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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 June 30, 2001

[_] 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 (IRS Employer
incorporation or organization) Identification No.)

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

(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 twelve 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

Number of shares of the Registrant's Common Stock outstanding as of August
7, 2001: 4,337,886.

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SPECIALTY CATALOG CORP.

INDEX

PART I. FINANCIAL STATEMENTS

Page No.
--------

Item 1. Condensed Consolidated Financial Statements as of June 30,
2001, December 30, 2000 and July 1, 2000, for the Thirteen
Weeks Ended June 30, 2001 and July 1, 2000 and for the
Twenty-Six Weeks Ended June 30, 2001 and July 1, 2000

Condensed Consolidated Statements of Operations 3-4

Condensed Consolidated Balance Sheets 5

Condensed Consolidated Statements of Cash Flows 6

Notes to Condensed Consolidated Financial Statements 7

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12

PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds 15

Item 5. Other Information 16

Item 6. Exhibits and Reports on Form 8-K 17

Signatures 18

PART I. FINANCIAL STATEMENTS
Item 1. Condensed Consolidated Financial Statements

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

Thirteen Weeks Ended
June 30, 2001 July 1, 2000
------------- ------------

Revenues:
Net sales........................................................... $ 13,244,157 $ 14,484,695
Shipping & handling income.......................................... 2,042,875 2,138,392
Royalties........................................................... 13,183 57,119
------------- ------------
Total revenues......................................................... 15,300,215 16,680,206
Cost of sales (including buying, occupancy and order
fulfillment costs)................................................. 5,491,006 5,836,990
------------- ------------
Gross profit........................................................... 9,809,209 10,843,216
Operating expenses:
Operating expenses.................................................. 7,686,578 8,885,760
Depreciation and amortization....................................... 466,304 416,329
------------- ------------
Total operating expenses............................................... 8,152,882 9,302,089
------------- ------------
Income from operations................................................. 1,656,327 1,541,127
Interest expense, net.................................................. 206,751 225,683
------------- ------------
Income before income taxes............................................. 1,449,576 1,315,444
Income tax provision................................................... 593,098 539,329
------------- ------------
Net income............................................................. 856,478 776,115
Other comprehensive loss - foreign currency translation adjustment..... 97,019 81,204
------------- ------------
Comprehensive income................................................... $ 759,459 $ 694,911
============= ============

Earnings per share - Basic EPS:
Net income per share............................................. $ 0.20 $ 0.18
============ ============
Weighted average shares outstanding.............................. 4,337,886 4,340,353
============ ============

Earnings per share - Diluted EPS:
Net income per share............................................. $ 0.19 $ 0.17
============ ============
Weighted average shares outstanding.............................. 4,592,700 4,615,365
============ ============

See notes to condensed consolidated financial statements.

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

Twenty-Six Weeks Ended
June 30, 2001 July 1, 2000
------------- ------------

Revenues:
Net sales........................................................... $ 27,512,930 $ 28,366,448
Shipping & handling income.......................................... 4,292,347 4,250,034
Royalties........................................................... 37,185 138,666
------------- ------------
Total revenues......................................................... 31,842,462 32,755,148
Cost of sales (including buying, occupancy and order
fulfillment costs)................................................. 11,738,223 11,667,129
------------- ------------
Gross profit........................................................... 20,104,239 21,088,019
Operating expenses:
Operating expenses.................................................. 16,601,179 18,582,052
Depreciation and amortization....................................... 916,460 816,030
------------- ------------
Total operating expenses............................................... 17,517,639 19,398,082
------------- ------------
Income from operations................................................. 2,586,600 1,689,937
Interest expense, net.................................................. 470,071 441,682
------------- ------------
Income before income taxes............................................. 2,116,529 1,248,255
Income tax provision................................................... 866,548 511,769
------------- ------------
Net income............................................................. 1,249,981 736,486
Other comprehensive loss - foreign currency translation adjustment..... 250,826 76,537
------------- ------------
Comprehensive income................................................... $ 999,155 $ 659,949
============= ============

Earnings per share - Basic EPS:
Net income per share............................................. $ 0.29 $ 0.17
============= ============
Weighted average shares outstanding.............................. 4,337,886 4,345,973
============= ============

Earnings per share - Diluted EPS:
Net income per share............................................. $ 0.28 $ 0.16
============= ============
Weighted average shares outstanding.............................. 4,539,968 4,631,735
============= ============

See notes to condensed consolidated financial statements.

SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

June 30, December 30, July 1,
2001 2000 2000
----- ----- ----
Assets

Current assets:
Cash and cash equivalents.......................................... $ 1,533,346 $ 435,276 $ 608,112
Accounts receivable, net........................................... 1,166,914 1,521,469 1,502,619
Inventories........................................................ 5,132,249 5,324,460 5,667,516
Prepaid expenses................................................... 3,671,451 3,561,311 4,458,275
------------ ------------ ------------
Total current assets..................................... 11,503,960 10,842,516 12,236,522
------------ ------------ ------------
Property, plant and equipment, net....................................... 4,042,273 4,391,445 4,561,834
Intangible assets, net................................................... 3,943,288 3,942,508 4,172,925
Deferred income taxes.................................................... 3,862,719 4,273,287 4,001,199
Other assets............................................................. 262,851 253,748 169,507
------------ ------------ ------------
Total assets............................................. $ 23,615,091 $ 23,703,504 $ 25,141,987
============ ============ ============

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses.............................. $ 4,023,885 $ 3,656,757 $ 4,953,065
Liabilities to customers........................................... 1,134,736 925,888 1,163,359
Short-term borrowings.............................................. -- 788,100 5,426,132
Income taxes payable............................................... 458,520 376,914 588,340
Current portion of long-term debt.................................. 1,800,000 1,800,000 2,384,105
------------ ------------ ------------
Total current liabilities................................ 7,417,141 7,547,659 14,515,001
------------ ------------ ------------
Long-term debt........................................................... 6,300,000 7,200,000 1,959,053
Other long-term liabilities.............................................. 170,885 227,929 304,499
Commitments and contingencies
Shareholders' equity:
Common stock....................................................... 52,397 52,397 52,397
Additional paid-in capital......................................... 16,159,570 16,159,570 16,159,570
Accumulated other comprehensive loss............................... (389,776) (138,950) (127,787)
Accumulated deficit................................................ (3,227,948) (4,477,923) (4,853,568)
------------ ------------ ------------
12,594,243 11,595,094 11,230,612
Less treasury stock, at cost, 901,888 shares at June 30, 2001,
December 30, 2000 and July 1, 2000............................. (2,867,178) (2,867,178) (2,867,178)
------------ ------------ ------------
Total shareholders' equity.................................. 9,727,065 8,727,916 8,363,434
------------ ------------ ------------
Total liabilities and shareholders' equity.................. $ 23,615,091 $ 23,703,504 $ 25,141,987
============ ============ ============

See notes to condensed consolidated financial statements.

SPECIALTY CATALOG CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

Twenty-Six Weeks Ended
June 30, 2001 July 1, 2000
------------- ------------

Cash flows from operating activities:
Net income............................................................. $ 1,249,981 $ 736,486
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.................................... 916,460 816,030
Deferred income taxes............................................ 421,913 351,587
Changes in operating assets and liabilities:
Accounts receivable, net....................................... 328,722 (321,096)
Inventories.................................................. 147,847 (89,503)
Prepaid expenses............................................... (117,504) (455,066)
Other assets................................................... (37,542) 33,388
Accounts payable and accrued expenses.......................... 463,764 734,685
Liabilities to customers....................................... 208,848 (5,897)
Income taxes payable........................................... 88,629 155,487
Other long-term liabilities.................................... (8,334) (16,668)
------------ -----------
Net cash provided by operating activities.............................. 3,662,784 1,939,433
------------ -----------

Cash flows from investing activities:
Acquisitions, net of cash acquired and liabilities assumed....... (436,560) --
Purchases of trademarks.......................................... (700) --
Purchases of property, plant and equipment....................... (344,396) (872,648)
------------ -----------
Net cash used in investing activities.................................. (781,656) (872,648)
------------ -----------

Cash flows from financing activities:
Repayments on short-term borrowings, net......................... (788,100) (873,758)
Repayments of long-term debt..................................... (900,000) (616,728)
Purchase of treasury stock....................................... -- (35,446)
Repayments of capital lease obligations.......................... (48,710) (67,138)
------------ -----------
Net cash used in financing activities.................................. (1,736,810) (1,593,070)
------------ -----------

Effect of exchange rate changes on cash and cash equivalents........... (46,248) (2,450)
------------ -----------

Increase (decrease) in cash and cash equivalents....................... 1,098,070 (528,735)

Cash and cash equivalents, beginning of year........................... 435,276 1,136,847
------------ -----------

Cash and cash equivalents, end of period............................... $ 1,533,346 $ 608,112
============ ===========

Supplemental disclosures of cash flow information:
During the twenty-six weeks ended July 1, 2000, the Company received federal
income tax refunds of $320,000.

See notes to condensed consolidated financial statements.

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 Form 10-K of Specialty Catalog Corp. (the "Company") for
the fiscal year ended December 30, 2000, 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 accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. The results of operations for the
thirteen weeks and twenty-six weeks ended June 30, 2001 are not necessarily
indicative of the results for the entire fiscal year ending December 29, 2001.

The condensed consolidated financial statements for the thirteen weeks and
twenty-six weeks ended June 30, 2001 and July 1, 2000 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 condensed consolidated financial
statements are those set forth in Note 1 of the consolidated financial
statements included in the Company's Form 10-K for the year ended December 30,
2000.

Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", is effective for all fiscal
years beginning after June 15, 2000. SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS No. 133, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative. The Company adopted
SFAS No. 133 effective December 31, 2000.

On January 19, 2001, the Company and Fleet National Bank, N.A. (the "Bank")
entered into an Interest Rate Swap Agreement based on a notional principal
balance of $4.5 million. Under the interest rate swap agreement, the Company
receives quarterly LIBOR-based interest rate payments from the Bank, and pays
interest quarterly at a fixed rate of 5.57% to the Bank, plus a borrowing margin
to the Bank. These interest rate payments are settled net with the Bank. The
agreement is effective for a period of two years and terminates on January 19,
2003.

