<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C.  20549

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

                                   FORM 10-Q

     [X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.


For the quarterly period ended November 28, 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 No.  0-19369
                     -------


                           LITTLE SWITZERLAND, INC.
            (Exact name of registrant as specified in its charter)


       Delaware                                           66-0476514
(State of Incorporation)                               (I.R.S Employer
                                                     Identification No.)

   161-B Crown Bay Cruise Ship Port
         St.  Thomas U.S.V.I.                               00802
(Address of Principal Executive Offices)                  (Zip Code)


                                (340) 776-2010
             (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 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 
                             ------     -----    

At January 4, 1999, 8,624,202 shares of $.01 par value common stock of the
registrant were outstanding.

                                       1
<PAGE>
 
                           LITTLE SWITZERLAND, INC.

                              INDEX TO FORM 10-Q

                    FOR THE QUARTER ENDED NOVEMBER 28, 1998

<TABLE>
<CAPTION>                                                                                
                                                                                              PAGE
PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements
-------   --------------------
<S>                                                                                           <C>
 
          Consolidated Balance Sheets as of November 28, 1998 (unaudited) and May 30, 1998        3 
 
          Consolidated Statements of Income (unaudited) for the three and six months ended
           November 28, 1998 and November 29, 1997..........................................      4
 
          Consolidated Statements of Cash Flows (unaudited) for the six months ended
           November 28, 1998 and November 29, 1997..........................................      5
 
          Notes to Consolidated Financial Statements (unaudited)............................   6-11
 
Item 2.   Management's Discussion and Analysis of Financial Condition and Results
-------   -----------------------------------------------------------------------
           of Operations....................................................................  12-15
           -------------       

Item 3.   Quantitative and Qualitative Disclosures about Market Risk.......................      15
-------   ----------------------------------------------------------    
 
PART II.  OTHER INFORMATION
 
Item 1.   Legal Proceedings................................................................      16
-------   -----------------
 
Item 5.   Other Information................................................................      16
-------   -----------------
 
Item 6.   Exhibits and Reports on Form 8-K.................................................      17
-------   --------------------------------
</TABLE>

Signature Page

                                       2
<PAGE>
 
PART I.   FINANCIAL INFORMATION

Item 1.   Financial statements

                   LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
                          Consolidated Balance Sheets
                     (in thousands except per share data)
<TABLE>
<CAPTION>
 
                                                      November 28,    May 30,
                      ASSETS                              1998         1998
                                                      -------------  ---------
                                                       (unaudited)
<S>                                                   <C>            <C>
Current assets:                                        
 Cash and cash equivalents..........................      $  2,143      2,278
 Accounts receivable................................         2,734      1,999
 Inventory..........................................        46,422     49,178
 Prepaid expenses and other current assets..........         2,357      1,944
                                                          --------   --------
   Total current assets.............................        53,656     55,399
                                                          --------   --------
 
Property, plant and equipment, at cost..............        37,240     39,688
 Less -- Accumulated depreciation...................       (17,968)   (18,230)
                                                          --------   --------
                                                            19,272     21,458
                                                          --------   --------
 
Other assets........................................           292        294
                                                          --------   --------
 
   Total assets.....................................      $ 73,220   $ 77,151
                                                          ========   ========
 
               LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
 Current portion of long term debt..................      $  2,225   $  2,225
 Unsecured notes payable............................        14,300      7,825
 Accounts payable...................................         7,591     10,840
 Accrued and currently deferred income taxes........         1,320        777
 Other accrued expenses and deferred income.........         3,112      3,500
                                                          --------   --------
 
   Total current liabilities........................        28,548     25,167
 
Long term debt......................................         2,781      3,894
 
Deferred income taxes...............................           202        202
                                                          --------   --------
 
   Total liabilities................................        31,531     29,263
                                                          --------   --------
 
Commitments and contingencies.......................           ---        ---
 
Minority interest...................................         1,619      1,619
                                                          --------   --------
Stockholders' equity:
 Preferred stock, $.01 par value--
 Authorized--5,000 shares
 Issued and outstanding--none.......................           ---        ---
 Common stock, $.01 par value--
 Authorized--20,000 shares
 Issued and outstanding--8,624 shares
  at November 28, 1998 and at May 30, 1998..........            87         87
Capital in excess of par............................        15,601     15,601
Retained earnings...................................        24,382     30,581
                                                          --------   --------
 
  Total stockholders' equity........................        40,070     46,269
                                                          --------   --------
  Total liabilities, minority interest
   and stockholders' equity.........................      $ 73,220   $ 77,151
                                                          ========   ========
 
</TABLE>

          See accompanying notes to consolidated financial statements

                                       3
<PAGE>
 
                   LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
                       Consolidated Statements of Income
                     (in thousands except per share data)
                                  (unaudited)
<TABLE>
<CAPTION>
 
                                        For the three                   For the six
                                        months ended                    months ended
                                 November 28,   November 29,        November 28, November 29,
                                    1998           1997                1998         1997
                                  -------        -------             -------      -------
<S>                              <C>            <C>                 <C>          <C>
Net sales.................        $14,800        $21,034             $31,787      $41,404
Cost of sales.............          8,886         11,997              18,190       23,710
                                  -------        -------             -------      -------
 
Gross profit..............          5,914          9,037              13,597       17,694
 
