UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-Q
(Mark One)
              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the quarterly period ended August 1, 1998

OR

                 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
               For the transition period from ....... to ........

                         Commission file number 0-15934


                                JAY JACOBS, INC.
             (Exact name of registrant as specified in its charter)


              Washington                               91-0698077
    (State or other jurisdiction of                   (IRS Employer
     incorporation or organization)                Identification Number)


                  1530 Fifth Avenue, Seattle, Washington 98101
               (Address of principal executive offices) (Zip code)

                                 (206) 622-5400
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

             Common Stock: 549,220 shares as of September 11, 1998.


                                     Page 1
<PAGE>
                          PART I. FINANCIAL INFORMATION

                          Item 1. Financial Statements

                         JAY JACOBS, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
                                 Balance Sheets
                                 (In thousands)
                                   (Unaudited)

                                                                   August 1,         Jan. 31,
                                                                       1998             1998
<S>                                                                <C>              <C>     
Assets

Current assets:
  Cash and cash equivalents                                        $  1,223         $  1,567
  Accounts receivable                                                   530              336
  Inventories                                                        12,203            9,532
  Prepaid expenses                                                      789              562
                                                                   --------         --------
Total current assets                                                 14,745           11,997
                                                                   --------         --------

Property and equipment, net                                           4,652            4,409
                                                                   --------         --------

Total Assets                                                       $ 19,397         $ 16,406
                                                                   --------         --------

Liabilities and Shareholders' Equity

Current liabilities:
  Accounts payable                                                 $  1,829         $  2,074
  Accrued payroll                                                       213              162
  Accrued reorganization expenses                                       384              400
  Other accrued expenses                                                851              988
  Line of credit                                                     10,158            5,687
  Subordinated debt                                                   2,000                0
                                                                   --------         --------
Total current liabilities                                            15,435            9,311
                                                                   --------         --------

Deferred rental credits                                                 171              171

Federal income tax refund reserve                                     1,980            1,980
                                                                   --------         --------
Total liabilities                                                  $ 17,586         $ 11,462
                                                                   --------         --------

Series A preferred stock -- 46,000 shares issued
and outstanding each period - mandatorily redeemable               $  3,834         $  3,874

Shareholders' equity:
   Preferred stock:  5,000,000 shares authorized;
   Series B preferred stock - 25,000 shares issued
   and outstanding, each period                                       2,072            2,072
   Common stock:  20,000,000 shares authorized;
   549,220 shares issued and outstanding, each                       16,164           13,257
   period
   Retained deficit                                                 (18,245)         (14,259)
   Unrecognized option compensation expense                          (2,014)               0
                                                                   --------         --------
Total shareholders' equity                                         $ (2,023)        $  1,070
                                                                   --------         --------

Total liabilities and shareholders' equity                         $ 19,397         $ 16,406
                                                                   --------         --------


The accompanying notes are an integral part of the financial statements.
</TABLE>

                                     Page 2
<PAGE>
                         JAY JACOBS, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
                      Consolidated Statements of Operations
                    (In thousands, except per share amounts)
                                   (Unaudited)


                                                                   Three Months Ended            Six Months Ended
                                                                   Aug. 1,      Aug. 2,        Aug. 1,      Aug. 2,
                                                                     1998         1997           1998         1997
<S>                                                              <C>          <C>            <C>          <C>     
Net Sales                                                        $ 15,963     $ 15,657       $ 28,654     $ 29,123
                                                                 --------     --------       --------     --------

Operating costs and expenses:
Cost of sales, buying and occupancy costs                          11,520       11,610         21,967       22,563
Selling, general and administrative expenses                        4,557        4,017          8,714        8,000
Interest expense                                                      344          165            578          292
Option compensation expense                                           112            0            783            0
                                                                 --------     --------       --------     --------

                                                                   16,533       15,792         32,042       30,855
                                                                 --------     --------       --------     --------

Loss before extraordinary item                                       (570)        (135)        (3,388)      (1,732)

Extraordinary charge
     Debt extinguishment                                                0            0            522            0
                                                                 --------     --------       --------     --------