The interest rate swap is carried at its fair value. Hedge accounting is
not applied and changes in the fair value of the swap are included in interest
expense, net. At June 30, 2001, the carrying value of the swap was approximately
$85,000, which is included in the accrued expenses. Interest expense, net was
increased by approximately $38,000 and $85,000 in the thirteen and twenty-six
weeks ended June 30, 2001, respectively, which represents the change in the fair
value of the swap during these periods.

Certain amounts in the 2000 financial statements have been reclassified to
conform to the 2001 presentation.

SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

3. Reconciliation of Basic and Diluted Earnings per Share

The following table (in thousands) shows the amounts used in computing
basic and diluted earnings per share for net income and the effects of
potentially dilutive options on the weighted average number of shares
outstanding.

For the thirteen weeks ended For the twenty-six weeks ended
June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000
------------- ------------ ------------- ------------
Net Net Net Net
Income Shares Income Shares Income Shares Income Shares
------ ------ ------ ------ -------- ------ ------ ------

Basic earnings per share $ 856 4,338 $ 776 4,340 $ 1,250 4,338 $ 736 4,346
Effect of dilutive options -- 255 -- 275 -- 202 -- 286
------ ------ ------ ------ -------- ------ ------ ------
Diluted earnings per share $ 856 4,593 $ 776 4,615 $ 1,250 4,540 $ 736 4,632
====== ====== ====== ====== ======== ====== ====== ======

Options to purchase 487,551 shares of common stock ranging from $5.33 to
$7.15 per share were not included in computing diluted EPS for the thirteen
weeks and twenty-six weeks ended June 30, 2001 because their effects were
antidilutive. Options to purchase 564,251 shares of common stock ranging from
$5.33 to $7.15 per share were not included in computing diluted EPS for the
thirteen weeks and twenty-six weeks ended July 1, 2000 because their effects
were antidilutive.

4. Acquisition

On January 29, 2001, the Company's British subsidiary, Daxbourne
International Limited, acquired the women's wig and hairpiece business of the
Company's former British licensee. The licensee had been the exclusive British
licensee of the Company's Paula Young brand of women's wigs and hairpieces since
1994. During the term of the license agreement the licensee developed and
circulated the Paula Young Fashion Wigs catalog using the merchandising and
------------------------
creative resources of the Company, thereby establishing Paula Young as a
preeminent brand in Britain with a loyal customer following.

The purchase price includes (i) an initial fixed payment of approximately
$254,000 on the closing date of the transaction, (ii) a fixed payment of
approximately $36,000 due at the beginning of each of fiscal years 2002 and 2003
and (iii) a minimum royalty fee of approximately $73,000 per year due on March
31, 2002 and March 31, 2003, offset by the fixed payments in part (ii). The
acquisition agreement also provides for the termination of the 1994 license
agreement and transfer of the assets of the Paula Young Fashion Wigs catalog
------------------------
business to Daxbourne. Daxbourne's catalog division will now circulate both
catalogs -- continuing to circulate its Jacqueline Collection catalog and the
---------------------
Paula Young Fashion Wigs catalog.
- ------------------------

The agreement also called for continued support services from the British
licensee for a period of three months ending on April 30, 2001. Daxbourne
International Limited has not completed the allocation of the purchase price
among the various asset categories. The purchase price allocation is preliminary
and subject to final adjustment.

5. Sale of Assets

On May 8, 2001, the Company's subsidiary, SC Publishing, Inc., sold its
business of continuing education for accounting professionals to the California
Certified Public Accountants Education Foundation. The sales price of $150,000
includes an irrevocable, royalty free, worldwide license to use the trade name
Western Schools for accounting courses, all related inventory for existing
courses, and title and rights to its accounting courses, both existing and under
development. The Company recognized a pre-tax gain, included in selling,
general, and administrative expenses, on the sale of these assets of
approximately $55,000. SC Publishing is retaining its continuing education
business for nurses and other mental health professionals which produced
approximately ninety-two percent of the 2000 net revenue of the Western Schools
division of SC Publishing.

SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

6. Merger Agreement

On April 30, 2001, the Company announced that Mr. Guy Naggar, a British
investor and substantial stockholder and director of the Company, has submitted
a proposal to acquire for cash, through merger, all of the issued and
outstanding shares of common stock of the Company, other than his shares and the
shares of others who may join him, for $3.75 a share.

On May 4, 2001, the Company entered into a definitive Merger Agreement with
Specialty Acquisition Corp., a Delaware corporation owned by Mr. Naggar and
several other substantial stockholders of the Company. The Merger Agreement
provides for a cash merger in which the holders of common stock of the Company,
other than Specialty Acquisition Corp., immediately prior to the merger, will
receive $3.75 per share in cash for each share of common stock of Specialty
Catalog Corp owned before the merger. The merger is subject to the satisfaction
of a number of closing conditions, including, but not limited to, the
consummation of financing arrangements and approval by the stockholders of
Specialty Catalog Corp. The merger is expected to close in the fall of 2001.
Other stockholders, including certain members of the Board of Directors of the
Company, have joined Mr. Naggar in the proposed transaction.

