<PAGE>
 
        ===============================================================
                      SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C.   20549

                          ---------------------------

                                   FORM 10-Q

(Mark One)

 X   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
---                                                                             
     Act of 1934
FOR THE PERIOD ENDED JULY 4, 1998

                                      OR

___  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

                       COMMISSION FILE NUMBER:  0-21499

                            SPECIALTY CATALOG CORP.
            (Exact name of registrant as specified in its charter)


 
           DELAWARE                                     04-3253301
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
 Incorporation or Organization)


                               21 BRISTOL DRIVE
                       SOUTH EASTON, MASSACHUSETTS 02375
                   (Address of principal executive offices)

                        TELEPHONE NUMBER (508) 238-0199
             (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___
                    -                          

     As of August 1, 1998, there were 5,057,001 shares of the Registrant's
Common Stock outstanding.

================================================================================
<PAGE>
 
                            SPECIALTY CATALOG CORP.


                                     INDEX



                         PART I.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                        Page No.
<S>                                                                     <C> 
ITEM 1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS
          OF JULY 4, 1998 AND JANUARY 3, 1998, FOR THE
          THREE MONTHS ENDED JULY 4, 1998 AND JUNE 28,
          1997 AND FOR THE SIX MONTHS ENDED JULY 4, 1998 AND
          JUNE 28, 1997
 
          Condensed Consolidated Statements of Operations                  3
 
          Condensed Consolidated Balance Sheets                            4
 
          Condensed Consolidated Statements of Cash Flows                  5-6
 
          Notes to Condensed Consolidated Financial Statements             7-9
 
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS                              10-14
 

                          PART II.  OTHER INFORMATION

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS              14
 
ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K                                 14
 
          SIGNATURES                                                       15
</TABLE>

                                       2
<PAGE>
 
PART I.   FINANCIAL STATEMENTS
ITEM 1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                            SPECIALTY CATALOG CORP.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (unaudited)

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED                SIX MONTHS ENDED
 
                                       JULY 4, 1998    JUNE 28, 1997    JULY 4, 1998    JUNE 28, 1997
                                       -------------   ---------------  --------------  ---------------
<S>                                    <C>             <C>              <C>             <C>
Net sales                                $13,263,194     $11,273,442      $26,571,758     $22,246,695
          
Cost of sales (including buying,
 occupancy and order fulfillment           4,745,763       3,657,656        9,579,016       7,444,103
 costs)                                  -----------     -----------      -----------     -----------
 
Gross profit                               8,517,431       7,615,786       16,992,742      14,802,592
 
Selling, general & administrative                                                                     
 expense                                   6,371,392       5,597,511       15,284,684      13,444,106 
                                         -----------     -----------      -----------     ----------- 
 
Income from operations                     2,146,039       2,018,275        1,708,058       1,358,486
 
Interest expense, net                        214,882         174,201          425,235         440,973
                                         -----------     -----------      -----------     -----------
 
Income before income taxes and
 extraordinary item                        1,931,157       1,844,074        1,282,823         917,513
 
 Income tax provision                        796,246         755,980          522,965         385,356
                                         -----------     -----------      -----------     -----------
 
Income before extraordinary item           1,134,911       1,088,094          759,858         532,157
 
Extraordinary item - loss on early
extinguishment of debt (net of           
 income tax benefit of $41,372 and
 $149,083 for the three and six
 months ended June 28, 1997,                                                                         
 respectively)                                   ---          57,132              ---         218,699
                                         -----------     -----------      -----------     -----------

 Net income                              $ 1,134,911     $ 1,030,962      $   759,858     $   313,458
                                         ===========     ===========      ===========     ===========
 
Earnings per share - Basic:
 
  Income before extraordinary item       $      0.22     $      0.22      $      0.15     $      0.11
 
  Loss on extraordinary item                     ---          ($0.01)             ---          ($0.04)
                                         -----------     -----------      -----------     -----------
 
  Net income per share                   $      0.22     $      0.21      $      0.15     $      0.07
                                         ===========     ===========      ===========     ===========
 
