<PAGE>
 
================================================================================
                                 UNITED STATES
                      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 August 2, 1998

                                      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 1-11752


                             ST. JOHN KNITS, INC.
            (Exact Name of Registrant as Specified in its Charter)

          California                                    95-2245070
(State or Other Jurisdiction of          (I.R.S. Employer Identification Number)
 Incorporation or Organization)                      
 
17422 Derian Avenue, Irvine, California                    92614
(Address of Principal Executive Offices)                 (Zip Code)

Registrant's Telephone Number, Including Area Code:  (949) 863-1171


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 [_]


The number of outstanding shares of registrant's Common Stock, no par value, was
16,683,884 shares as of September 8, 1998.
================================================================================
<PAGE>
 
                        PART I.  FINANCIAL INFORMATION
                                        
Item 1.  Financial Statements


                             ST. JOHN KNITS, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE> 
<CAPTION> 
                                                                                    August 2,            November 2,  
                                                                                      1998                  1997     
                                                                               ----------------       --------------- 
                                                                                  (unaudited)                       
<S>                                                                            <C>                    <C> 
                                        ASSETS
                                        ------
Current assets:
       Cash and cash equivalents.............................................      $ 12,957,572          $ 14,266,564
       Investments...........................................................         2,502,036             2,351,765 
       Accounts receivable, net..............................................        32,455,301            36,572,423 
       Inventories...........................................................        47,246,307            30,736,980 
       Deferred income tax benefit...........................................         6,293,961             5,793,961 
       Prepaid income taxes..................................................         1,092,178                    -- 
       Other.................................................................         2,355,174             2,591,742 
                                                                                  -------------          ------------ 
            Total current assets.............................................       104,902,529            92,313,435 
                                                                                  -------------          ------------ 
Property and equipment:                                                                                               
       Machinery and equipment...............................................        42,497,987            35,903,659 
       Leasehold improvements................................................        28,232,022            25,351,868 
       Buildings.............................................................        15,065,572            11,572,917 
       Furniture and fixtures................................................         6,020,739             5,434,754 
       Land..................................................................         5,226,857             3,536,606 
       Construction in progress..............................................         4,659,946             4,225,573 
                                                                                  -------------          ------------ 
                                                                                    101,703,123            86,025,377
       Less-Accumulated depreciation and amortization........................        35,638,987            28,222,633
                                                                                  -------------          ------------
                                                                                     66,064,136            57,802,744
                                                                                  -------------          ------------
Other assets.................................................................         3,298,536             3,787,396
                                                                                  -------------          ------------ 
                                                                                   $174,265,201          $153,903,575
                                                                                  =============          ============
                                                                                                         
                         LIABILITIES AND SHAREHOLDERS' EQUITY                                            
                         ------------------------------------                                            
Current liabilities:                                                                                     
       Accounts payable......................................................      $  7,451,963          $ 10,034,396  
       Accrued expenses......................................................         8,858,767            10,504,934  
       Income taxes payable..................................................                --             2,081,242  
                                                                                  -------------          ------------  
            Total current liabilities........................................        16,310,730            22,620,572  
                                                                                  -------------          ------------  
Minority interest............................................................           651,100               602,910  
                                                                                  -------------          ------------  
Shareholders' equity:                                                                                                  
       Preferred Stock, no par value: Authorized2,000,000 shares, issued                                 
        and outstanding-none                                                                 --                    --
       Common Stock, no par value: Authorized40,000,000 shares, issued                                                      
        and outstanding 16,743,884 and 16,634,548 shares, respectively.......           502,799               502,799  
       Additional paid-in capital............................................        20,762,509            18,929,541  
       Cumulative translation adjustment....................................           (267,735)              (19,351)
       Retained earnings.....................................................       136,305,798           111,267,104  
                                                                                  -------------          ------------   
                                                                                    157,303,371           130,680,093
                                                                                  -------------          ------------
                                                                                   $174,265,201          $153,903,575
                                                                                  =============          ============ 
</TABLE>

                            See accompanying notes.