Net loss                                                         $   (570)    $   (135)      $ (3,910)    $ (1,732)
                                                                 --------     --------       --------     --------

Basic earnings per share:
     Loss before extraordinary item                              $  (1.29)    $  (0.33)      $  (6.67)    $  (4.24)
                                                                 --------     --------       --------     --------
     Extraordinary charge                                               0            0          (0.95)           0
                                                                 --------     --------       --------     --------
     Net loss                                                    $  (1.29)    $  (0.33)      $  (7.62)    $  (4.24)
                                                                 --------     --------       --------     --------

Weighted average number of shares outstanding                         549          408            549          408


    The accompanying notes are an integral part of the financial statements.

      (See Note 2 - Earnings (Loss) Per Share - for per share calculation)
</TABLE>

                                     Page 3
<PAGE>
<TABLE>
<CAPTION>
                         JAY JACOBS, INC. AND SUBSIDIARY

                      Consolidated Statements of Cash Flows
                                 (In thousands)
                                   (Unaudited)

                                                                                Six Months Ended
                                                                        Aug. 1, 1998         Aug. 2, 1997
            <S>                                                         <C>                  <C>          
            Cash flows from operating activities:
            Net loss                                                    $     (3,910)        $     (1,732)
            Adjustments to reconcile net loss to net cash
               used in operating activities:
            Depreciation and amortization                                        642                  574
            Option compensation expense                                          783                    0
            Change in deferred rental credits                                      0                  (47)

            Change in assets and liabilities:
               Accounts receivable                                              (194)                   7
               Inventories                                                    (2,671)              (1,419)
               Prepaid expenses                                                 (277)                (109)
               Accounts payable                                                 (245)                 839
               Accrued payroll                                                    51                  (86)
               Other accrued expenses                                           (137)                  45
               Accrued reorganization expenses                                   (16)                (119)
               Federal income tax refund reserve                                   0                   25
                                                                        ------------         ------------
            Net cash used for operations                                $     (5,974)        $     (2,022)
                                                                        ------------         ------------

            Cash flows from (to) investing activities:
               Net increase in property and equipment                           (736)                 (54)
                                                                        ------------         ------------
            Net cash used by investing activities                               (736)                 (54)
                                                                        ------------         ------------

            Cash flows from (to) financing activities:
               Net borrowing from line of credit                               4,471                1,935
               Proceeds from options exercised                                    10                    0
               Proceeds from subordinated debt                                 2,000                    0
               Preferred stock dividend                                         (115)                   0
                                                                        ------------         ------------
            Net cash from financing activities                                 6,366                1,935
                                                                        ------------         ------------

            Net increase (decrease) in cash and cash
               equivalents                                              $       (344)        $        141
            Cash and cash equivalents - beginning of period                    1,567                  249
                                                                        ------------         ------------
            Cash and cash equivalents - end of period                   $      1,223         $        108
                                                                        ------------         ------------


    The accompanying notes are an integral part of the financial statements.
</TABLE>

                                     Page 4
<PAGE>
                         JAY JACOBS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


Note 1. Financial Presentation
------------------------------

The attached condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
As a result, certain information and footnote disclosures normally included in
financial statements prepared in accordance with Generally Accepted Accounting
Principles have been condensed or omitted. Jay Jacobs, Inc. ("Jay Jacobs" or the
"Company") believes that the disclosures made are adequate to make the
information not misleading and that the information furnished reflects all
material adjustments which are, in the opinion of management, necessary to
present fairly its results for the interim periods reported and that all such
adjustments are of a normal recurring nature. The consolidated financial
statements should be read in conjunction with the financial statements and
related notes included in the Company's Form 10-K/A filed with the Securities
and Exchange Commission on May 15, 1998. Certain prior year amounts have been
reclassified to conform to the current year's presentation.

Results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year.

The Company's fiscal year ends on the Saturday closest to January 31st of each
year. The current fiscal year ends on January 30, 1999. Each fiscal quarter
contains 13 weeks.