  Weighted average shares outstanding      5,057,001       4,929,096        5,049,693       4,818,297
                                         ===========     ===========      ===========     ===========
 
Earnings per share - Diluted:
 
  Income before extraordinary item       $      0.21     $      0.20      $      0.14     $      0.10
 
  Loss on extraordinary item                     ---          ($0.01)             ---          ($0.04)
                                         -----------     -----------      -----------     -----------
 
  Net income per share                   $      0.21     $      0.19      $      0.14     $      0.06
                                         ===========     ===========      ===========     ===========
 
  Weighted average shares outstanding      5,529,354       5,534,395        5,524,650       5,513,357
                                         ===========     ===========      ===========     ===========
</TABLE>

           See notes to condensed consolidated financial statements.

                                       3
<PAGE>
 
                            SPECIALTY CATALOG CORP.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (unaudited)

<TABLE>
<CAPTION>
                       ASSETS                              JULY 4, 1998         JANUARY 3, 1998
                                                           ------------         ---------------    
<S>                                                        <C>                  <C>
Current assets:
    Cash and cash equivalents                              $    67,042          $   603,840       
    Accounts receivable, net                                 1,585,677            1,123,176       
    Inventories                                              5,770,502            6,258,928       
    Prepaid expenses                                         3,805,301            3,344,675       
                                                           -----------          -----------       
        Total current assets                                11,228,522           11,330,619       
                                                           -----------          -----------       
Property, plant and equipment, net                           2,799,773            2,162,803       
                                                           -----------          -----------       
Intangible assets, net                                       3,800,637            3,942,547       
                                                           -----------          -----------       
Deferred income taxes                                        5,060,374            5,560,050       
                                                           -----------          -----------       
Other assets                                                   239,726              297,086       
                                                           -----------          -----------       
        Total assets                                       $23,129,032          $23,293,105       
                                                           ===========          ===========       
               LIABILITIES AND STOCKHOLDERS' EQUITY                                                              
Current liabilities:                                                                              
    Accounts payable and accrued expenses                  $ 2,575,572          $ 3,123,100       
    Liabilities to customers                                   947,750              996,943       
    Line of credit                                           4,010,915            3,784,952       
    Income taxes                                                   ---              282,329       
    Current portion of long-term debt                        1,581,459            1,567,666       
    Deferred purchase price                                    494,130              492,510       
                                                           -----------          -----------       
        Total current liabilities                            9,609,826           10,247,500       
                                                           -----------          -----------       
Long-term debt                                               4,652,331            5,012,092       
Other long-term liabilities                                    158,376              167,755       
Commitments and contingencies                                                                     
Stockholders' equity:                                                                             
    Common stock                                                50,570               50,220       
    Additional paid-in capital                              15,916,252           15,838,826       
    Deferred compensation                                      (57,113)             (65,862)      
    Accumulated other comprehensive income                        (147)               3,495       
    Accumulated deficit                                     (7,201,063)          (7,960,921)      
                                                           -----------          -----------       
        Total stockholders' equity                           8,708,499            7,865,758       
                                                           -----------          -----------       
Total liabilities and stockholders' equity                 $23,129,032          $23,293,105       
                                                           ===========          ===========       
</TABLE>

           See notes to condensed consolidated financial statements.