Selling, general and
administrative expenses...          9,224          8,826              18,485       17,306
 
  Operating income(loss)..         (3,310)           211              (4,888)         388
 
Interest expense, net.....            367            426                 711          796
                                  -------        -------             -------      -------
 
 (Loss) before
   income taxes...........         (3,677)          (215)             (5,599)        (408)
 
(Benefit) for
income taxes..............            600            (47)                600          (82)
                                  -------        -------             -------      -------
 
Net (loss)................        $(4,277)       $  (168)             (6,199)        (326)
                                  =======        =======             =======      =======
 
Net (loss)
 Per share................        $ (0.50)       $ (0.02)            $ (0.72)     $ (0.04)
                                  =======        =======             =======      =======
 
Weighted average shares
 outstanding..............          8,624          8,462               8,624        8,462
                                  =======        =======             =======      =======
</TABLE>

          See accompanying notes to consolidated financial statements

                                       4
<PAGE>
 
                   LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
                     Consolidated Statements of Cash Flows
                                (in thousands)
                                  (unaudited)
<TABLE>
<CAPTION>
 
 
                                                                            For the six months ended
                                                                        November 28,         November 29,
                                                                            1998                 1997
                                                                        -------------        ------------
<S>                                                                     <C>                 <C>
Cash flows from operating activities:
 Net (loss).....................................................             $ (6,199)          $   (326)
   Adjustments to reconcile net (loss) to net cash
     provided by (used in) operating activities--
   Depreciation.................................................                1,539              1,283
   Store closing expense........................................                1,668                 --
   Changes in assets and liabilities:
     Decrease (increase) in accounts receivable.................                 (735)            (1,206)
     (Increase) in prepaid income taxes.........................                   --                (83)
     Decrease (increase) in inventory...........................                2,756             (7,347)
     (Increase) in prepaid expenses and other current assets....                 (413)            (1,542)
     Decrease in other assets...................................                    2                171
     (Decrease) increase in accounts payable....................               (3,249)             5,570
     (Decrease) in other accrued expenses and deferred income...                 (972)               606
     (Decrease) in accrued and currently deferred income taxes..                  543               (428)
                                                                             --------           --------
 
 Net cash (used in) operating activities........................               (5,060)            (3,302)
                                                                             --------           --------
 
 Cash flows from investing activities:
   Capital expenditures.........................................                 (437)              (582)
                                                                             --------           --------
 
 Net cash (used in) investing activities........................                 (437)              (582)
                                                                             --------           --------
 
Cash flows from financing activities:
   Proceeds from unsecured notes payable........................               18,056             21,125
   Repayments of unsecured notes payable........................              (11,581)           (13,700)
   Repayments of long term borrowings...........................               (1,113)              (838)
   Issuance of common stock.....................................                   --                  3
                                                                             --------           --------
 
Net cash provided by financing activities.......................                5,362              6,590
                                                                             --------           --------
 
 
Net (decrease) increase in cash and cash equivalents............                 (135)             2,706
 
Cash and cash equivalents, beginning of period..................                2,278              1,710
                                                                             --------           --------
 
Cash and cash equivalents, end of period........................             $  2,143           $  4,416
                                                                             ========           ========
</TABLE>
During the six months ended November 28, 1998 and November 29 1997, the Company
paid income taxes of $56 and $428, respectively, and paid interest of $718 and
$785, respectively.


          See accompanying notes to consolidated financial statements

                                       5
<PAGE>
 
1.   Consolidated Financial Statements
     ---------------------------------

     The accompanying consolidated financial statements include the operations
of Little Switzerland, Inc. (the "Company") and its wholly owned subsidiaries,
L.S. Holding, Inc. and L.S. Wholesale, Inc. All significant intercompany
balances have been eliminated in consolidation. The interim financial statements
are unaudited and, in the opinion of management, contain all adjustments
necessary to present fairly the Company's financial position as of November 28,
1998 and November 29, 1997 and the results of its operations and cash flows for
the interim periods presented. It is suggested that these interim financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's latest annual report on Form 10-K/A for the
fiscal year ended May 30, 1998.

     The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for a full fiscal year, due
to the seasonal nature of the Company's operations.


2.   Use of Estimates
     ----------------

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.


3.   Transactions with Affiliates
     ----------------------------

     The Company enters into a number of transactions with Town & Country
Corporation and its affiliates ("Town & Country") for the purchase of jewelry.
During a portion of fiscal 1998 and all of fiscal years 1997 and 1996 one of the
Company's directors and its acting president and chief executive officer was an
executive officer of Town & Country.  The Company purchased jewelry in an
aggregate of approximately $560,000, $640,000 and $1.4 million in fiscal 1998,
1997 and 1996, respectively. Management believes that these purchases
approximate arm's-length transactions.


4.   Store Closing Expense
     ---------------------

     During the quarter ended November 28, 1998, the Company recorded a charge
associated with the closure of its store in Ketchikan, Alaska, as well as one
store in each of Antigua and St. Kitts.  The store in St. Kitts was closed
indefinitely due to damage inflicted by Hurricane Georges.  The charge amounted
to approximately $1.7 million and has been included in selling, general and
administrative expenses in the accompanying consolidated statements of income.
Approximately $1.5 million of the charge relates to the impairment of fixed
assets and leasehold improvements at the closed stores.


