Loss) Per Share                                               $(0.07)                       $0.00
Diluted Earnings (Loss) Per Share                                             $(0.07)                       $0.00

Weighted average number of common shares outstanding
   Basic                                                                  13,639,587                   10,540,308
   Diluted                                                                13,639,587                   11,126,998
</TABLE>

         See accompanying notes to consolidated financial statements.
<PAGE>

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


<TABLE>
<CAPTION>
                                                                                Three Months Ended
                                                                     April 30,                      April 30,
                                                                       1999                           1998
                                                               ----------------------        ----------------------
<S>                                                            <C>                           <C>
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities:

Net income (loss)                                                         $  (930,703)                  $    14,726

Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
     Depreciation and amortization                                          2,256,099                       520,213
     Common stock issued for professional services                             34,112                             -
     Increase in deferred tax assets                                         (547,484)                            -

Changes in assets and liabilities, net of effects of
 acquisitions:
     Decrease (increase) in customer receivable                              (528,831)                      227,046
     Decrease in notes receivable                                                   -                       124,253
     Increase in merchandise inventories                                   (1,740,046)                     (357,953)
     Increase in other assets                                                (433,750)                   (1,035,362)
     Increase in accounts payable                                             281,394                     1,374,043
     Decrease in accrued expenses                                          (2,329,706)                      (93,392)
     Increase (decrease) in other liabilities                                 162,000                      (131,984)
                                                               ----------------------        ----------------------
Net cash provided by (used in) operating activities                        (3,776,915)                      641,590
                                                               ----------------------        ----------------------

Cash flows from investing activities:
     Purchases of videocassette rental inventory, net                      (3,628,174)                     (836,834)
     Purchases of fixed assets                                             (1,255,869)                     (417,934)
     Proceeds from Sale of Prism Film Library                                       -                       818,171
     Cash portion of purchase price for store acquisitions                   (167,036)                     (177,632)
                                                               ----------------------        ----------------------
Net cash used in investing activities                                      (5,051,079)                     (614,229)
                                                               ----------------------        ----------------------

Cash flows from financing activities:
     Principal payments on obligations under capital leases                         -                       (18,136)
     Repayment of long-term debt                                             (157,850)                   (5,648,858)
     Proceeds from issuance of long-term debt                               1,700,000                             -
     Proceeds from borrowings under credit facility                         7,199,012                     5,652,071
                                                               ----------------------        ----------------------
Net cash provided by (used in) financing activities                         8,741,162                       (14,923)
                                                               ----------------------        ----------------------

Net increase (decrease) in cash                                               (86,832)                       12,438
Cash at beginning of the period                                               172,043                        28,127
                                                               ----------------------        ----------------------
Cash at end of the period                                                 $    85,211                   $    40,565
                                                               ======================        ======================
</TABLE>



          See accompanying notes to consolidated financial statements.
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                Three Months Ended
                                                                       April 30,                   April 30,
                                                                         1999                         1998
                                                               ----------------------       ---------------------
Supplementary disclosures of cash flow information
<S>                                                            <C>                          <C>
Cash paid during the year:
 Interest                                                                  $  419,486                    $120,734
 Income taxes                                                                  17,924                         800

Noncash investing and financing activities:
 Professional services financed through issuance of common
   stock                                                                       34,112                           -
 Liabilities converted to preferred stock                                   2,000,000                           -
</TABLE>



For acquisitions consummated during the three months ended April 30, 1999 and
April 30, 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                                        $ 2,547,176                  $ 3,826,781
    Cash paid                                                               (167,036)                    (177,632)
    Note payable issued                                                            -                     (562,574)
    Common stock issued                                                     (641,394)                  (1,270,578)
    Preferred stock issued                                                (1,251,230)                           -
    Goodwill                                                               3,210,312                      924,141
                                                               ---------------------        ---------------------
        Liabilities assumed                                              $ 3,697,828                  $ 2,740,138
                                                               =====================        =====================
</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 April 30, 1999, the consolidated statement
of operations for the three  months ended April 30, 1999, and the consolidated
statement of cash flows for the three months ended April 30, 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 April 30, 1999, the results of operations for the
three months ended April 30, 1999 and 1998, and cash flows for the three months
ended April 30, 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.  Recent Accounting Pronouncements

In October 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", which effectively changes the way mortgage
banking firms account for certain securities and other interests they retain
after securitizing mortgage loans that were held for sale.  The adoption of SFAS
134 had no impact on the Company's financial position.