                                       4
<PAGE>
 
                            SPECIALTY CATALOG CORP.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                  SIX MONTHS ENDED
                                                                       JULY 4, 1998              JUNE 28, 1997
                                                                       ------------              -------------      
<S>                                                                    <C>                       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                               $ 759,858                 $   313,458
Adjustments to reconcile net income to net cash provided by                          
 operating activities:                                                     
    Depreciation and amortization                                          356,563                     140,716
    Deferred income taxes                                                  499,676                     206,008
    Amortization of deferred compensation                                    8,749                       8,750
    Extraordinary loss due to early extinguishment of debt                     ---                      98,504
    Changes in operating assets and liabilities:                                     
        Accounts receivable                                               (462,088)                   (202,128)
        Inventories                                                        492,589                     108,801
        Prepaid expenses                                                  (460,626)                  1,490,512
        Other assets                                                        50,788                      52,198
        Accounts payable and accrued expenses                             (550,675)                   (842,072)
        Liabilities to customers                                           (49,193)                    166,028
        Income taxes                                                      (215,305)                   (107,019)
        Other long-term liabilities                                         25,002                         ---
                                                                         ---------                 -----------
Net cash provided by operating activities                                  455,338                   1,433,756
                                                                         ---------                 -----------
CASH FLOWS FROM INVESTING ACTIVITIES:                                                
    Purchases of property, plant and equipment                            (829,910)                   (300,496)
                                                                         ---------                 -----------
Net cash used in investing activities                                     (829,910)                   (300,496)
                                                                         ---------                 -----------
CASH FLOWS FROM FINANCING ACTIVITIES:                                                
    Issuance of common stock                                                10,752                         ---
    Repayment of capital lease obligation                                  (34,381)                        ---
    Proceeds from line of credit, net                                      211,682                   2,423,834
    Repayment of long term debt                                           (351,717)                        ---
    Issuance of long term debt                                                 ---                   5,000,000
    Repayment of subordinated debt                                             ---                  (4,224,683)
    Repayment of BNP debt                                                      ---                  (5,400,000)
                                                                         ---------                 -----------
Net cash used in financing activities                                     (163,664)                 (2,200,849)
                                                                         ---------                 -----------
Effect of exchange rate changes on cash and cash equivalents                 1,438                         ---
                                                                         ---------                 -----------
Decrease in cash and cash equivalents                                     (536,798)                 (1,067,589)
Cash and cash equivalents, beginning of period                             603,840                   1,392,344
                                                                         ---------                 -----------
Cash and cash equivalents, end of period                                 $  67,042                 $   324,755
                                                                         =========                 ===========
</TABLE>

           See notes to condensed consolidated financial statements.

                                       5
<PAGE>
 
                            SPECIALTY CATALOG CORP.
          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                  (unaudited)

SUMMARY OF NONCASH TRANSACTIONS:
 
     During the six months ended July 4, 1998, an officer of the Company
exercised 35,000 stock options for which the Company recorded a deduction in its
income tax payable and an increase in additional paid in capital of $67,024.

     In April 1997, $495,000 of junior subordinated debt and $5,000 of accrued
interest was converted into $2,653 of common stock and $497,343 of additional
paid-in capital as a result of a cashless exercise of warrants.

     In March 1997, $131,146 of note receivable from a stockholder was offset
against the portion of the subordinated notes owed to that stockholder.



           See notes to condensed consolidated financial statements.

                                       6
<PAGE>
 
                            SPECIALTY CATALOG CORP.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)


1.   Basis of Presentation

     These unaudited condensed consolidated financial statements should be read
in conjunction with the Annual Report on Form 10-K of Specialty Catalog Corp.
(the "Company") for the fiscal year ended January 3, 1998, and the consolidated
financial statements and footnotes included therein.  Certain information and
footnote disclosures normally included in the consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the Securities and Exchange Commission rules
and regulations.  The results of operations for the three and six months ended
July 4, 1998 are not necessarily indicative of the results for the entire fiscal
year ending January 2, 1999.

     The financial statements for the three and six months ended July 4, 1998
and June 28, 1997 are unaudited but include, in the Company's opinion, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the results for the periods presented.


2.   Accounting Policies

     The accounting policies underlying the financial statements are those set
forth in Note 1 of the financial statements included in the Company's Annual
Report on Form 10-K for the year ended January 3, 1998.

     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which became effective for the Company for periods beginning after
December 15, 1997.  SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements.  SFAS No. 130
requires that a company (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of the balance sheet.  Reclassification of
financial statements for earlier periods provided for comparative purposes is
required.  The Company adopted this statement during the first quarter of 1998.
Comprehensive income consists solely of accumulated foreign currency translation
adjustments in connection with the Company's United Kingdom subsidiary.