                                       2
<PAGE>
 
                             ST. JOHN KNITS, INC.
                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
 
                                                               Thirteen Weeks Ended                 Thirty-Nine Weeks Ended 
                                                           ------------------------------        ------------------------------
                                                            August 2,          August 3,          August 2,           August 3,
                                                              1998               1997               1998               1997
                                                           -----------        -----------        ------------      ------------
                                                                     (unaudited)                            (unaudited)
<S>                                                        <C>                <C>                <C>               <C>
Net sales............................................      $67,726,764        $54,810,646        $206,293,273      $170,548,472
Cost of sales........................................       28,298,475         22,647,956          86,210,644        70,759,344 
                                                           -----------        -----------        ------------      ------------ 
Gross profit.........................................       39,428,289         32,162,690         120,082,629        99,789,128 
Selling, general and administrative expenses.........       27,466,146         20,125,485          76,857,692        60,570,472 
                                                           -----------        -----------        ------------      ------------ 
Operating income.....................................       11,962,143         12,037,205          43,224,937        39,218,656 
Other income.........................................          467,849            204,539           1,100,080           659,250 
                                                           -----------        -----------        ------------      ------------ 
Income before income taxes...........................       12,429,992         12,241,744          44,325,017        39,877,906 
Income taxes.........................................        5,105,041          5,040,539          18,033,451        16,419,728 
                                                           -----------        -----------        ------------      ------------ 
Net income...........................................      $ 7,324,951        $ 7,201,205        $ 26,291,566      $ 23,458,178 
                                                           ===========        ===========        ============      ============ 
Net income per common share - basic..................      $      0.44        $      0.43        $       1.57      $       1.41 
                                                           ===========        ===========        ============      ============ 
Net income per common share - diluted................      $      0.43        $      0.42        $       1.53      $       1.37 
                                                           ===========        ===========        ============      ============ 
Dividends per share..................................      $     0.025        $     0.025        $      0.075      $      0.075 
                                                           ===========        ===========        ============      ============ 
Shares used in the calculation of net income per                                                                                 
 share-basic.........................................       16,741,455         16,603,906          16,707,206        16,609,280  
Shares used in the calculation of net income per           ===========        ===========        ============      ============  
 share-diluted.......................................       17,154,662         17,136,718          17,133,421        17,129,964  
                                                           ===========        ===========        ============      ============  
</TABLE> 

                                 See accompanying notes.