In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers Disclosures about Pensions and Other Postretirement
Benefits" ("Statement No. 132"), which standardizes the disclosure requirements
for pensions and other postretirement benefits. Statement No. 132 is effective
for fiscal years beginning after December 15, 1997. While this statement may
result in additional financial disclosures, it will not impact the Company's
financial position or result of operations.

In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement
No. 133") which establishes accounting and reporting standards for derivative
instruments and hedging activities. Statement No. 133 is effective for all
fiscal years beginning after June 15, 1999. The Company has not yet determined
the effect Statement No. 133 will have on its financial statements or the timing
of adoption.

Note 2. Earnings (Loss) Per Share
---------------------------------

Basic earnings (loss) per share is based on the weighted average number of
Common Shares outstanding during the period as adjusted to take into account the
effect of options outstanding under the 1998 Stock Incentive Plan (the "Plan")
and warrants to purchase Common Stock unless the effect of including such
options is anti-dilutive. The weighted average number of Common Shares and
equivalents outstanding were 549,000 and 408,000 for the quarters ended Aug. 1,
1998 and Aug. 2, 1997, respectively. All Common Shares and equivalents have been
adjusted for the reverse stock split noted below. The weighted average number of
shares outstanding do not reflect the impact of conversion feature of the Series
B Preferred Stock and the exercise of warrants attached to the subordinated
debt. If the Series B Preferred Stock were converted to Common Stock and the
warrants exercised, Common Shares outstanding would increase by 

                                     Page 5
<PAGE>
3,888,000 shares. The total Common Shares outstanding after the conversion and
exercise of warrants would be 4,437,000.

On March 24, 1998, the shareholders of the Company approved a 1-for-15 reverse
stock split and the Company's 1998 Stock Incentive Plan. Both items were
approved by the majority of the holders of both classes of the Company's stock.
The reverse stock split was effective on April 3, 1998. As such, all share and
per share amounts presented in the financial statements and related notes
thereto have been retroactively restated to reflect this stock split.

The following represents the reconciliation of numerators and denominators used
to calculate the basic and diluted earnings per share for all periods presented:

<TABLE>
<CAPTION>
                                                  Quarter             Quarter          Six Months          Six Months
                                                    ended               ended               ended               ended
                                             Aug. 1, 1998        Aug. 2, 1997        Aug. 1, 1998        Aug. 2, 1997
                                             ------------        ------------        ------------        ------------
<S>                                          <C>                 <C>                 <C>                 <C>          
Loss before extraordinary item               $       (570)       $       (135)       $     (3,388)       $     (1,732)
Less:  Accretion of Series A Preferred
   Stock to redemption value                          (38)                  0                 (76)                  0
Less: Series A Preferred Stock dividends              (58)                  0                (115)                  0
Less: Series B Preferred Stock dividends              (40)                  0                 (80)                  0
                                             ------------        ------------        ------------        ------------
Loss available to common shareholders                (706)               (135)             (3,659)             (1,732)

Extraordinary charge
   Debt extinguishment                                  0                   0                 522                   0
                                             ------------        ------------        ------------        ------------

Total loss available to common shareholders  $       (706)       $       (135)       $     (4,181)       $     (1,732)
                                             ------------        ------------        ------------        ------------

Weighted average shares (basic and diluted)           549                 408                 549                 408
                                             ------------        ------------        ------------        ------------

Basic earnings per share:

   Loss before extraordinary item            $      (1.29)       $      (0.33)       $      (6.67)       $      (4.24)
   Extraordinary loss                                   0                   0               (0.95)                  0
                                             ------------        ------------        ------------        ------------
   Net loss                                  $      (1.29)       $      (0.33)       $      (7.62)       $      (4.24)
                                             ------------        ------------        ------------        ------------
</TABLE>

The discounts on the increasing rate Series A and Series B Preferred Stock are
equivalent to a prepayment of dividends by the Company, and accordingly are
being amortized using the effective interest method over the period until
January 1, 2003, when the dividend rates increase to 20%. For purposes of
calculating earnings per share, the current period amortization of these
discounts has been added to the stated dividends for the period.