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
became effective for the Company for periods beginning after December 15, 1997.
SFAS No. 131 establishes standards for the way public companies report selected
information about operating segments in annual financial statements and requires
those companies to report selected information about segments in interim
financial reports issued to shareholders.  It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers.  SFAS No. 131 supersedes SFAS No.14, "Financial Reporting Segments of
a Business Enterprise," but retains the requirement to report information about
major customers.  As required, the Company will adopt SFAS No. 131 in the fourth
quarter of 1998.

                                       7
<PAGE>
 
                            SPECIALTY CATALOG CORP.
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (unaudited)


     In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use".  SOP 98-1
requires that costs incurred in the development of internal use software be
capitalized and amortized over a period of time.  Specifically, external direct
costs of materials and services consumed in developing or obtaining internal use
computer software, payroll and payroll related costs for employees who are
directly associated with and who devote time to the internal use computer
software project, and interest cost incurred when developing computer software
for internal use, should be capitalized. Costs to develop or obtain software
that allows for access or conversion of old data by new systems should also be
capitalized. All other data conversion and all training costs on the internal
use software should be expensed as incurred. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998 with earlier application encouraged in
fiscal years for which annual financial statements have not been issued. The
provisions of SOP 98-1 should be applied to internal use software costs incurred
in those fiscal years for all projects, including those projects in progress
upon initial application of SOP 98-1. Costs incurred prior to initial
application of SOP 98-1, whether capitalized or not, should not be adjusted to
the amounts that would have been capitalized had SOP 98-1 been in effect when
those costs were incurred. The Company adopted SOP 98-1 in the first quarter of
1998. During the three and six months ended July 4, 1998, the Company has
capitalized approximately $87,000 and $217,000, respectively, of costs
associated with a new comprehensive catalog information system, of which
approximately $49,000 and $116,000, respectively, was internal payroll and
payroll related costs.

     In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"),
"Reporting on the Costs of Start-Up Activities".  SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred.  SOP 98-5
had no impact on the Company's financial condition or results of operations for
the three and six months ended July 4, 1998.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."  This statement
is effective for the Company's fiscal year beginning January 3, 1999.  The
Company has not yet determined the effect of adopting SFAS No. 133 on the
consolidated financial statements.


3.   Reconciliation of Basic and Diluted Earnings per Share

     The following data shows the amounts used in computing basic and diluted
earnings per share for income before extraordinary items and the effects of
potentially dilutive securities on the weighted average number of shares
outstanding.

                                       8
<PAGE>
 
                            SPECIALTY CATALOG CORP.
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                              FOR THE THREE                      FOR THE SIX
                                                               MONTHS ENDED                      MONTHS ENDED
                                                      JULY 4, 1998     JUNE 28, 1997    JULY 4, 1998     JUNE 28, 1997
                                                     ---------------  ---------------  ---------------  ---------------
<S>                                                  <C>              <C>              <C>              <C>
   Income before extraordinary item                       $1,134,911       $1,088,094       $  759,858       $  532,157
 
   BASIC EPS                                              $     0.22       $     0.22       $     0.15       $     0.11
                                                          ==========       ==========       ==========       ==========
   Basic weighted average shares outstanding               5,057,001        4,929,096        5,049,693        4,818,297
                                                          ==========       ==========       ==========       ==========
 
   EFFECT OF DILUTIVE SECURITIES
      Stock options                                          472,353          578,073          474,957          587,094
      Warrants                                                   ---           27,226              ---          107,966
                                                          ----------       ----------       ----------       ----------
 
   Income before extraordinary item
      plus assumed conversions                            $1,134,911       $1,088,094       $  759,858       $  532,157
 
   DILUTED EPS                                            $     0.21       $     0.20       $     0.14       $     0.10
                                                          ==========       ==========       ==========       ==========
   Diluted weighted average shares outstanding             5,529,354        5,534,395        5,524,650        5,513,357
                                                          ==========       ==========       ==========       ==========
</TABLE>

  Options to purchase 395,735 shares of common stock ranging in prices from
$6.50 to $6.88 per share were not included in computing diluted EPS for the
three and six months ended July 4, 1998 because their effects were anti-
dilutive.  Options to purchase 2,500 shares of common stock with a price of
$6.88 per share were not included in computing diluted EPS for the three months
ended June 28, 1997 because their effects were anti-dilutive.  There were not
any options during the six months ended June 28, 1997 whose effects were
excluded because they were anti-dilutive.