                                       3
<PAGE>
 
                             ST. JOHN KNITS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                         Thirty-Nine 
                                                                                         Weeks Ended 
                                                                         -------------------------------------------
                                                                         August 2, 1998               August 3, 1997  
                                                                         --------------               --------------  
                                                                                         (unaudited)
<S>                                                                      <C>                          <C>  
Cash flows from operating activities:
   Net income......................................................        $ 26,291,566               $    23,458,178 
   Adjustments to reconcile net income to net cash                                                                      
    provided by operating activities:                                                                                   
       Depreciation and amortization...............................           8,275,770                     6,516,819 
       Increase in deferred income tax benefit.....................            (500,000)                           --
       (Gain) loss on disposal of property and equipment...........             478,275                        (4,603)
       Partnership losses..........................................             252,113                       263,578 
       Minority interest in income of consolidated subsidiaries....              48,190                            -- 
       Decrease in accounts receivable.............................           4,117,122                        33,703 
       Increase in inventories.....................................         (16,509,327)                   (4,704,146)
       Increase in prepaid income taxes............................          (1,092,178)                           --
       (Increase) decrease in other current assets.................             236,568                      (436,775)
       Increase in other assets....................................             (48,414)                     (688,015)
       Decrease in accounts payable................................          (2,582,433)                      (93,783)
       Decrease in accrued expenses................................          (1,230,303)                   (1,781,181)
       Decrease in income taxes payable............................          (2,081,242)                   (2,037,101)
                                                                         --------------               ---------------
           Net cash provided by operating activities...............          15,655,707                    20,526,674 
                                                                         --------------               --------------- 
Cash flows from investing activities:                                                                                
       Proceeds from sale of property and equipment................              10,499                       222,932 
       Purchase of property and equipment..........................         (16,799,772)                  (13,564,230)
       Purchase of short-term investments..........................            (150,271)                           --
       Sale of short-term investments..............................                  --                     1,895,997 
       Capital distributions from partnership......................              58,996                            -- 
       Capital contributions to partnership........................                  --                       (17,562)
                                                                         --------------               --------------- 
           Net cash used in investing activities...................         (16,880,548)                  (11,462,863)
                                                                         --------------               ---------------
Cash flows from financing activities:                                                                                
       Issuance of common stock....................................           1,832,968                       719,942 
       Dividends paid..............................................          (1,668,735)                   (1,661,022)
                                                                         --------------               ---------------
           Net cash provided by (used in) financing activities.....             164,233                      (941,080)
                                                                         --------------               ---------------
Effect of exchange rate changes....................................            (248,384)                           --
                                                                         --------------               ---------------
Net increase (decrease)  in cash and cash equivalents..............          (1,308,992)                    8,122,731
Beginning balance, cash and cash equivalents.......................          14,266,564                     6,186,057 
                                                                         --------------               --------------- 
Ending balance, cash and cash equivalents..........................      $   12,957,572               $    14,308,788 
                                                                         ==============               =============== 
Supplemental disclosures of cash flow information:                                                                   
       Cash received during the thirty-nine weeks for interest           $    1,115,220               $       723,936 
        income.....................................................      ==============               =============== 
       Cash paid during the thirty-nine weeks for:                                                                   
           Interest expense........................................      $          338               $         9,454
                                                                         ==============               ===============
           Income taxes............................................      $   20,910,962               $    17,995,223 
                                                                         ==============               ===============  
</TABLE>

                            See accompanying notes.

                                       4
<PAGE>
 
                             ST.  JOHN KNITS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)


1. Basis of Presentation

     The accompanying unaudited consolidated financial statements of St. John
Knits, Inc. and its subsidiaries (collectively referred to herein as "the
Company") reflect all adjustments (which include only normal recurring
adjustments) considered necessary to present fairly the financial position,
results of operations and cash flows of the Company for the periods presented.
It is suggested that the accompanying unaudited consolidated financial
statements and footnotes thereto be read in conjunction with the financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended November 2, 1997 as filed with the Securities and Exchange
Commission on January 30, 1998.

     The results of operations for the periods presented are not necessarily
indicative of the operating results that may be expected for the year ending
November 1, 1998.

2. Summary of Accounting Policies

 a. Company Operations

     The Company is a leading designer, manufacturer and marketer of women's
clothing and accessories.  The Company's products are distributed primarily
through specialty retailers and Company owned retail boutiques.  All
intercompany and interdivisional transactions and accounts have been eliminated.

 b. Definition of Fiscal Year

     The Company utilizes a 52-53 week fiscal year whereby the fiscal year ends
on the Sunday nearest to October 31.  The quarters also end on the Sunday
nearest the end of the quarter, which accordingly were August 2, 1998 and August
3, 1997.

3. Dividends

     The Company declared a quarterly dividend of $0.025 per share on June 8,
1998 for all shareholders of record on June 25, 1998.  The dividend was paid on
July 30, 1998.  On September 9, 1998, the Company declared another quarterly
cash dividend of $0.025 per share to be paid on October 30, 1998 to shareholders
of record on September 25, 1998.

4. Earnings Per Share

     The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128 "Earnings Per Share" during the first quarter of fiscal 1998.  Under the
new requirement, primary earnings per share was replaced with basic earnings per
share.  Basic earnings per share excludes the dilutive effect of common stock
equivalents, including stock options.  Diluted earnings per share includes all
dilutive items. Dilution is calculated based upon the treasury stock method,
which assumes that all dilutive securities were exercised and that the proceeds
received were applied to repurchase outstanding shares at the average market
price during the period.

     As a result of the adoption of SFAS No. 128, primary earnings per share for
the third quarter and first nine months of fiscal 1997 were restated from $0.42
to $0.43 and from $1.37 to $1.41, respectively, to reflect the change to basic
earnings per share. The difference between basic and diluted earnings per share,
as shown on the Company's Consolidated Statements of Income, is due to the
dilutive effect of stock options outstanding at August 2, 1998 and August 3,
1997.