3.  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.
<PAGE>

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) 360,667
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.

4.  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 April 30,
                                          -------------------------------------------------------------------------------------
                                                            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:
   Net income (loss)                        $(930,703)  13,639,587      $(0.07)            $14,726   10,540,308        $0.00
Effect of Dilutive Securities:
   Incremental shares from outstanding
   common stock options, warrants, and
   preferred stock                             -            -              -                -           586,690         -
                                          -----------   ----------    -----------      -----------   -----------    -----------
Diluted EPS
Income (loss) available to common
 stockholders:
   Net income (loss)                        $(930,703)  13,639,587      $(0.07)            $14,726   11,126,998        $0.00
                                          ===========   ==========    ===========      ===========   ===========    ===========
</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.

<PAGE>

6.  Recent Developments

On April 22, 1999 the Company entered into an Asset Purchase Agreement with
Blockbuster Inc. pursuant to which the Company has agreed to sell to Blockbuster
Inc. substantially all of the assets of 50 of the Company's retail video stores
located in the states of Washington and Oregon for approximately $16 million in
cash. The consummation of the sale is subject to certain conditions, including
the receipt of certain third-party consents. The company anticipates using the
net proceeds from the sale of the assets to pay off certain of the Company's
indebtedness and to finance future acquisitions. There can be no assurances that
the contemplated asset sale will be consummated.


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 ended April 30, 1999 compared to the three months ended April 30,
1998.

Revenues

Rental revenue and product sales for the three months ended April 30, 1999
increased by $9,913,747 or 292%, to $13,305,070 compared to $3,391,323 for the
three months ended April 30, 1998. The increased revenues were primarily
attributable to the acquisition of 101 stores since April 30, 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 18, 1999, and 15 stores were
acquired on March 26, 1999. Same store revenues for the three months ended April
30, 1999 increased by approximately 6.6% compared to the same period of the
previous year. The Company ended the first quarter of 1999 with 135 stores
operating in twelve states compared to 47 stores operating in three states at
the end of the first quarter of 1998. The Company had no Management fee income
for the quarter ended April 30, 1999, compared to $42,833 for the quarter ended
April 30, 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 ended April 30, 1999 increased by
$6,188,558 or 361% to $7,903,827 compared to $1,715,269 for the three months
ended April 30, 1998.  The increase in store operating expenses was primarily
due to the acquisition of 101 stores since April 30, 1998.   Store operating
expenses as a percentage of total revenue was 59% for the three months ended
April 30, 1999 compared to 50% for the corresponding period of 1998.  The
increase in store expenses as a percentage of total revenue for the three months
ended April 30, 1999 compared to the corresponding period of 1998 was
<PAGE>

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.

Amortization of Videocassette Rental Inventory

Amortization of videocassette rental inventory increased by $1,319,253, or 291%
to $1,772,490 compared to $453,237 for the three months ended April 30, 1998.
The primary reason for the increase was the acquisition of 101 stores since
April 30, 1998, partially offset by the effect of a change in the amortization
period for base inventory (copies 1-3) from 36 months to 60 months. Amortization
of videocassette rental inventory as a percentage of revenue remained fairly
consistent at 13% for the first quarters of 1998 and 1999.

Cost of Product Sales

Cost of product sales for the three months ended April 30, 1999 increased by
$1,747,366 or 820% to $1,960,315 compared to $212,949 for the comparable period
of 1998. The increase in the cost of product sales for the three months ended
April 30, 1999 was primarily due to aggregate growth in videocassette,
concession, and accessory sales of 542% resulting from the acquisition of 110
stores since April 30, 1998 and the addition of "sell through" videocassettes as
a new product line in the 29 stores acquired on March 25, 1998.