5.   Credit Arrangements
     -------------------

     The Company has unsecured credit facilities of $19.7 million with two
banks, of which approximately $16.6 million in borrowings were outstanding as of
November 28, 1998. Approximately $4.1 million of these outstanding borrowings is
utilized to secure customs bonds and other bank guarantees required in the
normal course of business. The Company currently has $3.1 million available for
borrowing under these credit facilities. However, any unfunded portion of the
available facilities can be withdrawn at the banks' discretion.

                                       6
<PAGE>
 
     The credit facilities with the Company's two banks were up for renewal
at the end of December 1998. One of the Company's lead banks has
renewed its credit facility in the amount of $9.5 million on approximately the
same terms and conditions through December 31, 1999. The other lead bank has
extended its credit facility in the amount of $7.0 million through January 31,
1999. The Company is currently negotiating a renewal of this facility through
September 30, 1999; however, there is no assurance at this time that such
renewal will be granted. If this credit facility is not renewed, or if the terms
and conditions of this credit facility are materially changed, it could have a
material adverse effect on the Company's results of operations. On August 11,
1998, in addition to the credit facilities discussed above, one of the Company's
lead banks approved a $3.0 million seasonal line of credit (the "Credit
Facility"), which the Company is using to support its inventory for the peak
selling season. As of January 4, 1999, the Company has drawn $2.8 million
under the Credit Facility. Additionally, in February 1996, the Company
obtained a term loan of approximately $8.9 million from its two lead banks to
finance the acquisition of the fixtures, leasehold rights and inventories of two
stores in Barbados. Interest on this debt accrues at an annual interest rate of
7.25%, and is payable monthly. The principle is payable in equal quarterly
payments over a four year period, commencing March 1997. As of November 28,
1998, the Company had $5.0 million of term debt outstanding against this term
loan. As of May 30, 1998, the Company was in compliance with, or received
waivers for, all restrictive covenants related to these credit facilities.

6.   Earnings Per Share
     ------------------

     The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings per Share, effective December 15, 1997. In accordance with the
requirements of SFAS No. 128, basic earnings per share is computed by dividing
net income by the weighted average number of shares outstanding and diluted
earnings per share reflects the dilutive effect of stock options (as calculated
utilizing the "Treasury Method"). The weighted average number of shares
outstanding, the dilutive effects of outstanding stock options, and the shares
under option plans which were anti-dilutive for the periods included in this
report are as follows (in thousands):
<TABLE>
<CAPTION>
 
                                                Three Months Ended
                                                ------------------
                                                11/28/98  11/29/97
                                                --------  --------
<S>                                             <C>       <C>
 
  Weighted average number of shares
   used in basic earnings per share
   calculation................................     8,624     8,462
 
  Dilutive effects of options.................       ---       ---
 
  Weighted average number of shares
   used in diluted earnings per share
   calculation................................     8,624     8,462
 
  Shares under option plans or outside
   such option plans excluded in computation
   of diluted earnings per share due to
   anti-dilutive effects......................       944       929
 
</TABLE>

                                       7
<PAGE>
 
7.   Accounting for Income Taxes
     ---------------------------

     The Company follows the liability method of accounting for income taxes as
set forth in SFAS No. 109, Accounting for Income Taxes.  Under SFAS No. 109,
deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been included in the financial statements or
tax returns.  The amount of deferred tax asset or liability is based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.  Valuation allowances are established when
necessary to reduce deferred tax assets to the amount that is realizable, based
upon the realization criteria defined in SFAS No. 109.


8.   Other Assets
     ------------

     Other assets consist primarily of amounts related to rental deposits.

     The Company accounts for long-lived and intangible assets in accordance
with SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of. The Company continually reviews applicable
assets for events or changes in circumstances which might indicate the carrying
amount of the assets may not be recoverable. The Company assesses the
recoverability of these assets by determining whether the amortization over
their remaining lives can be recovered through projected undiscounted future
results. The amount of impairment, if any, is measured based on projected
discounted future results using a discount rate commensurate with the risks
involved. No such impairment existed as of November 28, 1998.

     In April 1998, the AICPA issued Statement of Position (SOP) 98-5, Reporting
on the Costs of Start-up Activities.  SOP 98-5 requires all costs associated
with preopening, preoperating and organization activities to be expensed as
incurred.  The Company elected to adopt SOP 98-5 as of June 1, 1997.

9.   Statement of Financial Accounting Standards No.  123 - Accounting for
     ---------------------------------------------------------------------
Stock-Based Compensation
------------------------

     In December 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which became effective for fiscal
years beginning after December 15, 1995. SFAS No. 123 requires employee stock-
based compensation to be either recorded or disclosed at its fair value.
Management continues to account for employee stock-based compensation under
Accounting Principles Board Opinion No. 25 and did not adopt the new accounting
provision for employee stock-based compensation under SFAS No. 123.  The
additional required disclosures will be included in the Company's fiscal year
end financial statements.


10.  Accounting for Derivative Instruments and Hedging Activities
     ------------------------------------------------------------
 
     In June 1998, the Financial Account Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities.  The SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met.  Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.

                                       8
<PAGE>
 
     SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. 
A company may also implement SFAS No. 133 as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before 
January 1, 1998).

     The Company has not yet quantified the impact of adopting SFAS No. 133 on
its financial statements and has not determined the timing of or method of its
adoption of SFAS No. 133.  However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.