Note 3. 1998 Stock Incentive Plan
---------------------------------

During March 1998, the shareholders approved the 1998 Stock Incentive Plan (the
"Plan") for the benefit of senior management and associates. The Plan reserved
1,094,467 shares of non-qualified stock options for issuance at the discretion
of the compensation committee of the board of directors. The options under the
Plan generally vest over five years and expire ten years from the date of grant.
In addition, the shares outstanding under the Company's previous plans were
rolled over into the Plan and all options were priced at an exercise price of
$1.95 per share.

The Company has elected to apply APB 25 and related interpretations in
accounting for the Plan. APB 25 requires that compensation expense be recorded
for the difference between the exercise price and the fair value of the shares,
as defined, on the date of grant. This non-cash compensation expense is charged
to operations 20% (the initial vesting percentage) as of the date of the Plan
approval with the balance charged to operations ratably using a straight line
method, subject to the vesting provisions of the Plan. For the quarter and six
months ended August 1, 1998, option related compensation expense of $112,000 and
$783,000, respectively, was charged to operations.

                                     Page 6
<PAGE>
Note 4. Subordinated Debt
-------------------------

On March 11, 1998 the Company closed on a financing transaction with two members
of its investor group, Cahill, Warnock & Company, L.L.C. and affiliates, and T.
Rowe Price Recovery Fund II, L.P. The financing transaction provided for
subordinated debt in the amount of $2,000,000. The subordinated debt agreement
provides for interest at the rate of 14% per annum payable June 30, 1998 and
December 31, 1998, and warrants to purchase 2% of the Company, on a fully
diluted basis. The subordinated debt matures on December 31, 1998.

The warrants associated with the subordinated debt were issued at a redemption
price below the market price. As a result, the Company will incur $200,000 of
non-cash expense over the life of the debt as interest expense. During the
quarter ended August 1, 1998 warrant related interest expense amounted to
$60,000. During the six months ended August 1, 1998 warrant related interest
expense amounted to $100,000.

Note 5. Federal Income Tax Refund Reserve
-----------------------------------------

During fiscal 1997, the Company filed a refund claim with the Internal Revenue
Service (the "IRS") resulting from the carry back of certain expenses of its
bankruptcy proceeding. The tentative refund of approximately $2,355,000, which
is net of fees and expenses, was received in October 1996. The tentative refund
is subject to audit by the IRS, which is currently in process. Should the IRS
ultimately determine that the carry back of some or all of the expenses was
inappropriate, the Company may be called upon to repay a portion of the
tentative refund, with interest. A reserve of $1,980,000 was established in the
Company's financial statements related to the tentative refund.

Note 6. Line of Credit
----------------------

On June 2, 1998 the Company entered into a new credit facility with FINOVA
Capital Corporation ("FINOVA") providing for borrowings up to $15,000,000. The
new credit facility provides for borrowing and letters of credit based on a
formula the aggregate of which cannot exceed the lesser of 100% of the net
appraised value of eligible inventory, as defined, and outstanding letters of
credit, or $15,000,000. Letters of credit are limited to a maximum of
$5,000,000. A first lien is granted to FINOVA on all the Company's assets. The
Company must maintain a scheduled minimum earnings before interest, taxes,
depreciation and amortization and a senior debt coverage ratio, and may not
declare or pay dividends or other distributions on account of any equity
interest in the Company, until payment or satisfaction in full of liabilities
under the FINOVA line of credit and termination of the financing agreement.
Excluded under certain circumstances are dividends to be paid on Series A and
Series B Preferred Stock. Interest is charged at FINOVA's prime rate plus 0.5%
which was 9% at August 1, 1998.

As a condition of closing this facility, the Company repaid the previous General
Electric Capital Corporation ("GECC") facility and incurred a $338,000
termination fee. This cost, together with remaining unamortized financing costs
related to the closing of the GECC facility of $184,000, are reflected as an
extraordinary charge for debt extinguishment during the first quarter of fiscal
1999.