7. Business Segments and Financial Information by Geographic Location

Specialty Catalog Corp. has five reportable segments: Paula Young and
Especially Yours under the SC Direct division, Western Schools and American
Healthcare Institute ("AHI") under the SC Publishing division and Daxbourne
International Limited. The SC Direct division sells women's wigs and hairpieces
using two distinct catalogs: Paula Young and Especially Yours. The SC Publishing
division distributes catalogs under its Western Schools brand and specializes in
providing continuing education courses to nurses and accounting professionals
(see sale of assets in Note 5). SC Publishing's other segment, AHI, distributes
catalogs under its own name and specializes in providing continuing education
seminars and conferences to nurses and other mental health professionals.
Daxbourne International Limited is a retailer and wholesaler of women's wigs,
hairpieces and related products in the United Kingdom.

The accounting policies of the reportable segments are the same as those
described in Note 1 of the consolidated financial statements included in the
Company's Form 10-K for the year ended December 30, 2000. The Company's
reportable segments are strategic business units that offer either different
products or operate in different geographic locations. The Company markets its
products in two major geographic areas, the United States and the United
Kingdom. The SC Direct and SC Publishing divisions market their products and
maintain their assets in the United States. Daxbourne International Limited
markets its products and maintains its assets in the United Kingdom.

SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

A summary of information about the Company's operations by segment for the
thirteen weeks and twenty-six weeks ended June 30, 2001 and July 1, 2000
follows.

Paula Especially Corporate Total SC Western
Young Yours Expenses Direct Schools
----------- ---------- ----------- ------------ ----------

Thirteen weeks ended
June 30, 2001
Net sales (including royalties)........ $ 7,452,638 $2,260,114 $ -- $ 9,712,752 $1,240,122
Shipping & handling income............. 1,418,333 383,314 -- 1,801,647 225,443
----------- ---------- ----------- ------------ ----------
Total revenues......................... 8,870,971 2,643,428 -- 11,514,399 1,465,565
Gross profit........................... 5,537,821 1,649,359 (57,605) 7,129,575 1,131,069
Operating expenses..................... 3,139,906 1,306,122 1,225,945 5,671,973 817,036
Depreciation and amortization.......... -- -- 299,743 299,743 15,905
----------- ---------- ----------- ------------ ----------
Income (loss) from operations.......... 2,397,915 343,237 (1,583,293) 1,157,859 298,128
Interest expense, net.................. -- -- 165,472 165,472 --
Income tax provision (benefit)......... -- -- 405,650 405,650 122,233

Segment assets......................... -- -- 16,064,565 16,064,565 5,019,381
Capital expenditures................... -- -- 121,855 121,855 --

Total SC
AHI Publishing Daxbourne Total
----------- ---------- ----------- ------------

Thirteen weeks ended
June 30, 2001
Net sales (including royalties)........ $ 715,462 $1,955,584 $ 1,589,004 $ 13,257,340
Shipping & handling income............. -- 225,443 15,785 2,042,875
----------- ---------- ----------- ------------
Total revenues......................... 715,462 2,181,027 1,604,789 15,300,215
Gross profit........................... 423,014 1,554,083 1,125,551 9,809,209
Operating expenses..................... 509,725 1,326,761 687,844 7,686,578
Depreciation and amortization.......... 51,582 67,487 99,074 466,304
----------- ---------- ----------- ------------
Income (loss) from operations.......... (138,293) 159,835 338,633 1,656,327
Interest expense, net.................. -- -- 41,279 206,751
Income tax provision (benefit)......... (56,700) 65,533 121,915 593,098

Segment assets......................... 101,858 5,121,239 2,429,287 23,615,091
Capital expenditures................... -- -- 3,728 125,583

Paula Especially Corporate Total SC Western
Young Yours Expenses Direct Schools
----------- ---------- ----------- ------------ ----------

Thirteen weeks ended
July 1, 2000
Net sales (including royalties)........ $ 8,524,780 $2,011,122 $ -- $ 10,535,902 $1,060,013
Shipping & handling income............. 1,575,941 346,658 -- 1,922,599 206,144
----------- ---------- ----------- ------------ ----------
Total revenues......................... 10,100,721 2,357,780 -- 12,458,501 1,266,157
Gross profit........................... 6,617,353 1,473,943 (57,605) 8,033,691 912,273
Operating expenses..................... 4,036,656 1,202,975 1,247,908 6,487,539 837,623
Depreciation and amortization.......... -- -- 280,423 280,423 10,179
----------- ---------- ----------- ------------ ----------
Income (loss) from operations.......... 2,580,697 270,968 (1,585,936) 1,265,729 64,471
Interest expense, net.................. -- -- 170,253 170,253 --
Income tax provision (benefit)......... -- -- 443,822 443,822 26,431

Segment assets......................... -- -- 15,395,686 15,395,686 4,501,208
Capital expenditures................... -- -- 411,551 411,551 --