                                       5
<PAGE>
 
5. Inventories

     A summary of the components of inventories is as follows:

<TABLE>
<CAPTION>
                                           August 2,         November 2,
                                             1998                1997
                                          -----------        -----------
        <S>                               <C>                <C>
        Raw  materials.............       $14,543,134        $10,362,158 
        Work in process............        11,155,329          6,451,053
        Finished products..........        21,547,844         13,923,769       
                                          -----------        -----------
                                          $47,246,307        $30,736,980      
                                          ===========        ===========      
</TABLE>

                                       6
<PAGE>
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Results of Operations

     The following table is derived from the Company's Consolidated Statements
of Income and sets forth, for the periods indicated, the results of operations
as a percentage of net sales:

<TABLE>
<CAPTION>
                                                    Percent of Net Sales               Percent of Net Sales
                                                   Thirteen Weeks Ended             Thirty-Nine Weeks Ended
                                                    ("Third Quarter")                    ("Nine Months")
                                                  ----------------------         ---------------------------
                                                  August 2,    August 3,         August 2,         August 3,
                                                    1998         1997              1998              1997
                                                  ---------    ---------         ---------         ---------
<S>                                               <C>          <C>                <C>              <C>
Net sales.....................................        100.0%        100.0%           100.0%            100.0%  
Cost of sales.................................         41.8          41.3             41.8              41.5      
                                                      -----         -----            -----             -----      
Gross profit..................................         58.2          58.7             58.2              58.5      
Selling, general and administrative expenses..         40.6          36.7             37.3              35.5      
                                                      -----         -----            -----             -----      
Operating income..............................         17.6          22.0             20.9              23.0      
Other income..................................          0.7           0.4              0.5               0.4      
                                                      -----         -----            -----             -----      
Income before income taxes....................         18.3          22.4             21.4              23.4      
Income taxes..................................          7.5           9.2              8.7               9.6      
                                                      -----         -----            -----             -----      
Net income....................................         10.8%         13.2%            12.7%             13.8%     
                                                      =====         =====            =====             =====
</TABLE>

                                       7
<PAGE>
 
Third Quarter Fiscal 1998 Compared to Third Quarter Fiscal 1997

     Net sales for the third quarter of fiscal 1998 increased by $12,916,000, or
23.6% over the third quarter of fiscal 1997.  This increase was principally
attributable to (i) an increase in sales to existing domestic retail customers
of approximately $7,771,000, (ii) an increase in sales by Company owned retail
stores of approximately $2,352,000, due in part to the increased sales of the
New York boutique, the expansion of the Las Vegas boutique, which was completed
in May 1998, and the addition of one retail outlet store since the beginning of
the third quarter of fiscal 1997, (iii) sales of approximately $1,505,000
recorded by Amen Wardy Home Stores, LLC, a majority owned subsidiary that
commenced operations during the fourth quarter of fiscal 1997 ("Amen Wardy Home
Stores") and (iv) an increase in international sales of $1,288,000, which
includes the sales of St. John Company, Ltd., a majority owned subsidiary that
commenced operations in Japan during the fourth quarter of fiscal 1997 ("St.
John Company, Ltd."). Net sales increased primarily as a result of increased
unit sales of various product lines.

     Gross profit for the third quarter of fiscal 1998 increased by $7,266,000,
or 22.6% as compared with the third quarter of fiscal 1997, and decreased as a
percentage of net sales to 58.2% from 58.7%. Gross profit as a percentage of net
sales increased slightly from the third quarter of fiscal 1997 to the third
quarter of fiscal 1998, after adjusting for the increase in gross profit
recorded during the third quarter of fiscal 1997 for the change in the method of
accounting for inventory from LIFO to FIFO of $363,000. The Company incurred
costs related to overtime and the training of new employees during the third
quarter of fiscal 1998, which were offset by an increase in the number of
garments being produced and sold without a corresponding increase in certain
production costs, due in part to the fixed nature of these costs.