Cost of Leased Product

Cost of leased product for the three months ended April 30, 1999 increased
$262,693 or 111% to $499,784 compared to $237,091 for the corresponding period
of 1998. The increase was primarily attributable to the acquisition of 110
stores since the first quarter of 1998. Cost of leased product as a percentage
of total revenue was 3.7% for the three months ended April 30, 1999 compared to
6.9% for the same period of 1998. The decrease in cost of leased products as a
percentage of total revenue was due to the delay in the Videoland stores
conversion to the Company's revenue sharing program as of April 30, 1999.

General and Administrative Expenses

General and administrative expenses increased $1,401,810 or 206%, to $2,080,551
for the three months ended April 30, 1999, compared to $678,741 for the
corresponding period of 1998. The increase for the three months ended April 30,
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 opened since May 1, 1998.
General and administrative expenses as a percentage of revenues was 15.6 % for
the three months ended April 30, 1999 compared to 19.8% for the same period of
1998. The percentage decrease for the three months ended April 30, 1999 was
primarily the result of spreading the corporate expenses over significantly
higher revenues for that period.

Interest Expense

Interest expense increased $466,583 or 382%, to $588,727 for the three months
ended April 30, 1999, compared to $122,143 for the corresponding period of 1998.
The increase in interest expense was primarily due to the increase in borrowings
under the credit facility entered into with BankBoston Retail Finance Inc.
("BankBoston") on December 28, 1998 that was used primarily to fund the cash
portion of the December 28, 1998 acquisition of Videoland and to pay off the
balance of the FINOVA Capital Corporation 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.  Due in a large part to
the recent acquisitions of Videoland and Video Galaxy, management has determined
from its projections that it is more likely than not that future taxable income
would be sufficient to enable the
<PAGE>

Company to realize all of its deferred tax assets. As a result, the Company has
not recorded a valuation allowance for its deferred tax assets.

Recent Accounting Pronouncements

In October 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", which effectively changes the way mortgage
banking firms account for certain securities and other interests they retain
after securitizing mortgage loans that were held for sale. The adoption of SFAS
134 had no impact on the Company's financial position.

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
the equity financing, debt financing or the contemplated strategic divestiture,
the Company may not have the liquidity to sustain its current rate of growth.

Videocassette rental inventories are accounted for as noncurrent assets under
generally accepted accounting principles because they are not assets which are
reasonably expected to be completely realized in cash or sold in the normal
business cycle.  Although the rental of this inventory generates a substantial
portion of the Company's revenue, the classification of these assets as
noncurrent excludes them from the computation of working capital.  The
acquisition cost of videocassette rental inventories, 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 fiscal
the year ended 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 $7.5 million loan
facility with FINOVA Capital Corporation. The new 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,
Video City 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 and the number of units of the acceptable
inventory, net of reserves. The agreement provided for various financial
reporting and financial performance covenants that require the Company to meet
or exceed certain 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 April 30, 1999, the total outstanding balance under the BankBoston credit
facility was approximately $23,244,000 and the availability on the credit
facility was approximately $324,000. As of June 18, 1999, the total outstanding
balance under the BankBoston credit facility was approximately $23,679,000 and
the availability on the credit facility was approximately $10,000.  The Company
currently intends to finance
<PAGE>

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 of $3,118,000 with
certain of the Company's key suppliers that have maturity dates of June and July
1999.  Although there can be no assurances, the Company anticipates that it will
be able to renew the agreements on favorable terms before the maturity date of
these obligations.

On April 22, 1999 the Company entered into an Asset Purchase Agreement with
Blockbuster Inc. pursuant to which the Company has agreed to sell to Blockbuster
Inc. substantially all of the assets of 50 of the Company's retail video stores
located in the states of Washington and Oregon for approximately $16 million in
cash.  The consummation of the sale is subject to certain conditions, including
the receipt of third-party consents. The company anticipates using the net
proceeds from the sale of the assets to pay off certain of the Company's
indebtedness and to finance future acquisition. There can be no assurances that
the contemplated asset sale will be consummated.

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 January 31, 1999 and 1998 since the note related thereto substantially
bears interest at a floating rate based upon the lenders' "prime" rate.