Total SC
AHI Publishing Daxbourne Total
----------- ---------- ----------- ------------

Thirteen weeks ended
July 1, 2000
Net sales (including royalties)........ $ 1,659,645 $2,719,658 $ 1,286,254 $ 14,541,814
Shipping & handling income............. -- 206,144 9,649 2,138,392
----------- ---------- ----------- ------------
Total revenues......................... 1,659,645 2,925,802 1,295,903 16,680,206
Gross profit........................... 1,005,635 1,917,908 891,617 10,843,216
Operating expenses..................... 963,319 1,800,942 597,279 8,885,760
Depreciation and amortization.......... 35,475 45,654 90,252 416,329
----------- ---------- ----------- ------------
Income (loss) from operations.......... 6,841 71,312 204,086 1,541,127
Interest expense, net.................. -- -- 55,430 225,683
Income tax provision (benefit)......... 2,657 29,088 66,419 539,329

Segment assets......................... 808,717 5,309,925 4,436,376 25,141,987
Capital expenditures................... 21,050 21,050 7,364 439,965

SPECIALTY CATALOG CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

Paula Especially Corporate Total SC Western Total SC
Young Yours Expenses Direct Schools AHI Publishing
----- ----- -------- ------ ------- --- ----------

Twenty-six weeks ended
June 30, 2001
Net sales (including royalties).. $15,708,242 $4,520,234 $ -- $20,228,476 $2,970,577 $1,201,325 $4,171,902
Shipping & handling income....... 2,924.121 778,087 -- 3,702,208 562,741 -- 562,741
----------- ---------- ---------- ----------- ---------- ---------- ----------
Total revenues................... 18,632,363 5,298,321 -- 23,930,684 3,533,318 1,201,325 4,734,643
Gross profit..................... 11,454,274 3,206,602 (116,354) 14,544,522 2,645,876 699,370 3,345,246
Operating expenses............... 6,867,057 2,784,848 2,729,005 12,380,910 1,701,005 1,153,522 2,854,527
Depreciation and amortization.... -- -- 591,213 591,213 29,111 99,209 128,320
----------- ---------- ---------- ----------- ---------- ---------- ---------
Income (loss) from operations.... 4,587,217 421,754 (3,436,572) 1,572,399 915,760 (553,361) 362,399
Interest expense, net............ -- -- 385,557 385,557 -- 104 104
Income tax provision (benefit)... -- -- 485,377 485,377 375,462 (226,921) 148,541
Segment assets................... -- -- 16,064,565 16,064,565 5,019,381 101,858 5,121,239
Capital expenditures............. -- -- 215,310 215,310 57,695 9,164 66,859

Paula Especially Corporate Total SC Western Total SC
Young Yours Expenses Direct Schools AHI Publishing
----- ----- -------- ------ ------- --- ----------

Twenty-six weeks ended
July 1, 2000
Net sales (including royalties).. $16,813,497 $3,727,093 $ -- $20,540,590 $2,761,295 $2,472,938 $5,234,233
Shipping & handling income....... 3,020,783 678,979 -- 3,699,762 529,772 21 529,793
----------- ---------- ---------- ----------- ---------- ---------- ----------
Total revenues................... 19,834,280 4,406,072 -- 24,240,352 3,291,067 2,472,959 5,764,026
Gross profit..................... 12,723,789 2,674,480 (116,315) 15,281,954 2,431,504 1,477,715 3,909,219
Operating expenses............... 8,587,566 2,715,620 2,832,164 14,135,350 1,723,423 1,475,399 3,198,822
Depreciation and amortization.... -- -- 542,174 542,174 20,851 69,319 90,170
----------- ---------- ---------- ----------- ---------- ---------- ----------
Income (loss) from operations 4,136,223 (41,140) (3,490,653) 604,430 687,230 (67,003) 620,227
Interest expense, net............ -- -- 325,457 325,457 -- -- --
Income tax provision
(benefit)........................ -- -- 114,363 114,363 281,763 (27,471) 254,292
Segment assets................... -- -- 15,395,686 15,395,686 4,501,208 808,717 5,309,925
Capital expenditures............. -- -- 791,601 791,601 -- 58,324 58,324

Daxbourne Total
--------- -----

Twenty-six weeks ended
June 30, 2001
Net sales (including royalties).......... $3,149,737 $27,550,115
Shipping & handling income............... 27,398 4,292,347
------------ -------------

Total revenues........................... 3,177,135 31,842,462
Gross profit............................. 2,214,471 20,104,239
Operating expenses....................... 1,365,742 16,601,179
Depreciation and amortization............ 196,927 916,460
------------ ----------

Income (loss) from operations........... 651,802 2,586,600
Interest expense, net................... 84,410 470,071

Income tax provision (benefit).......... 232,630 866,548

Segment assets.......................... 2,429,287 23,615,091

Capital expenditures.................... 62,227 344,396

Daxbourne Total
--------- -----

Twenty-six weeks ended
July 1, 2000
Net sales (including royalties)......... $2,730,291 $28,505,114

Shipping & handling income.............. 20,479 4,250,034
------------- -------------

Total revenues.......................... 2,750,770 32,755,148
Gross profit............................ 1,896,846 21,088,019
Operating expenses...................... 1,247,880 18,582,052
Depreciation and amortization........... 183,686 816,030
------------- -------------

Income (loss) from operations 465,280 1,689,937
Interest expense, net.................. 116,225 441,682

Income tax provision 143,114 511,769
(benefit)..............................