     Amounts presented for the three and six months ended June 28, 1997 have
been restated for the adoption of FAS 128.

4.   Subsequent Event

     In August 1998, the Company announced a reorganization of certain
management positions. In connection with this reorganization, the Company has
incurred severance and other costs and, accordingly, will record a pre-tax
charge of approximately $450,000 in the third quarter of 1998.

                                       9
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     In addition to the historical information contained herein, this quarterly
Report on Form 10-Q may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, but not limited to, the Company's expected
future revenues, operations and expenditures, estimates of the potential markets
for the Company's products, assessments of competitors and potential
competitors, and projected timetables for the market introduction of the
Company's products.  Investors are cautioned that forward-looking statements are
inherently uncertain.  Actual performance and results of operations may differ
materially from those projected or suggested in the forward-looking statements
due to certain risks and uncertainties, including, but not limited to, the
following risks and uncertainties: (i) the Company's indebtedness and future
capital requirements, (ii) increasing postal rates, paper prices and media
costs, (iii) limited sources of fiber used to make the Company's products, (iv)
the limited number of suppliers of the Company's products, (v) the Company's
dependence upon foreign suppliers, especially in China, Indonesia and Korea,
(vi) the customary risks of doing business abroad, including fluctuations in the
value of currencies, (vii) the potential development of a cure for hair loss and
cancer treatment improvements, (viii) the effectiveness of the Company's
catalogs and advertising programs, (ix) the Company's competition and (x) the
impact of acquisitions on the Company's prospects. Additional information
concerning certain risks and uncertainties that could cause actual results to
differ materially from those projected or suggested in the forward-looking
statements is contained in the Company's filings with the Commission, including
those risks and uncertainties discussed under the caption "Risk Factors" in the
Company's Form 10-K for the year ended January 3, 1998.  The forward-looking
statements contained herein represent the Company's judgment as of the date of
this Report on Form 10-Q, and the Company cautions readers not to place undue
reliance on such statements.

THREE MONTHS ENDED JULY 4, 1998 COMPARED TO THREE MONTHS ENDED JUNE 28, 1997

     Net sales increased $2.0 million, or 17.7%, from $11.3 million for the
three months ended June 28, 1997 to $13.3 million for the three months ended
July 4, 1998. This increase was due to (i) the addition of $1.3 million in net
sales from Daxbourne, a leading United Kingdom retailer and wholesaler of
women's wigs and hairpieces, which was acquired by the Company in October 1997
and (ii) the continued success of the Company's Paula's Hatbox and Especially
Yours catalogs, which together increased net sales by approximately $800,000 for
the three months ended July 4, 1998 compared to the three months ended June 28,
1997.

     Gross margin dollars increased approximately $900,000, or 11.8%, from $7.6
million for the three months ended June 28, 1997 to $8.5 million for the three
months ended July 4, 1998. The gross margin percentage decreased from 67.6% for
the three months ended June 28, 1997 to 64.2% for the three months ended July 4,
1998.  The decrease in gross margin percentage related primarily to (i) expanded
promotional pricing on several of the Company's wig and hairpiece products,
which resulted in a decrease in the average order size for the three months
ended July 4, 1998 compared to the three months ended June 28, 1997, (ii)
increased sales of hats, accessories and apparel which have lower margins than
wigs and hairpieces and (iii) an increase in freight charges as a result of an
increase in the amount of merchandise air freighted for the three months ended
July 4, 1998 compared to the three months ended June 28, 1997.