Cash Flows

Three Months Ended April 30, 1999 Compared to the Three Months Ended April 30,
1998

The increase in net cash used in operating activities of $4,418,000 for the
three months ended April 30, 1999 compared to the three months ended April 30,
1998 was primarily due to a decrease in accrued expenses and an increase in
merchandise inventories, partially offset by an increase in other liabilities.
Net cash used in investing activities increased by $4,437,000 for the three
months ended April 30, 1999 compared to the three months ended April 30, 1998
primarily due to an increase in the purchases of videocassette rental inventory
and fixed assets resulting from the growth in the number of stores.  Net cash
provided by financing activities increased $8,756,000 for the three months ended
April 30, 1999 compared to the three months ended April 30, 1998 mainly due to
increased borrowings under the credit facility and proceeds received from the
issuance of debt, partially offset by a 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.
<PAGE>

PART II.  OTHER INFORMATION

Item 2. Changes in Securities and Use of  Proceeds

On February 15, 1999, the Company issued 17,000 shares of the Company's Common
Stock in connection with the purchase by the Company of certain inventory and
fixtures for the Company's stores.  The Company also issued 38,500 shares in
March 1999 as consideration for the purchase by the Company of certain other
inventory.

In March 1999, the Company issued 26,000 shares of the Company's Common Stock to
a law firm in consideration for certain legal services previously provided to
the Company by such law firm.  The Company also issued 25,000 shares of the
Company's Common Stock in March 1999 to a financial advisor in consideration for
certain financial advisory services provided to the Company.

In March 1999, the Company issued a total of 545,900 shares of the Company's
Common Stock to C. Anthony Anderson, David A. Ballstadt and certain members of
Mr. Ballstadt's family as part of the consideration for the acquisitions that
were completed in March 1998.

On March 25, 1999, the Company granted options to purchase 20,000 shares of the
Company's Common Stock at an exercise price of $2.00 per share to each of the
five non-employee director of the Company.

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.

On March 31, 1999, the Company issued an aggregate of 344,000 shares of the
Company's Common Stock to the former shareholders of Video Galaxy, Inc. as part
of the consideration for the acquisition by the Company of Video Galaxy, Inc.
In addition, the Company issued 2,000 shares of the Company's Series D
Convertible Redeemable Preferred Stock, $1,000 stated value per share, and
warrants to purchase 500,000 shares of the Company's Common Stock at an exercise
price of $3.00 per share to Mortco, Inc. (a subsidiary of Rentrak Corporation)
in consideration for the cancellation by Mortco, Inc. and Rentrak Corporation of
amounts due 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.

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.

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

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

Numbers                   Description
-------                   -----------
<PAGE>

3.1   Certificate of Designations for the Company's Series C Convertible
      Redeemable Preferred Stock.

3.2   Certificate of Designations for the Company's Series D Convertible
      Redeemable Preferred Stock.

3.3   Certificate of Designations for the Company's Series E Convertible
      Preferred Stock.

10.1  Asset Purchase Agreement, dated as of April 22, 1999, by and among, the
      Company, Videoland, Inc. and Blockbuster Inc.

10.2  Agreement of Merger and Plan of Reorganization, dated as of March 30,
      1999, by and among the Company, Video Galaxy, Inc., James G. Howard,
      George M. Peloso and Kurt Peterson (previously filed).

10.3  Debt Conversion Agreement, dated as of March 30, 1999, by and among the
      Company, Rentrak Corporation, Mortco, Inc. and Video Galaxy, Inc.

10.4  Warrant to purchase 500,000 shares of common stock, dated as of March 31,
      1999, between the Company and Mortco, Inc.

10.5  Form of Option Agreement for directors and executive officers of the
      Company.

10.6  Form of Indemnity Agreement for directors and executive officers of the
      Company.

10.7  Second Modification Agreement, dated as of March 31, 1999, to Loan and
      Security Agreement by and among the Company, its subsidiaries and
      BankBoston Retail Finance Inc.

27    Financial Data Schedule


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

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.
<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:  June 21, 1999            /s/ Robert Y. Lee
                                -----------------
                                Robert Y. Lee
                                Chief Executive Officer
                                (Principal Executive Officer)

Date:  June 21, 1999            /s/ Timothy J. Denari
                                ---------------------
                                Timothy J. Denari
                                Chief Financial Officer
                                (Principal Financial Officer)