                                     Page 7
<PAGE>
                  ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements
--------------------------

The information in this Report may contain "forward looking statements" within
the meaning of Section 27 A of the Securities Act of 1933, as amended, and
Section 21 E of the Securities Act of 1934, as amended. Such forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties related to the Company's operations. These risks and uncertainties
include, but are not limited to, matters discussed in Item 5 B 1 "Risk Factors"
from the Company's Report on Form 8-K, filed December 15, 1997.

General
-------

All references herein to fiscal 1999 and fiscal 1998 relate to the twelve months
ending January 30, 1999 and January 31, 1998, respectively. References to the
second quarter of fiscal 1999 and fiscal 1998 relate to the three months ended
August 1, 1998 and August 2, 1997, respectively. References to the first half of
fiscal 1999 and fiscal 1998 relate to the six months ended August 1, 1998 and
August 2, 1997, respectively.

Overview and Recent Developments
--------------------------------

Jay Jacobs was incorporated in 1941 and operates a chain of mall-based specialty
apparel stores offering contemporary men's and women's clothing and accessories
at reasonable prices. At the date of this report the Company operates 101 stores
in 19 states. The greatest concentration of stores is in the Pacific Northwest
and Alaska.

In March 1998 the Company closed on a financing transaction with two members of
its investor group, Cahill, Warnock & Company, L.L.C. and affiliates, and T.
Rowe Price Recovery Fund II, L.P. The financing transaction provided for
subordinated debt in the amount of $2,000,000 (See Note 4 - Subordinated Debt).

On June 2, 1998 the Company entered into a new credit facility with FINOVA
providing for borrowings up to $15,000,000 (See Note 6 - Line of Credit). The
facility provides for the ability to finance eligible inventory and to
facilitate the issuance of letters of credit. The Company had $10,158,000 of
short-term notes outstanding at the end of the second quarter of fiscal 1999. As
a condition of closing the new facility, the Company repaid the GECC facility
and incurred $338,000 in termination fees. This cost, together with remaining
unamortized financing costs related to the closing of the GECC facility of
$184,000, was expensed during the first quarter of fiscal 1999.

The Company is utilizing the additional capacity provided by the new credit
facility along with the new subordinated debt provided by its investor group to
fund its business plan for fiscal 1999, which includes opening up to 30 new
stores during fiscal 1999.

During the first quarter of fiscal 1999, the shareholders approved a 1-for-15
reverse stock split and the Company's 1998 Stock Incentive Plan (the "Plan").
The reverse stock split was effective on April 3, 1998. In order to more closely
align the interests of management and employees to those of the shareholders,
the board of directors approved the issuance of 932,000 non-qualified stock
options on March 24, 1998 to employees at an exercise price of $1.95 per share.
Twenty percent of the non-qualified stock options vested immediately and the
balance vest over a five-year period. The Company will incur option related
compensation expense amounting to the difference between the exercise price and
the market price on the date of grant. During the second quarter of fiscal 1999
option related compensation expense of $112,000 was charged to operations.
Option related compensation expense for the first half of fiscal 1999 amounted
to $783,000 (See Note 3 - 1998 Stock Incentive Plan). The Company will record a
charge of $112,000 in each of the next 18 quarters, which represents the
straight line amortization of option related compensation expense over the
vesting period of the stock options. The charges during the first half of fiscal
1999, as well as future quarters, represent non-cash expense.

                                     Page 8
<PAGE>
The Company is planning to increase the net store count during the year,
reversing a three-year trend where the store count was significantly reduced, as
a result of the closure of unprofitable stores. Five new stores were opened
during the first half of 1999, and management has committed to opening an
additional 25 new stores in the second half of fiscal 1999. The majority of the
new locations will be opened in the combination store format, which features
both men's and women's clothing, and averages 4500 square feet. The combination
store format is the Company's most productive in generating an expected positive
cash flow in the first year of operation. Management expects that the new
locations will generate sufficient cash flow to return the initial investment
over a two-year period. The new stores will be located primarily in existing
markets, focusing generally in the Midwest and Southeastern areas of the United
States. The increase in store count should result in increased sales and
operating income. Annual capital requirements will also increase as a result of
the new store opening program and are estimated at $1,700,000 for fiscal 1999.