     Selling, general and administrative expenses for the third quarter of
fiscal 1998 increased by $7,341,000, or 36.5% over the third quarter of fiscal
1997, and increased as a percentage of net sales to 40.6% from 36.7%. This
increase was primarily due to (i) costs incurred related to the start-up of the
new home furnishing division, Amen Wardy Home Stores, (ii) an increase in
corporate legal expenses related to the protection of the Company's trademarks,
(iii) an increase in selling expenses due to the Company's expansion of its
sales and marketing team, (iv) an increase in selling expenses due to increased
costs of promoting and marketing its products to its major customers and (v)
costs incurred in connection with the completion and start-up of the jewelry
manufacturing facility in Mexico and the acquisition of additional warehouse
space.

     Operating income for the third quarter of fiscal 1998 decreased by $75,000,
or 0.6% over the third quarter of fiscal 1997.  Operating income as percentage
of net sales decreased to 17.6% from 22.0% during the same period.  This
decrease in the operating income as a percentage of net sales was due to the
decrease in the gross profit margin and the increase in selling, general and
administrative expenses as a percentage of net sales.

First Nine Months Fiscal 1998 Compared to First Nine Months Fiscal 1997

     Net sales for the first nine months of fiscal 1998 increased by
$35,745,000, or 21.0% over the first nine months of fiscal 1997. This increase
was principally attributable to (i) an increase in sales to existing domestic
retail customers of approximately $19,473,000, (ii) an increase in sales by
Company owned retail stores of approximately $7,664,000, due in part to the
increased sales of the New York boutique and the addition of three retail outlet
stores since the beginning of fiscal 1997, (iii) sales by

                                       8
<PAGE>
 
Amen Wardy Home Stores of approximately $4,421,000 and (iv) an increase in
international sales of $4,187,000, which includes the sales of St. John Company,
Ltd. Net sales increased primarily as a result of increased unit sales of
various product lines.

     Gross profit for the first nine months of fiscal 1998 increased by
$20,294,000, or 20.3% as compared with the first nine months of fiscal 1997, and
decreased as a percentage of net sales to 58.2% from 58.5%. This decrease was
primarily due to costs incurred for overtime and the training of new employees,
which were partially offset by an increase in the number of garments being
produced and sold without a corresponding increase in certain production costs,
due in part to the fixed nature of these costs.

     Selling, general and administrative expenses for the first nine months of
fiscal 1998 increased by $16,287,000, or 26.9% over the first nine months of
fiscal 1997, and increased as a percentage of net sales to 37.3% from 35.5%.
This increase was primarily due to (i) costs incurred related to the start-up of
the new home furnishing division, Amen Wardy Home Stores, (ii) an increase in
selling expenses due to the Company's expansion of its sales and marketing team
and (iii) the closure of the retail boutique located in Aspen during the second
quarter of fiscal 1998.

     Operating income for the first nine months of fiscal 1998 increased by
$4,006,000 or 10.2% over the first nine months of fiscal 1997.  Operating income
as percentage of net sales decreased to 20.9% from 23.0% during the same period.
This decrease in the operating income as a percentage of net sales was due to
the decrease in the gross profit margin and the increase in selling, general and
administrative expenses as a percentage of net sales.

Liquidity and Capital Resources

     The Company's primary cash requirements are to fund the Company's working
capital needs, primarily inventory and accounts receivable, and for the purchase
of property and equipment.  During the first nine months of fiscal 1998, cash
provided by operating activities was $15,656,000.  Cash provided by operating
activities was primarily generated by net income and a decrease in accounts
receivable, while cash used in operating activities was primarily used to fund
the increase in inventories and the decreases in accounts payable, income taxes
payable and accrued expenses. Cash used in investing activities was $16,881,000
during the first nine months of fiscal 1998. The principal use of cash in
investing activities was for the purchase of property and construction of
improvements for the jewelry and garment hardware manufacturing facility in
Mexico, the purchase of 34 computerized knitting machines, and the construction
of leasehold improvements for a new boutique location in Las Vegas.