     Selling, general and administrative expenses ("SG&A") increased
approximately $775,000, or 13.8%, from $5.6 million for the three months ended
June 28, 1997 to $6.4 million for the three months ended July 4, 1998. The
increase in SG&A related primarily to (i) the addition of approximately $695,000
of expenses from Daxbourne for the three months ended July 4, 1998 and (ii)
additional catalog production expenses of approximately $525,000 for the three
months ended July 4, 1998 compared to the three months ended June 28, 1997, due
primarily to a 35% increase in the number of catalogs mailed in the 1998 period.
The increase in SG&A expense for the three months ended July 4, 1998 compared to
the three months ended June

                                       10
<PAGE>
 
28, 1997 was offset by (i) a decrease in advertising expense of approximately
$340,000 and (ii) an increase in shipping and handling income of approximately
$120,000.

     In June 1997, the Company's subsidiary, SC Publishing, sold its business of
continuing education for real estate professionals.  The Company recognized a
pre-tax gain, included in SG&A, on the sale of these assets of $121,980.
 
     Net interest expense increased approximately $40,000, or 22.9%, from
approximately $175,000 for the three months ended June 28, 1997 to approximately
$215,000 for the three months ended July 4, 1998, reflecting higher principal
amounts outstanding on the Company's bank facility due to additional borrowing
to acquire Daxbourne during the fourth quarter of 1997.

     The Company recorded a $57,132 extraordinary loss on the early
extinguishment of debt (net of income tax benefit of $41,372) for the three
months ended June 28, 1997.

SIX MONTHS ENDED JULY 4, 1998 COMPARED TO SIX MONTHS ENDED JUNE 28, 1997

     Net sales increased $4.4 million, or 19.8%, from $22.2 million for the six
months ended June 28, 1997 to $26.6 million for the six months ended July 4,
1998.  This increase was due to (i) the addition of $2.6 million in net sales
from Daxbourne, a leading United Kingdom retailer and wholesaler of women's wigs
and hairpieces, which was acquired by the Company in October 1997 and (ii) the
continued success of the Company's Paula's Hatbox and Especially Yours catalogs,
which together increased net sales by $1.8 million for the six months ended July
4, 1998 compared to the six months ended June 28, 1997.

     Gross margin dollars increased $2.2 million, or 14.9%, from $14.8 million
for the six months ended June 28, 1997 to $17.0 million for the six months ended
July 4, 1998. The gross margin percentage decreased from 66.5% for the six
months ended June 28, 1997 to 64.0% for the six months ended July 4, 1998. The
decrease in gross margin percentage related primarily to (i) expanded
promotional pricing on several of the Company's wig and hairpiece products,
which resulted in a decrease in the average order size for the six months ended
July 4, 1998 compared to the six months ended June 28, 1997, (ii) increased
sales of hats, accessories and apparel which have lower margins than wigs and
hairpieces and (iii) an increase in freight charges as a result of an increase
in the amount of merchandise air freighted for the six months ended July 4, 1998
compared to the six months ended June 28, 1997.

     Selling, general and administrative expenses increased $1.9 million, or
14.2%, from $13.4 million for the six months ended June 28, 1997 to $15.3
million for the six months ended July 4, 1998. The increase in SG&A related
primarily to (i) the addition of approximately $1.4 of expenses from Daxbourne
for the six months ended July 4, 1998, (ii) additional catalog production
expenses of approximately $715,000 for the six months ended July 4, 1998
compared to the six months ended June 28, 1997, due primarily to a 40% increase
in the number of catalogs mailed in the 1998 period and (iii) the addition of
approximately $145,000 related to additional headcount at the Company. The
increase in SG&A expense for the six months ended July 4, 1998 compared to the
six months ended June 28, 1997 was offset by (i) a decrease in advertising
expense of approximately $330,000 and (ii) an increase in shipping and handling
income of approximately $255,000.

  In June 1997, the Company's subsidiary, SC Publishing, sold its business of
continuing education for real estate professionals.  The Company recognized a
pre-tax gain, included in SG&A, on the sale of these

                                       11
<PAGE>
 
assets of $121,980.