In April 1998 the Company signed a five-year contract with SPS Payment Systems
("SPS") to provide the Company with a private label credit card and related
marketing program. SPS will provide third party services for developing,
managing, and marketing the Company's private label credit card to its
customers. SPS will also purchase credit sales on a non-recourse basis. The
Company is responsible for marketing the program in conjunction with SPS and for
a service fee based on a percentage of credit sales. The private label credit
card program was launched in May 1998. The Company will use the private label
credit card program to provide its customers with an exclusive credit line for
use in Jay Jacobs stores. The program will provide for the ability to market
directly to private label credit card customers and provide incentives to them
for shopping frequently at its stores. Management believes that this program is
an important element in its strategic plan to improve the productivity of its
new and existing locations.

As a result of the fundamental changes instituted by management, including the
new financing and increased credit facility put in place during the first
quarter of fiscal 1999, management believes that the Company is well positioned
to be a successful competitor in its market. While management believes that it
will continue to be required to manage liquidity carefully, it believes that the
recent financings will enable it to fully implement its business plan, open new
stores, and improve operating efficiency in the future.

As a result of the financing described above, the Company expects that the
increase in interest expense reflected in the results for the second quarter and
first half of fiscal 1999 will continue in future quarters. In addition,
dividend obligations on the Preferred Stock, as well as the convertibility of
the Series B Preferred Stock, will affect earnings per share of Common Stock in
future periods.

Seasonality
-----------

Historically, the Company's operations have been seasonal, with highest-sales
and net income occurring in the fourth fiscal quarter, reflecting increased
demand during the year-end holiday selling season and, to a lesser extent, the
third quarter, reflecting increased demand during the Fall selling season. The
Company has generally recognized net losses during its first and second fiscal
quarters.

                                     Page 9
<PAGE>
Results of Operations
---------------------

The following table sets forth, for the periods indicated, certain consolidated
financial data as a percentage of net sales:

<TABLE>
<CAPTION>
                                                                   Three Months Ended            Six Months Ended
                                                                   Aug. 1,      Aug. 2,        Aug. 1,      Aug. 2,
                                                                     1998         1997           1998         1997
<S>                                                                 <C>          <C>            <C>          <C>
Net sales                                                           100.0%       100.0%         100.0%       100.0%

Cost of sales, buying and occupancy costs                            72.2         74.2           76.7         77.5
Selling, general and administrative expenses                         28.5         25.7           30.4         27.5
Interest expense                                                      2.2          1.1            2.0          1.0
Option compensation expense                                           0.7          0.0            2.7          0.0
                                                                 --------     --------       --------     --------
Loss before extraordinary items                                      (3.6)        (1.0)         (11.8)        (6.0)
Extraordinary charge
   Debt extinguishment                                                  0            0            1.8            0
Net loss                                                             (3.6)%       (1.0)%        (13.6)%       (6.0)%
</TABLE>


Quarter Ended August 1, 1998 Compared to Quarter Ended August 2, 1997.
----------------------------------------------------------------------

Net sales increased by $306,000, or 2%, in the second quarter of fiscal 1999
compared to the second quarter of fiscal 1998. This increase was primarily a
result of the 11% comparable store sales increase and opening three new
locations. This increase was partially offset by a decline in store count which
resulted in operating 14 fewer stores at the beginning of the second quarter of
fiscal 1999 compared to the beginning of the second quarter of fiscal 1998. The
increase in comparable stores sales coupled with the closure of low volume
stores resulted in an increase in average store volume during the quarter of 16%
over the same quarter last year. Comparable store sales increased primarily as a
result of the increasing acceptance by our target customers of our merchandise
concept. During the second quarter of fiscal 1999 the Company opened three
stores, closed four stores, and relocated two stores for a total of 101 stores
in operation at the end of the quarter.