11.  Advertising
     -----------

     The Company expenses the costs of advertising as advertisements are printed
and distributed.  The Company's advertising expenses consist primarily of
advertisements with local, regional and national travel magazines, which are
produced on a periodic basis and distributed to visiting tourists, and fees paid
for promotional "port lecturer" programs directed primarily at cruise ship
passengers.


12.  Commitments and Contingencies
     -----------------------------

The Company's Relationship with Rolex
-------------------------------------

     Historically, the Company was the exclusive authorized retailer for Rolex
watches on the islands on which the Company operates.  Following the execution
of the Agreement and Plan of Merger, dated as of February 4, 1998 (the "Merger
Agreement"), with Destination Retail Holdings Corporation ("DRHC") and certain
of its affiliates, Rolex suspended shipments of its products to the Company
because Rolex indicated that it did not believe it would be in its best interest
to begin a business relationship with DRHC.  Following termination of the Merger
Agreement, on June 9, 1998, the Company made numerous attempts to rebuild its
business relationship with Rolex.  However, on July 15, 1998, the Company
announced that it had learned that Rolex had decided not to resume shipments of
its watches to the Company for retail sale through Little Switzerland's stores.
Sales of Rolex watches accounted for 26%, 24% and 23% of the Company's sales in
fiscal 1998, 1997 and 1996, respectively.  In order to mitigate the impact on
sales of the loss of Rolex products, the Company is actively exploring
opportunities for expanding existing, and adding new, world class product lines
in both watches and jewelry.  In connection with these efforts, the Company has
added Movado, Baume & Mercier and Mont Blanc time pieces to its watch lines and
has added Breitling products to its flagship store in Aruba.  At this time, the
Company does not anticipate adding Breitling products to its other stores.  In
addition, the Company has increased the showcase space allocated to jewelry in
certain of its larger stores to accommodate a greater variety of moderate to
higher priced fashion merchandise, including diamond, tanzanite, pearl and
certain designer name classifications.  There can be no assurance that the
Company's actions in replacing Rolex products with new or expanded watch and
jewelry products will be successful or that the sales of these new or expanded
products will reduce the effect of the loss of Rolex as a supplier on the
Company's sales.

     On September 25, 1998, at Rolex's request, the Company returned its
remaining Rolex inventory valued at $1.4 million to Rolex for credit.  The
Company invoiced Rolex for the full value of the inventory and has accounted for
the return as a receivable on its books.  The Company has been verbally
informed by Rolex that Rolex does not believe the returned inventory is worth
the $1.4 million and the Company is currently in discussions with Rolex
regarding the value of this inventory.

                                       9
<PAGE>
 
Aruba Audit
-----------

     During 1997, the Company received an assessment from the local government
in Aruba that relates to the Company's local income tax returns regarding
certain consulting fees paid and service fees assessed by L.S. Wholesale, Inc.,
a wholly-owned subsidiary of the Company, to Aruba. During 1998, the Company met
with the tax authorities in Aruba. The Company has entered into a final
settlement with the tax authorities regarding its 1988-1996 local tax returns
and recorded a tax expense of $.6 million in the three-month and six-month
periods ended November 28, 1998 for the incremental cost of this settlement.
Pursuant to this settlement, the Company has been assessed a profit tax in the
amount of $650,000, which is payable in ten equal installments of $65,000 per
month commencing on March 1, 1999. Interest of 6% per annum will be charged on
the outstanding amount starting on March 1, 1999. The Company also has been
assessed a wage tax in the amount of $550,000, which is payable in six
installments commencing in June 1999. Interest of 6% per annum will be charged
on the outstanding amount starting on June 1, 1999. The Company may be subject
to an additional assessment for the Company's fiscal years 1997 and 1998 local
income tax returns. At this time the Company is unable to quantify the related
financial exposure, if any. In the opinion of management of the Company, there 
is no assurance that this assessment will not have a material adverse effect on
the Company's financial condition or results of operations.

IDC Benefit
-----------

     Under an agreement which expired at the end of August, 1998, the Company's
wholly-owned subsidiary, L.S. Wholesale, Inc., which acts as a purchasing agent
for items sold by the Company's stores and charges fees for acting as such an
agent, benefited from a lower tax rate on its income earned outside the U.S.
Virgin Islands. Under this agreement such income was taxed at a rate of 3.74%.
L.S. Wholesale has submitted its application for renewal of benefits, and
anticipates that it will be notified with respect to the renewal sometime during
fiscal 1999. Until it receives notification with respect to this renewal, the
Company must pay taxes on all of L.S. Wholesale's U.S.V.I. based income at the
statutory rate of 37.4%. However, if the renewal is granted, then management
believes that the lower tax rate will be applied retroactively to the end of
August, 1998 and the Company will be reimbursed for any excess tax payments;
however, there is no assurance that this will occur. The Company anticipates
that the agreement will be renewed at the same or less favorable benefit. It,
however, has no assurance at this time that such a renewal will be granted or
that it will be notified with respect to such renewal during fiscal 1999. If it
is not renewed, all of the L.S. Wholesale's U.S.V.I. based income will be taxed
at the statutory rate of 37.4% and L.S. Wholesale will be subject to a gross
receipts tax. Such non-renewal may have a material adverse effect on the
Company's results of operations. The Company's effective tax rate was 31.9% and
0.0% in the fiscal years ended May 30, 1998 and May 31, 1997, respectively.