     Net interest expense decreased approximately $15,000, or 3.4%, from
approximately $440,000 for the six months ended June 28, 1997 to approximately
$425,000 for the six months ended July 4, 1998, reflecting lower interest rates
which were offset by higher principal amounts outstanding on the Company=s bank
facility due to additional borrowing to acquire Daxbourne during the fourth
quarter of 1997.

     The Company recorded a $218,699 extraordinary loss on the early
extinguishment of debt (net of income tax benefit of $149,083) for the six
months ended June 28, 1997.

LIQUIDITY AND CAPITAL RESOURCES

     During the first six months of 1998, sources of operating cash flows
consisted primarily of (i) net income of approximately $760,000, (ii) an
increase in deferred income taxes of approximately $500,000 and (iii) a decrease
in inventories of approximately $493,000. These operating cash flow sources were
offset by (i) a decrease in accounts payable and accrued expenses of
approximately $551,000, (ii) a decrease in income taxes payable of approximately
$215,000 and (iii) an increase in accounts receivable of approximately $462,000.
Financing cash flow sources for the six months ended July 4, 1998 came from line
of credit borrowings of approximately $212,000, which were offset by repayments
of approximately $352,000 under the Company's term loan agreements. Cash flows
provided by operating activities were also offset by approximately $830,000 of
cash used in investing activities, primarily due to (i) the construction costs
associated with the Company's build out of its former warehouse space and (ii)
the costs associated with a new comprehensive catalog information system
project.

     The Company is in the process of installing a new comprehensive catalog
information system purchased from an outside vendor.  The system is currently
undergoing modification, both by the vendor and by the Company's internal staff.
The system is scheduled to be implemented for SC Direct, a subsidiary of the
Company, by late 1998.  The new system has been represented by its vendor to be
Year 2000 compliant.  Following the implementation by SC Direct, it is
anticipated that the system will be modified to deal with the special processing
needs of SC Publishing, another subsidiary of the Company.  It is anticipated
that these modifications will take between three and six months to complete,
with full implementation being completed in mid-1999.  The entire cost of the
new system, including new hardware, is estimated to be between $1.2 and $1.4
million.  As of July 4, 1998, approximately $880,000 of these costs have been
capitalized, of which approximately $217,000 was added during the first six
months of 1998.

     During March 1998, the Company completed the first phase of renovation of
its former warehouse space in its South Easton facility to allow for further
office expansion. Costs of the renovation and for the purchase of new furniture
and fixtures amounted to approximately $300,000 in the first quarter of 1998.

     The Company's cash flow from operations and available credit facilities are
considered adequate to fund planned business operations and both the short-term
and long-term capital needs of the Company.  However, certain events, such as
additional significant acquisitions, could require new external financing.

SUBSEQUENT EVENT

  In August 1998, the Company announced a reorganization of certain management
positions.  In connection with this reorganization, the Company has incurred
severance and other costs and, accordingly, will record a pre-tax charge of
approximately $450,000 in the third quarter of 1998.

                                       12
<PAGE>
 
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

          In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which became effective for the Company for periods
beginning after December 15, 1997. SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that a company (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of the balance
sheet. Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company adopted this statement during the
first quarter of 1998. Comprehensive income consists solely of accumulated
foreign currency translation adjustments in connection with the Company's United
Kingdom subsidiary.

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
became effective for the Company for periods beginning after December 15, 1997.
SFAS No. 131 establishes standards for the way public companies report selected
information about operating segments in annual financial statements and requires
those companies to report selected information about segments in interim
financial reports issued to shareholders.  It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers.  SFAS No. 131 supersedes SFAS No.14, "Financial Reporting Segments of
a Business Enterprise," but retains the requirement to report information about
major customers.  As required, the Company will adopt SFAS No. 131 in the fourth
quarter of 1998.