Segment assets......................... 4,436,376 25,141,987

Capital expenditures................... 22,723 872,648

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 for the Company 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 ("Exchange Act"), 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, (x) the impact of acquisitions on the Company's prospects
and (xi) the completion of the transaction contemplated by the merger agreement.
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
Securities and Exchange Commission, including those risks and uncertainties
discussed under the caption "Risk Factors" in the Company's Form 10-K for the
year ended December 30, 2000. The forward-looking statements contained herein
represent the Company's judgment as of the date of this Quarterly Report on Form
10-Q, and the Company cautions readers not to place undue reliance on such
statements.

Thirteen Weeks Ended June 30, 2001 Compared to the Thirteen Weeks Ended July 1,
2000
Revenues decreased to $15.3 million for the thirteen weeks ended June 30,
2001 from $16.7 million for the thirteen weeks ended July 1, 2000, a decrease of
approximately $1.4 million or 8.4 percent. This change in revenues was due to
decreases in SC Direct's and AHI's revenues of approximately $944,000 and
$944,000, respectively, offset by increases in Western Schools and Daxbourne's
revenues of approximately $199,000 and $309,000, respectively.

The overall revenue decrease in SC Direct was caused by reducing the number
of catalogs circulated during the thirteen weeks ended June 30, 2001 compared to
the thirteen weeks ended July 1, 2000. The Paula Young business sales decreased
by $1.2 million, offset by a revenue increase in the Especially Yours business
of approximately $286,000. This total revenue decrease was offset by a decrease
in merchandise return rates resulting from the Company's initiatives during the
latter half of fiscal year 2000 to implement several marketing, creative,
operational and merchandising changes. AHI's revenue decrease was caused by the
elimination of unprofitable seminars during the thirteen weeks ended June 30,
2001 compared to the thirteen weeks ended July 1, 2000. Daxbourne's revenue
increase primarily related to the acquisition of the Paula Young UK business in
January 2001 which had revenues of approximately $167,000 for the thirteen weeks
ended June 30, 2001.

Gross profit as a percentage of revenues decreased to 64.1 percent for the
thirteen weeks ended June 30, 2001 from 65.0 percent for the thirteen weeks
ended July 1, 2000 as a result of merchandise sales mix changes. Gross profit
decreased to $9.8 million for the thirteen weeks ended June 30, 2001 from $10.8
million for the thirteen weeks ended July 1, 2000, a decrease of approximately
$1.0 million or 9.3 percent.

This decrease was due to the decrease in revenues discussed above as well as the
decrease in the gross profit rate also discussed above.

Operating expenses decreased to $8.2 million for the thirteen weeks ended
June 30, 2001 from $9.3 million for the thirteen weeks ended July 1, 2000, a
decrease of approximately $1.1 million or 11.8 percent. As mentioned above, the
decrease in operating expenses was due to the Company's decision to reduce
catalog circulation.

Interest expense, net of interest income, decreased to approximately
$207,000 for the thirteen weeks ended June 30, 2001 from approximately $226,000
for the thirteen weeks ended July 1, 2000, a decrease of approximately $19,000
or 8.4 percent. The decrease was attributable to lower interest rates on
variable rate borrowings not hedged by the interest rate swap agreement during
the thirteen weeks ended June 30, 2001 compared to the thirteen weeks ended July
1, 2000, offset by the loss recorded on the fair value of the interest rate swap
agreement of approximately $38,000 and by higher average principal amounts
outstanding on the Company's bank facility.

Twenty-Six Weeks Ended June 30, 2001 Compared to the Twenty-Six Weeks Ended July
1, 2000

Revenues decreased to $31.8 million for the twenty-six weeks ended June 30,
2001 from $32.8 million for the twenty-six weeks ended July 1, 2000, a decrease
of $1.0 million or 3.1 percent. This change in revenues was due to decreases in
SC Direct's and AHI's revenues of approximately $310,000 and $1.3 million,
respectively, offset by increases in Western Schools and Daxbourne's revenues of
approximately $242,000 and $426,000, respectively.

The overall revenue decrease in SC Direct was caused by reducing the number
of catalogs circulated during the twenty-six weeks ended June 30, 2001 compared
to the twenty-six weeks ended July 1, 2000. The Paula Young business sales
decreased by $1.2 million, offset by a revenue increase in the Especially Yours
business of approximately $892,000. This total revenue decrease was offset by a
decrease in merchandise return rates resulting from the Company's initiatives
during the latter half of fiscal year 2000 to implement several marketing,
creative, operational and merchandising changes. AHI's revenue decrease was
caused by the elimination of unprofitable seminars during the twenty-six weeks
ended June 30, 2001 compared to the twenty-six weeks ended July 1, 2000.
Daxbourne's revenue increase primarily related to the acquisition of the Paula
Young UK business in January 2001 which had revenues of approximately $214,000
for the twenty-six weeks ended June 30, 2001.