Hurricane Damage
----------------

     In September 1998, Hurricane Georges inflicted minor damage to several of
the Company's stores and caused significant damage to its St. Kitts store and to
various islands' infrastructures, including hotels and other tourist facilities.
As of October 16, 1998, all of the Company's stores have reopened with the
exception of the St. Kitts store, which sustained major damage.  Based on
currently available information, the Company anticipates that the St. Kitts
store will be closed indefinitely.  At this time, the financial impact of
Hurricane Georges on the Company's Caribbean operations is difficult to
quantify.  The Company is currently in the process of completing and filing
insurance claims with its insurance carrier in connection with the hurricane
damage to certain of the Company's properties.  In January 1999, the Company
received approximately $500,000 in initial payments on its claims from its
insurance carrier.

Employee Defalcation
--------------------

     In July, 1997 management disclosed to its independent auditors that certain
transactions may have been recorded in error on the books of the Company.  As a
result, the Company engaged Arthur Andersen LLP 

                                       10
<PAGE>
 
to evaluate the matter and determine the impact, if any, on the Company's
previously and currently reported consolidated financial statements. After
extensive review, analysis and evaluation, which focused on unlocated
differences in cash balances, management believes that an employee defalcation
occurred during fiscal 1997. The employee was able to circumvent existing
internal controls largely due to lapses in appropriate segregation of duties
regarding cash deposits and disbursements, inter-bank transfers and bank account
reconciliations. This lapse in the segregation of such duties was further
exacerbated by the resignation of the Company's Assistant Treasurer on February
28, 1997, which office was not filled until April 29, 1997. Two individuals, one
of whom was an employee of the Company, were arrested on February 10, 1998 in
connection with this defalcation and charged with embezzlement and appropriation
of the property of the Company. Lorraine Quetel, the former employee, has pled
guilty to the embezzlement of $1.85 million. The criminal action against Lydia
Magras is still pending.

     The estimated loss of approximately $2.4 million has been classified as a
general and administrative expense in the consolidated financial statements for
the fiscal year ended May 31, 1997.  As a result of the charge, the Company
filed amended financial statements on Form 10-Q for each of the quarters within
fiscal 1997.

     The Company has insurance coverage which calls for a maximum claim
limitation of $1,000,000.  A claim for the full amount of the loss has been
submitted and payment of the $1,000,000 has been received. The amount of
insurance recovery from its insurance carrier relating to these losses has been
reflected in the selling, general and administrative expenses in the
consolidated financial statements for the year ended May 30, 1998.  To date, the
Company has received $65,000 in restitution from the employee.  On March 11,
1998, the Company filed a civil action against Lorraine Quetel, the former
employee of the Company, Lydia Magras and Bon Voyage Travel, Inc. seeking full
restitution from such parties, however, the Company does not know what, if any,
of the funds are still in the possession of the former employee and such other
parties.  See Part II - Other Information, Item 1 "Legal Proceedings."

                                       11
<PAGE>
 
PART I.   FINANCIAL INFORMATION

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

FORWARD-LOOKING STATEMENTS

     This quarterly report on Form 10-Q contains certain statements that are
"forward-looking statements" as that term is defined under the Private
Securities Litigation Reform Act of 1995 and releases issued by the Securities
and Exchange Commission.  The words "believe," "expect," "anticipate," "intend,"
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements.  Forward-looking statements involve known and
unknown risks, uncertainties and other factors, which may cause the actual
results, performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied by
such forward-looking statements.  The Company undertakes no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.

     The future operating results and performance trends of the Company may be
affected by a number of factors, including, without limitation, the following:
(i) the frequency of tourist visits to the locations where the Company maintains
retail stores, (ii) the Company's ability to retain relationships with its major
suppliers of product for resale, (iii) the Company's ability to mitigate the
impact on sales of the loss of Rolex products by expanding existing, and adding
new, world class product lines in both watches and jewelry, (iv) weather in the
Company's markets, (v) actions of the Company's competitors and the Company's
ability to respond to such actions, (vi) economic conditions that affect the
buying patterns of the Company's customers and (vi) availability of new tourist
markets for expansion.  In addition to the foregoing, the Company's actual
future results could differ materially from those projected in the forward-
looking statements as a result of the risk factors set forth in the Company's
various filings with the Securities and Exchange Commission and of changes in
general economic conditions, changes in interest rates and/or exchange rates and
changes in the assumptions used in making such forward-looking statements.

YEAR 2000 READINESS DISCLOSURE

     The statements in the following section include "Year 2000 readiness
disclosure" within the meaning the Year 2000 Information and Readiness
Disclosure Act.

     Many existing computer programs and databases use two digits to identify a
year in the date field (i.e., 98 would represent 1998).  These programs and
databases were designed and developed without considering the impact of the
upcoming millennium.  If not corrected, many computer systems could fail or
create erroneous results relating to the year 2000.  If the Company or its
significant suppliers fail to make necessary modifications and conversions on a
timely basis, the year 2000 issue could have a material adverse effect on
Company operations.  However, the impact cannot be quantified at this time. The
Company believes that its competitors face a similar risk.