  In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use".  SOP 98-1
requires that costs incurred in the development of internal use software be
capitalized and amortized over a period of time.  Specifically, external direct
costs of materials and services consumed in developing or obtaining internal use
computer software, payroll and payroll related costs for employees who are
directly associated with and who devote time to the internal use computer
software project, and interest cost incurred when developing computer software
for internal use, should be capitalized. Costs to develop or obtain software
that allows for access or conversion of old data by new systems should also be
capitalized. All other data conversion and all training costs on the internal
use software should be expensed as incurred. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998 with earlier application encouraged in
fiscal years for which annual financial statements have not been issued. The
provisions of SOP 98-1 should be applied to internal use software costs incurred
in those fiscal years for all projects, including those projects in progress
upon initial application of SOP 98-1. Costs incurred prior to initial
application of SOP 98-1, whether capitalized or not, should not be adjusted to
the amounts that would have been capitalized had SOP 98-1 been in effect when
those costs were incurred. The Company adopted SOP 98-1 in the first quarter of
1998. During the three and six months ended July 4, 1998, the Company has
capitalized approximately $87,000 and $217,000, respectively, of costs
associated with a new comprehensive catalog information system, of which
approximately $49,000 and $116,000, respectively, was internal payroll and
payroll related costs.

  In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"),
"Reporting on the Costs of Start-Up Activities".  SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred.  SOP 98-5
had no impact on the Company's financial condition or results of operations for
the three and six months ended July 4, 1998.

                                       13
<PAGE>
 
  In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."  This statement
is effective for the Company's fiscal year beginning January 3, 1999.  The
Company has not yet determined the effect of adopting SFAS No. 133 on the
consolidated financial statements.

PART II.  OTHER INFORMATION

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  The Company held its annual meeting of stockholders on Tuesday, May 19, 1998.
The following represents the results of the voting on proposals submitted to a
vote of stockholders at such meeting:

  a.  Proposal to elect directors:

<TABLE>
<CAPTION>
 
     NAME OF DIRECTOR      NUMBER OF VOTES IN FAVOR    NUMBER OF VOTES WITHHELD
     ----------------      ------------------------    ------------------------
<S>                        <C>                         <C>
Steven L. Bock                     4,793,999                        0
                                                              
Alan S. Cooper                     4,793,999                        0
                                                              
Martin E. Franklin                 4,754,426                   39,573
                                                              
Samuel L. Katz                     4,793,699                      300
                                                              
Guy Naggar                         4,793,999                        0
                                                              
Andrea Pomerantz Lustig            4,793,699                      300
</TABLE>
                                        
     All persons named above were re-elected as directors of the Company for a
term of office expiring on the date of the next annual meeting of shareholders,
or special meeting in lieu thereof, and until their respective successors are
duly elected and qualified.

     b.  Proposal to amend the Company's 1996 Stock Incentive Plan to increase
     the number of shares authorized for issuance thereunder from 500,000 to
     750,000:

<TABLE>
<CAPTION>
    NUMBER OF VOTES FOR   NUMBER OF VOTES AGAINST   NUMBER OF VOTES ABSTAINING
    -------------------   -----------------------   --------------------------
    <S>                   <C>                       <C>
         4,792,599                 15,100                       6,300
</TABLE>
                                        
ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K
     (a)  Exhibits

          10.01 Development and Marketing Agreement dated June 1, 1998 by and
                between SC Corporation, a subsidiary of the Registrant, and
                CyberImaging Systems, Inc., Filed herewith.

          27.1  Financial Data Schedule (for EDGAR filing purposes only), Filed
                herewith.

     (b)  Reports on Form 8-K

          No reports on Form 8-K were filed by the Company during the first six
          months ended July 4, 1998.

                                       14
<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.

                                        SPECIALTY CATALOG CORP.


Dated: August 13, 1998                    /s/ Steven L. Bock
                                         ----------------------------------
                                         Steven L. Bock
                                         Chairman, Chief Executive Officer
                                         and President


Dated: August 13, 1998                    /s/ J.William Heise
                                         ----------------------------------
                                         J. William Heise
                                         Senior Vice President, Chief Financial
                                         Officer (Principal Accounting and
                                         Financial Officer)

                                       15