Gross profit as a percentage of revenues decreased to 63.1 percent for the
twenty-six weeks ended June 30, 2001 from 64.4 percent for the twenty-six weeks
ended July 1, 2000 as a result of merchandise sales mix changes. Gross profit
decreased to $20.1 million for the twenty-six weeks ended June 30, 2001 from
$21.1 million for the twenty-six weeks ended July 1, 2000, a decrease of
approximately $1.0 million or 4.7 percent. This decrease was due to the decrease
in revenues discussed above as well as the decrease in the gross profit rate
also discussed above.

Operating expenses decreased to $17.5 million for the twenty-six weeks
ended June 30, 2001 from $19.4 million for the twenty-six weeks ended July 1,
2000, a decrease of approximately $1.9 million or 9.8 percent. The decrease was
due to the Company's decision to reduce catalog circulation and advertising
promotions.

Interest expense, net of interest income, increased to approximately
$470,000 for the twenty-six weeks ended June 30, 2001 from approximately
$442,000 for the twenty-six weeks ended July 1, 2000, an increase of
approximately $28,000 or 6.3 percent. The increase was attributable to the loss
recorded on the fair value of the interest rate swap agreement of approximately
$85,000 and by higher average principal amounts outstanding

on the Company's bank facility, offset by lower interest rates on variable rate
borrowings not hedged by the interest rate swap agreement during the twenty-six
weeks ended June 30, 2001 compared to the twenty-six weeks ended July 1, 2000.

Liquidity and Capital Resources

Net cash flows provided by the Company for the twenty-six weeks ended June
30, 2001 were $1.1 million. Cash flows provided by operating activities for the
twenty-six weeks ended June 30, 2001 were $3.7 million, offset by uses of
approximately $782,000 in investing activities and $1.7 million in financing
activities. The major factors that caused the difference between net income and
net cash flows provided by operations for the twenty-six weeks ended June 30,
2001 were increases in: (i) depreciation and amortization expense of
approximately $916,000, (ii) deferred income taxes of approximately $422,000 and
(iii) cash working capital items of $1.1 million. The Company used approximately
$782,000 in investing activities, of which approximately $345,000 was for
computer and equipment purchases and approximately $437,000 was used to acquire
the Paula Young UK license from the Company's former British licensee. The $1.7
million in net cash used in financing activities was primarily due to: (i) the
repayment of $900,000 of long-term debt, (ii) the repayment of short-term
borrowings of approximately $788,000, and (iii) the repayment of approximately
$49,000 of capital leases.

On December 27, 2000, the Company entered into a $12.25 million credit
agreement (the "Agreement") with Fleet National Bank, N.A. (the "Bank") for the
purpose of refinancing its existing senior debt and to provide for the working
capital needs of the Company. The new credit facility, which may be increased to
$13.0 million in 2002, replaces the Company's former credit facilities with the
Bank. The Agreement includes a $9.0 million five-year term note (the "Term
Loan") and a $3.25 million two-year revolving credit agreement (the "Line of
Credit"). The amount available on the Line of Credit increases as principal
amortization payments on the Term Loan are paid, such that the total Agreement
remains at $12.25 million over the two years of the Line of Credit agreement.
The Line of Credit provides for revolving credit loans and letters of credit
with floating rates based on margins over LIBOR or prime at the Company's
option. The Term Loan is for five years and is amortized at the rate of $450,000
a quarter beginning January 1, 2001.

As of June 30, 2001, $8.1 million of the Term Loan was under LIBOR contract
rates ranging from 6.1681 percent to 7.0 percent (including the Bank's lending
margin). At June 30, 2001, $2.8 million was available under the Line of Credit.

The Agreement is collateralized by a first perfected security interest in
all tangible and intangible assets of the Company, subject to certain permitted
liens. The Agreement is subject to certain consolidated covenants, including but
not limited to, leverage and debt service coverage ratios, minimum earnings
requirements, limitation on capital expenditures, excess cash flow recapture,
and a restriction on the payment of cash dividends on the Company's common
stock.

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 an
additional significant acquisition, could require new external financing.

Recently Issued Accounting Pronouncements

SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", is effective for all fiscal years beginning after June 15, 2000.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly

considered derivatives may now meet the definition of a derivative. The Company
adopted SFAS No. 133 effective December 31, 2000.

On January 19, 2001, the Company and the Bank entered into an Interest Rate
Swap Agreement based on a notional principal balance of $4.5 million. Under the
interest rate swap agreement, the Company receives quarterly LIBOR-based
interest rate payments from the Bank, and pays interest quarterly at a fixed
rate of 5.57% to the Bank, plus a borrowing margin to the Bank. These interest
rate payments are settled net with the Bank. The agreement is effective for a
period of two years and terminates on January 19, 2003.

The interest rate swap is carried at its fair value. Hedge accounting is
not applied and changes in the fair value of the swap are included in interest
expense, net. At June 30, 2001, the carrying value of the swap was
approximately $85,000, which is included in accrued expenses. Interest expense,
net was increased by approximately $38,000 and $85,000 in the thirteen and
twenty-six weeks ended June 30, 2001, respectively, which represents the change
in the fair value of the swap during these periods.