     The Company has developed plans to address the possible exposures related
to the impact on its computer systems of the year 2000 issue. Key financial,
information and operational systems, including equipment with embedded
microprocessors, have been or are currently being inventoried and assessed, and
detailed plans have been or are currently being developed for the required
systems modifications or replacements. Progress against these plans is monitored
and reported to management on a regular basis. Implementation of required
changes to critical systems is expected to be completed during fiscal 1999. The
Company is also focusing on major suppliers to assess their compliance. The
Company has received assurances from certain suppliers that such suppliers
expect to be year 2000 compliant and is seeking such assurances from its other
material suppliers. Nevertheless, there can be no assurance that there will not
be a 

                                       12
<PAGE>
 
material adverse effect on the Company if third party governmental or business
entities do not convert or replace their systems in a timely manner and in a way
that is compatible with the Company's systems. In the event a material supplier
is not year 2000 compliant, the Company's business, financial condition and
results of operations could be materially and adversely affected.

     The costs incurred to date related to these programs have not been material
and the Company does not expect its future costs related to these programs to be
material.  Such costs have been and will continue to be funded through operating
cash flows. The Company presently believes that the total cost of achieving year
2000 compliant systems is not expected to be material to its financial
condition, liquidity, or results of operations.

     Time and cost estimates are based on currently available information.
Developments that could affect estimates include, but are not limited to, the
availability and cost of trained personnel; the ability to locate and correct
all relevant computer code and systems; and remediation success of the Company's
customers and suppliers.

     The preceding "Year 2000 Readiness Disclosure" contains various forward-
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934 and the Section 27A Securities Act of 1933.  These forward-looking
statements represent the Company's beliefs or expectations regarding future
events. When used in the "Year 2000 Readiness Disclosure", the words "believes,"
"expects," "estimates" and similar expressions are intended to identify forward-
looking statements. Forward-looking statements include, without limitation, the
Company's expectations as to when it will complete the modification and testing
phases of its year 2000 project plan as well as its year 2000 contingency plans;
its estimated cost of achieving Year 2000 readiness; and the Company's belief
that its internal systems will be year 2000 compliant in a timely manner. All
forward-looking statements involve a number of risks and uncertainties that
could cause the actual results to differ materially from the projected results.
Factors that may cause these differences include, but are not limited to, the
availability of qualified personnel and other information technology resources;
the ability to identify and remediate all date sensitive lines of computer code
or to replace embedded computer chips in affected systems or equipment; and the
actions of governmental agencies or other third parties with respect to year
2000 problems.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIOD ENDED NOVEMBER 28, 1998

General
-------

     The Company currently operates 24 luxury gift and jewelry stores. Last year
at this time, the Company operated 27 stores. The Company has recently closed
one store in Ketchikan, Alaska, as well as one store each in Antigua and St.
Kitts. The store in St. Kitts was closed indefinitely due to damage inflicted by
Hurricane Georges. See Part I, Item 1 "Footnote 12 Consolidated Financial
Statements (unaudited)."

Net Sales
---------

     Net sales for the three-month period ended November 28, 1998 were $14.8
million, a 29.6% reduction from net sales of $21.0 million for the corresponding
three-month period last year.  Net sales for the six-month period ended November
28, 1998 were $31.8 million, a 23.2% reduction from net sales of $41.4 million
for the corresponding six-month period last year.  Net sales in comparable
stores fell 28.6% in the three-month period ended November 28, 1998 and 22.5% in
the six-month period ended November 28, 1998.

     Management attributes the reduction in sales for both the three-month and
six-month period ended November 28, 1998 primarily to the absence of Rolex
products in the Company's stores.  The Company has not received any shipments of
Rolex products since January 1998.  Historically, Little Switzerland was the

                                       13
<PAGE>
 
exclusive authorized retailer for Rolex watches on the islands on which the
Company operates. On July 15, 1998, the Company announced that it had learned
that Rolex had decided not to resume shipments of its watches to the Company for
retail sale through Little Switzerland's stores. See Part I, Item 1 "Footnote 12
to Consolidated Financial Statements (unaudited)." The overall impact of
operating without Rolex was similar throughout most of the Company's market
areas. Excluding the impact of Rolex sales, sales in comparable stores fell 3.1%
in the three-month period ended November 28, 1998 and 1.8% in the six-month
period ended November 28, 1998.

     During the three-month period ended November 28, 1998, the Company's store
in St. Kitts was closed indefinitely due to damage inflicted by Hurricane
Georges. See Part I, Item 1 "Footnote 12 to Consolidated Financial Statements
(unaudited)." This event contributed to approximately $.2 million of the net
sales reduction in both the three-month and six-month period ended November 28,
1998.

Gross Profit
------------

     Gross profit, as a percentage of net sales, was 40.0% for the three-month
period ended November 28, 1998 and 42.8% for the six-month period ended November
28, 1998 as compared to 43.0% and 42.7%, respectively, for the corresponding
periods last year.  The Company attributes the decrease in gross profit as a
percentage of net sales for the three-month period ended November 28, 1998 in
part to the impact of markdowns taken to stimulate sales of slow-moving
inventory.  In addition, the Company decided to discontinue and liquidate
certain merchandise in the "accessories" category, resulting in significant
discounting of this product line.