     The Company anticipates purchasing property and equipment of approximately
$5,000,000 during the remainder of fiscal 1998.  The estimated $5,000,000 will
be used principally for the purchase of 12 computerized knitting machines and
the construction of leasehold improvements for the new retail boutique location
at South Coast Plaza.

     As of August 2, 1998, the Company had approximately $88,592,000 in working
capital and $15,460,000 in cash and marketable securities.  The Company's
principal source of liquidity is internally generated funds.  The Company also
has a $25,000,000 bank line of credit ("Line of Credit") which expires on March
1, 2000.  The Line of Credit is unsecured and borrowings thereunder bear
interest at the Company's choice of the bank's reference rate minus 0.25% (8.25%
at August 2, 1998) or an offshore rate plus 1.5%.  The availability of funds
under the Line of Credit is subject to the Company's continued compliance with
certain covenants, including a covenant that sets the 

                                       9
<PAGE>
 
maximum amount the Company can spend annually on the acquisition of fixed or
capital assets, and certain financial covenants, including a minimum quick
ratio, a minimum tangible net worth and a maximum ratio of total liabilities to
tangible net worth. The Company may not declare or pay any dividends if the
Company fails to perform its obligations under, or fails to meet the conditions
of, the Line of Credit or if payment of the dividend creates a default under the
Line of Credit. As of August 2, 1998, no amounts were outstanding under the Line
of Credit. The Company invests its excess funds primarily in a money market
fund, investment grade commercial paper and tax exempt municipal bonds.

     The Company believes it will be able to finance its working capital and
capital expenditure requirements on both a short-term and long-term basis with
internally generated funds.

     The Company declared a quarterly cash dividend of $0.025 per share on June
8, 1998 which was paid on July 30, 1998 to shareholders of record on June 25,
1998.  On September 9, 1998, the Company declared another quarterly cash
dividend of $0.025 per outstanding share to be paid on October 30, 1998 to
shareholders of record on September 25, 1998.  Future dividends by the Company
remain subject to limitations under applicable law and other factors the Board
of Directors deems relevant, including results of operations, financial
condition and capital requirements.


Year 2000

     The Company uses various types of technology in the operations of its
business. Some of this technology incorporates date identification functions;
however, many of these date identification functions were developed to use only
two digits to identify a year. These date identification functions, if not
corrected, could cause their relating technology to fail or create erroneous
results by or at the year 2000.

     The Company is continuing to assess the impact of Year 2000 issues on its
information and non-information technology systems. As part of this process, the
Company retained the services of an independent contractor with experience in
analyzing and addressing Year 2000 issues. In addition, the Company has
developed a five-phased plan with respect to the Year 2000 readiness of its
internal technology systems. This plan involves (i) creating awareness inside
the Company of Year 2000 issues, (ii) analyzing the Company's Year 2000 state of
readiness, (iii) correcting systems or acquiring new ones as needed, (iv)
testing the corrected or new systems and (v) incorporating the corrected or new
systems into the Company's business. The Company is currently finalizing the
assessment phase of this plan, and has moved into the correction and testing
phases with respect to those technology systems that have been identified by the
Company as having Year 2000 issues. The Company anticipates substantially
completing the implementation of this plan by the end of calendar 1998; however,
the Company may revise the estimated date of completion of this plan based upon
any unforeseen delays in implementing such plan.

     The Company has also developed a plan to address the impact that Year 2000
issues of its vendors and customers may have on the Company's operations. The
Company is currently finalizing its evaluation of the materiality of its vendor
and customer relationships and has initiated communications with certain of its
significant vendors and customers to identify and minimize disruptions to the
Company's operations and to assist in resolving Year 2000 issues. The Company
anticipates substantially completing the implementation of this plan by the end
of calendar 1998; however, there can be no assurances that such plan will be
completed by the estimated date or that the systems and products of other
companies on which the Company relies will not have an adverse effect on the
Company's business, operations or financial condition.