Quantitative and Qualitative Disclosures About Market Risk

The Company's primary exposures to market risks include fluctuations in
interest rates on its short-term and long-term borrowings of $8.1 million as of
June 30, 2001 under its credit facility. Management does not believe that the
risk inherent in the variable-rate nature of these instruments will have a
material adverse effect on the Company's consolidated financial statements.
However, no assurance can be given that such a risk will not have a material
adverse effect on the Company's financial statements in the future.

As of June 30, 2001, the outstanding balance on all of the Company's
credit facilities was $8.1 million. Based on this balance less the amount
covered by the interest rate swap agreement, an immediate change of one
percent in the interest rate would cause a change in interest expense of
approximately $36,000 on an annual basis. The Company's objective in maintaining
these variable rate borrowings is the flexibility obtained regarding early
repayment without penalties and lower overall cost as compared with fixed-rate
borrowings.

The foreign currencies to which the Company has the most significant
exchange rate exposure are the British Pound, Chinese Yuan, Indonesian Rupiah
and Korean Won. The Company expects that most of its wigs and hairpieces will
continue to be manufactured in China, Indonesia and Korea in the future.
Although a substantial portion of the Company's transactions with these
countries occurs in US dollars, the Company's operations are subject to
fluctuations in the value of these countries' currencies. Although to date such
exchange rate exposures have not had a significant effect on the Company's
business operations, no assurance can be given that such exchange rate exposures
will not have a material adverse effect on the Company's business operations in
the future.

PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

Rights Agreement Amendment

On April 11, 2000, the board of directors of Specialty Catalog adopted a
stockholder rights plan pursuant to a rights agreement dated as of April 11,
2000, between Specialty Catalog and Continental Stock Transfer and Trust
Company, as rights agent. The rights agreement is effective as of April 11, 2000
for all shares of common stock of Specialty Catalog outstanding on such date and
for certain shares

of common stock issued thereafter. Pursuant to the rights agreement, at any time
a person (other than an "exempt person") becomes the beneficial owner of 15% or
more of Specialty Catalog's common stock, a "right" is exercisable by the
registered holder of a right certificate to purchase 1/1000th of a share of
series A preferred stock of Specialty Catalog, subject to adjustment, at an
exercise price per 1/1000th of a share of series A preferred stock of $15,
subject to adjustment. Each 1/1000th of a share of series A preferred stock will
have economic attributes (i.e., participation in dividends and voting rights)
substantially equivalent to one whole share of the common stock of Specialty
Catalog. The rights expire on the tenth anniversary of the date of the rights
agreement unless earlier redeemed or exchanged by Specialty Catalog as provided
in the rights agreement.

Prior to the execution of the merger agreement, Specialty Catalog entered
into an amendment to the rights agreement. In accordance with the amendment, the
definition of "exempt person" was amended to include any person or persons, or
persons later joining such person or group of persons, who, prior to the time
they become the beneficial owner of 15% or more of Specialty Catalog's common
stock, receives the approval of the board of directors of Specialty Catalog for
the underlying transaction or transactions which results in the beneficial
ownership of 15% or more of Specialty Catalog's common stock. Mr. Naggar, and
the other stockholders who joined him in the proposed transaction in connection
with the merger agreement, are "exempt persons" because the merger agreement and
the transactions contemplated thereby have received the approval of our board of
directors prior to the time that those stockholders became the beneficial owner
of more than 15% of Specialty Catalog's common stock as a result of such
transactions. See "Item 5. Other Information - Merger Agreement" below.

ITEM 5. Other Information

Merger Agreement

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

2.1 Agreement and Plan of Recapitalization and Merger by and between
Specialty Acquisition Corp. and Specialty Catalog Corp. dated May
4, 2001. Filed as Exhibit 2.1 to Specialty Catalog Corp.'s Form 10-
Q, dated May 15, 2001.

4.1 Rights Agreement, dated as of April 11, 2000, between Specialty
Catalog Corp. and Continental Stock Transfer and Trust Company, As
Rights Agent. Filed as Exhibit 4.1 to Specialty Catalog Corp.'s
Form 8-K, dated April 13, 2000.

4.2 Amendment No. 1 to the Rights Agreement, dated as of March 26,
2001, between Specialty Catalog Corp. and Continental Stock
Transfer and Trust Company, As Rights Agent. Filed as Exhibit 99
(d) (16) to Specialty Catalog Corp.'s Form 13E-3/A, dated July 23,
2001.

(b) Reports on Form 8-K

One report on Form 8-K was filed on May 7, 2001 to report that the Company
has entered into a merger agreement. See the Merger Agreement note of the
condensed consolidated financial statements.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities 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 10, 2001 By: /s/ Joseph Grabowski
------------------------------
President and
Chief Executive Officer

Dated: August 10, 2001 By: /s/ Thomas McCain
------------------------------
Thomas McCain
Senior Vice President and
Chief Financial Officer