Selling, General and Administrative Expenses
--------------------------------------------

     Selling, General and Administrative expenses ("SG&A") for the three-month
period ended November 28, 1998 were $9.2 million, or 62.3% of net sales, and for
the six-month period ended November 28, 1998 were $18.5 million, or 58.2% of net
sales as compared to $8.8 million, or 42.0% of net sales and $17.3 million, or
41.8% of net sales for the corresponding periods last year.  Included in SG&A
for both the three-month and the six-month periods ended November 28, 1998 is a
charge of $1.7 million representing a charge recorded by the Company for the
closing of three stores.  The Company recently closed one store in Ketchikan,
Alaska, as well as one store in each of Antigua and St. Kitts.  The store in St.
Kitts was closed indefinitely due to damage inflicted by Hurricane Georges.  See
Part I, Item 1 "Footnote 12 to Consolidated Financial Statements (unaudited)."
This charge is for impairment of fixed assets and leasehold improvements at the
closed stores of approximately $1.5 million.  Excluding store closing costs,
SG&A represents 51.0% and 52.9% of net sales for the three-month and six-month
periods ended November 28, 1998, respectively.  The increase in SG&A as a
percentage to net sales, exclusive of store closing costs, is primarily
attributable to the reduction in net sales for the three-month and the six-month
period ended November 28, 1998.

Other
-----

     Net interest expense was $367,000 for the three-month period ended November
28, 1998 and $711,000 for the six-month period ended November 28, 1998 compared
to $426,000 and $796,000, respectively, for the corresponding periods last year.
The decrease in net interest expense reflects lower average borrowings and lower
interest rates as compared to the corresponding periods last year.

     The Company's effective tax rate was essentially 0.0% for the three-month
and six-month periods ended November 28, 1998 compared to 21.9% and 20.1%,
respectively, for the corresponding periods last year, however, a tax expense of
$.6 million was recorded in the three-month and six-month periods ended November
28, 1998 representing the incremental cost of the tax settlement with the
government of Aruba.  See "--Liquidity and Capital Resources."

                                       14
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

     Net cash used in operations during the six-month period ended November 28,
1998 was $5.1 million, compared to $3.3 million for the corresponding period
last year.  The increase in net cash used in operations primarily reflects an
increase in the net operating loss and a decrease in both inventory and accounts
payable balances during the three-month period ended November 28, 1998.

     During 1997, the Company received an assessment from the local government
in Aruba that relates to the Company's local income tax returns regarding
certain consulting fees paid and service fees assessed by L.S. Wholesale, Inc.,
a wholly-owned subsidiary of the Company, to Aruba. During 1998, the Company met
with the tax authorities in Aruba. The Company has entered into a final
settlement with the tax authorities regarding its 1988-1996 local tax returns
and recorded a tax expense of $.6 million in the three-month and six-month
periods ended November 28, 1998 for the incremental costs of this settlement.
Pursuant to this settlement, the Company has been assessed a profit tax in the
amount of $650,000, which is payable in ten equal installments of $65,000 per
month commencing on March 1, 1999. Interest of 6% per annum will be charged on
the outstanding amount starting on March 1, 1999. The Company also has been
assessed a wage tax in the amount of $550,000, which is payable in six
installments commencing in June 1999. Interest of 6% per annum will be charged
on the outstanding amount starting on June 1, 1999. The Company may be subject
to an additional assessment for the Company's fiscal years 1997 and 1998 local
income tax returns. At this time the Company is unable to quantify the related
financial exposure, if any. In the opinion of management of the Company, there
is no assurance that this assessment will not have a material adverse effect on
the Company's financial condition or results of operations.

     The Company has unsecured credit facilities of $19.7 million with two banks
of which approximately $16.6 million in borrowings were outstanding as of
November 28, 1998. The credit facilities with the Company's two banks were up
for renewal at the end of December 1998. One of the Company's lead banks has
renewed its credit facility in the amount of $9.5 million on approximately the
same terms and conditions through December 31, 1999. The other lead bank has
extended its credit facility in the amount of $7.0 million through January 31,
1999. The Company is currently negotiating a renewal of this facility through
September 30, 1999; however, there is no assurance at this time that such
renewal will be granted. If this credit facility is not renewed, or if the terms
and conditions of this credit facility are materially changed, it could have a
material adverse effect on the Company's results of operations. On August 11,
1998, in addition to the credit facilities discussed above, one of the Company's
lead banks approved a $3.0 million seasonal line of credit (the "Credit
Facility"), which the Company is using to support its inventory for the peak
selling season. The Credit Facility expires on March 2, 1999. As of January 4,
1999, the Company has drawn $2.8 million against the Credit Facility. Further,
in February 1996, the Company obtained a term loan of approximately $8.9 million
from its two lead banks to finance its acquisition of the fixtures, leasehold
rights and inventories of two stores in Barbados. Interest on this debt is
payable monthly and the principal is payable in equal quarterly payments over a
four year period commencing March 1997.

     The loan documents for the Company's credit facilities contain restrictive
covenants, including financial covenants.  As of May 30, 1998, the Company was
in compliance with, or received waivers for, all restrictive covenants related
to these credit facilities.  There is no assurance that the Company will
continue to be in compliance with, or obtain waivers for, all such restrictive
covenants.  It remains management's expectation that funds available from
operations and existing credit facilities will be sufficient to fund operations
and expansion for the foreseeable future.

     Capital expenditures for the six months ended November 28, 1998 were
approximately $437,000 compared to $582,000 for the corresponding period last
year.