                                       10
<PAGE>
 

     As of August 2, 1998, the Company had incurred approximately $150,000 in
costs related to the Year 2000 issue. The Company believes that additional costs
related to the Year 2000 issue will not be material to the Company's business,
operations or financial condition. However, estimates of Year 2000 related costs
are based on numerous assumptions and there is no certainty that estimates will
be achieved and actual costs could be materially greater than anticipated. The
Company anticipates that it will fund its additional Year 2000 costs from
current working capital.


Forward Looking Statements

     This Quarterly Report on Form 10-Q contains certain statements which
describe the Company's beliefs concerning future business conditions and the
outlook for the Company based on currently available information.  Wherever
possible the Company has identified these "forward looking" statements (as
defined in Section 21E of the Securities Exchange Act of 1934) by words such as
"anticipates," "believes," "estimates," "expects" and other similar expressions.
The forward looking statements and associated risks set forth herein may include
or relate to: (i) the Company's anticipated purchases of property and equipment
during the remainder of fiscal 1998, (ii) the Company's belief that it will be
able to fund its working capital and capital expenditure requirements with
internally generated funds, (iii) the Company's anticipated completion of its
Year 2000 readiness plans and (iv) the costs and source of funds to address the
Company's Year 2000 issues.

     These forward looking statements are subject to risks, uncertainties and
other factors which could cause the Company's actual results, performance or
achievements to differ materially from those expressed in, or implied by, these
statements.  These risks, uncertainties and other factors include, but are not
limited to, the following: (i) the financial strength of the retail industry and
the level of consumer spending for apparel and accessories, (ii) the Company's
ability to develop, market and sell its products, (iii) increased competition
from other manufacturers and retailers of women's clothing and accessories, (iv)
general economic conditions and (v) any unanticipated problems or delays in the
completion by the Company to become Year 2000 ready or the failure of the
Company's vendors or customers to do so.

                                       11
<PAGE>
 
                           PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

  (a) Exhibits required by Item 601 of Regulation S-K.

          See "Exhibit Index."

  (b) Reports on Form 8-K.

          None.

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<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.


September 9, 1998                      ST. JOHN KNITS, INC.

                                        By:    /s/ Bob Gray
                                           --------------------------------
                                                   Bob Gray
                                           Chairman of the Board and
                                           Chief Executive Officer

                                        By: /s/  Roger G. Ruppert
                                           --------------------------------
                                                 Roger G. Ruppert
                                           Senior Vice President - Finance,
                                               Chief Financial Officer
                                            (Principal Financial Officer)

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<PAGE>
 
                                 EXHIBIT INDEX
<TABLE> 
<CAPTION> 
Exhibit                                                                              Sequentially  
Number                            Description of Exhibit                             Numbered Page
-------                           ----------------------                             -------------
<C>             <S>                                                                  <C> 
  10.1          Lease Agreement dated June 5, 1998 between the Company and South
                Coast Plaza, a California General Partnership (South Coast Plaza
                Boutique)
        
  10.2          Wool Yarn Purchase Agreement dated July 29, 1998 between the
                Company and the Kent Manufacturing Company
        
  10.3          Amended and Restated Employment Agreement dated as of July 13,
                1998 between the Company and Robert E. Gray
        
  10.4          Employment Agreement dated as of July 14, 1998 between the Company
                and Marie St. John Gray
        
  10.5          Employment Agreement dated as of July 14, 1998 between the Company
                and Kelly A. Gray
        
  10.6          Employment Agreement dated as of July 14, 1998 between the Company
                and Roger G. Ruppert
        
  10.7          Employment Agreement dated as of July 14, 1998 between the Company
                and David C. Frankel
        
  10.8          Employment Agreement dated as of July 14, 1998 between the Company
                and Karla R. Guyer
        
  10.9          Employment Agreement dated as of July 14, 1998 between the Company
                and Bruce Fetter
        
  10.10         Amendment No. 6 to Business Loan Agreement between the Company and
                Bank of America National Trust and Savings Association
        
  10.11         Amendment No. 7 to Business Loan Agreement between the Company and
                Bank of America National Trust and Savings Association
        
  27.1          Financial Data Schedule
</TABLE>

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