Cost of sales, buying and occupancy costs decreased by 2% as a percentage of
sales. This decrease was primarily due to increased leverage on fixed occupancy
and buying costs as a result of the increase in average store sales volume. Cost
of sales related to merchandise improved by 0.1% compared to the same quarter
last year.

Selling, general and administrative expenses increased by 2.8% as a percentage
of sales. The increase primarily relates to an increase in staffing of key
positions in the buying and real estate areas of the business associated with
the Company's second half expansion program. In addition, the Company incurred
an increase in store payroll costs associated with training and implementation
of the new private label credit card program during the second quarter and the
Company's direct mail campaign instituted in the first half. The Company
believes that the additional expenses related to marketing will provide benefits
in future quarters.

The Company recorded option related compensation expense of $112,000 or 0.7% of
sales related to the issuance of 932,000 non-qualified stock options on March
24,1998 (See Note 3 - 1998 Stock Incentive Plan).

Interest expense as a percent of sales was 2.2% in the second quarter of fiscal
1999 compared to 1.1% of sales in the second quarter of fiscal 1998. This
increase resulted from greater capacity and borrowings under the line of credit
(See - Liquidity and Capital Resources) and interest incurred under the
subordinated debt transaction closed in March 1998.

                                    Page 10
<PAGE>
The Company had a loss of $570,000 for the second quarter of fiscal 1999 or
$1.29 per share compared to a loss of $135,000 in the second quarter of fiscal
1998 or $0.33 per share. The increase in expenses related to option compensation
expense, increased interest costs, and increased costs related to expansion of
the business accounted for the increased loss for the second quarter of fiscal
1999.

Six Months Ended August 1, 1998 Compared to August 2, 1997.
-----------------------------------------------------------

Net sales decreased by $469,000, or 2%, in the first half of fiscal 1999
compared to the first half of fiscal 1998. This decrease was primarily a result
of operating 15 less stores at the beginning of the first half of fiscal 1999
compared to the first half of fiscal 1998. This decline was partially offset by
the 8% increase in comparable store sales and opening five new locations. The
increase in comparable store sales coupled with the closure of low volume stores
resulted in an increase in average store volume during the six-month period of
11% over the same six-month period last year. Comparable store sales increased
primarily as a result of the increasing acceptance by our customers of our
merchandise concept. During the first half of fiscal 1999 the Company opened
five stores, closed twelve stores and relocated fifteen stores for a total of
101 stores in operation at the end of the period.

Cost of sales, buying and occupancy costs decreased by 0.8% as a percentage of
sales. This decrease was primarily due to increased leverage on fixed occupancy
and buying costs as a result of the increase in average store sales volume. Cost
of sales related to merchandise improved by 0.2% compared to the same quarter
last year.

Selling, general, and administrative expenses increased by 2.9% as a percentage
of sales. The increase relates primarily to an increase in staffing of key
positions in the buying and real estate areas of the business associated with
the Company's second half expansion program. In addition, the Company incurred
an increase in store payroll costs associated with training and implementation
of the new private label credit card program during the second quarter. The
Company believes that the additional expenses related to marketing will provide
benefits in future quarters.

The Company recorded option related compensation expense of $783,000 or 2.7% of
sales related to the issuance of 932,000 non-qualified stock options on March
24, 1998 (See Note 3 - 1998 Stock Incentive Plan).

Interest expense as a percent of sales was 2.0% in the first half of fiscal 1999
compared to 1.0% of sales in the first half of fiscal 1998. This increase
resulted from greater capacity and borrowings under the line of credit (See -
Liquidity and Capital Resources) and interest incurred under the subordinated
debt transaction closed in March 1998.

The Company incurred an extraordinary charge during the first half of 1999
related to the extinguishment of debt of the former GECC facility in the amount
of $522,000. The charge includes termination fees of $338,000 and the write-off
of remaining unamortized financing costs of $184,000 related to the previous
GECC line of credit.