ITEM 3.   Quantitative and Qualitative Disclosures about Market Risk.
          ---------------------------------------------------------- 

     None.

                                       15
<PAGE>
 
PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings
          -----------------

     On March 11, 1998, the Company filed a civil action in the Territorial
Court of the Virgin Islands (Civil Action No. 98-229) against Lorraine Quetel, a
former employee of the Company, Lydia Magras and Bon Voyage Travel, Inc. The
Company alleges that such parties were involved in the employee defalcation that
management believes occurred during the Company's fiscal year ended May 31,
1997. The Company is seeking a preliminary injunction and damages against the
former employee and the other parties allegedly involved in the theft against
the Company.

     On June 10, 1998, the Company filed a civil action in the United States
District Court for the District of Delaware (Civil Action No. 98-315-SLR)
against DRHC, Stephen Crane, DRHC's controlling shareholder, Young Caribbean
Jewelry Company Limited, a Cayman Islands corporation, Alliance International
Holdings Limited, a Bahamian corporation, and CEI Distributors Inc., a British
Virgin Islands corporation, each an affiliate of DRHC.  The Company alleges
breach of the Merger Agreement among the Company, DRHC and certain affiliates of
DRHC and also alleges claims of misrepresentation and civil conspiracy, among
other causes of action.   The Company is seeking monetary damages, including,
without limitation, consequential damages relating to harm to its business.

     On July 15, 1998, the defendants moved to dismiss the Complaint on the
grounds that the court lacks subject matter jurisdiction over the claims.  In
addition, Mr. Crane moved to dismiss the Complaint on the grounds that the court
lacks personal jurisdiction over him.  Following preliminary discovery, the
Company filed an opposition to the defendants' motion to dismiss.  The court
heard these motions on November 17, 1998, but has not yet issued a decision on
the motion.

     On October 7, 1998, Jewelcor Management, Inc. ("Jewelcor"), a record
stockholder of the Company, filed an action in the Court of Chancery for the
State of Delaware (Civil Action No. 16688-NC) against the Company seeking an
order that a meeting of stockholders of the Company be held immediately for the
purposes of electing directors and conducting such other business as is brought
before the meeting. On December 1, 1998, the Company announced that it had
scheduled an annual meeting of stockholders to be held on February 25, 1999,
with a record date of January 8, 1999, at which one Class I director and one
Class III director would be elected.  Jewelcor subsequently filed a motion for
leave to file an amended complaint alleging that the Company has inequitably
manipulated the size of the Board of Directors and seeking an election of four
directors at the next annual meeting of stockholders.  On December 11, 1998, the
court granted Jewelcor's motion for leave to file an amended complaint.  The 
parties are currently conducting discovery and a trial on this matter has been
scheduled for January 26, 1999.

     In addition, the Company is involved in various other legal proceedings
which, in the opinion of management, will not result in a material adverse
effect on the financial condition or results of operations of the Company.

ITEM 5.   Other Information
          -----------------

     In December, 1998, a Royal Caribbean cruise ship ran aground near St.
Maarten.  This ship is expected to be out of service during the Company's third
and fourth quarters.  This ship's regular travel route allows passengers to
disembark on several islands where the Company maintains stores.  It is not
possible at this time for the Company to quantify the amount of profits it may
lose as a result of the temporary loss of sales to passengers traveling on this
ship.  At this time, the Company does not expect that the losses will have a
material adverse effect on the financial condition or results of operations of
the Company.

                                       16
<PAGE>
 
ITEM 6.   Exhibits and Reports of Form 8-K
          --------------------------------

(a)  Exhibits

  3.1     The Amended and Restated Certificate of Incorporation of the Company
          is incorporated herein by reference to Exhibit 3.3 to Amendment No. 1
          to the Company's Registration Statement on Form S-1, Registration No.
          33-40907, filed with the Securities and Exchange Commission on July
          10, 1992 ("Amendment No. 1 to the Form S-1").

  3.2     The Amended and Restated By-Laws of the Company are incorporated
          herein by reference to Exhibit 3.4 to Amendment No. 1 to the Form S-1
          and the First Amendment to the Amended and Restated By-laws of the
          Company is incorporated herein by reference to the Current Report on
          Form S-K filed with the Securities and Exchange Commission on November
          12, 1997.

 10.26    Employment Agreement, dated as of September 10, 1998, between David J.
          Nace and the Company is filed herewith as Exhibit 10.26.

 10.27    Employment Agreement, dated as of August 25, 1998, between Michael M.
          Poole and the Company is filed herewith as Exhibit 10.27.

 10.28    Non-Qualified Stock Option Agreement, dated as of August 25, 1998,
          between Michael M. Poole and the Company is filed herewith as Exhibit
          10.28.

 27.1     Financial Data Schedule is filed herewith as Exhibit 27.1.

(b)  Reports on Form 8-K during the quarter ended November 28, 1998

     No Form 8-K was issued by the Company during the three-month period
  ended November 28, 1998.

                                       17
<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.


                                    LITTLE SWITZERLAND, INC.


Date: January 12, 1999              By: /s/ David J. Nace
                                        -----------------
                                        David J. Nace
                                        Chief Financial Officer,
                                        Executive Vice President and Treasurer
                                        [Authorized Officer and Principal
                                        Financial and Accounting Officer]

                                       18