The Company incurred a loss before the extraordinary charge of $3,388,000 for
the first half of fiscal 1999 or $6.67 per share compared to a loss of
$1,732,000 in the first half of fiscal 1998 or $4.24 per share. The increase in
expenses related to option compensation expense, increased interest costs, and
increased costs related to expansion of the business accounted for the increased
loss for the first half of fiscal 1999.

                                    Page 11
<PAGE>
The Company incurred a loss of $3,910,000 (or $7.62 per share) after the
extraordinary charge of $522,000 (or $0.95 per share) related to the
extinguishment of debt.

Liquidity and Capital Resources
-------------------------------

General
-------

The Company's principal needs for liquidity are to finance the purchase of
merchandise inventories, to fund operations and to fund the Company's expansion
plan.

During the first half of fiscal 1999 the Company's primary source of liquidity
was from borrowings under its $15,000,000 secured line of credit with FINOVA and
the $2,000,000 subordinated debt transaction closed in March 1998.

Net cash used for operations for the first half of fiscal 1999 was ($5,974,000).
This use of cash resulted primarily from an increase in inventory ($2,671,000),
the operating loss during the first six months of fiscal 1999 ($2,485,000, net
of non-cash expenses), increase in prepaid expenses ($217,000), and decrease in
accounts payable ($245,000). Property and equipment expenditures for the first
six months of fiscal 1999 were $736,000.

The Company had a working capital deficit of $690,000 at August 1, 1998 compared
to a working capital deficit of $4,200,000 at August 2, 1997. The working
capital deficit decreased $3,510,000 primarily due to the investment in the
Company of $5,900,000, net of related expenses, which occurred in December 1997.

The Company is currently planning to open 30 stores and has relocated 15 stores
during fiscal 1999. In addition, the Company is researching alternatives to its
existing management information system and expects to incur capital expenditures
to replace existing systems during fiscal 1999 and fiscal 2000. The estimated
capital expense during fiscal 1999 is $1,700,000. These forward-looking
statements will be influenced by the Company's financial position and the number
of advantageous mall store locations that become available.

At August 1, 1998 the Company had $1,223,000 in cash and cash equivalents. The
Company had drawn $10,158,000 and had approximately $1,200,000 of potential
availability under its line of credit based on its borrowing base formula. In
the opinion of management, the net proceeds of the subordinated debt transaction
along with increased availability under the new credit facility with FINOVA and
anticipated cash flow from operations are adequate to enable the Company to
accomplish its plans for fiscal 1999.

Depending on the ultimate success of its business strategy, the Company may
continue to incur future losses, which could negatively affect working capital,
the extension of credit by the Company's suppliers, the Company's ability to
maintain compliance with its debt covenants, and the ability to raise additional
capital as required in the future.

Year 2000
---------

The Company is currently conducting a comprehensive review of its options to
mitigate the risks associated with the Year 2000 compliance issue. This review
includes the inventory of all systems requiring conversion programming, the
coordination of internal personnel to identify all exposures, and the assessment
of implications of noncompliance in the organization. The Company believes its
mostly likely option is to replace the existing software with new software that
will improve productivity and is also Year 2000 compliant. The Company will be
making the final decision regarding the source of the new software during the
third quarter of fiscal 1999. It is planned that the software will be procured
and operational in sufficient time for the Company to be Year 2000 compliant.

                                    Page 12
<PAGE>
While the Company is acting prudently in addressing the Year 2000 issue, the
failure of a third party to be compliant could potentially have an adverse
affect on the Company's ability to operate. Plans are in place to communicate to
our critical vendors and suppliers our expectations that they attain Year 2000
compliance in a timely manner. Contingency plans will be in place to provide
alternate solutions if the progress of certain significant vendors/suppliers is
questionable so as not to jeopardize our ability to service our customers.

The Company believes it has taken and will continue to take the appropriate
steps to minimize the threat of any material technical failure having a
significant impact on operations. However, it is impossible for any company to
ensure Year 2000 compliance.

The costs associated with this effort are expected to range between $800,000 to
$1,600,000. The Company will finance these costs out of existing credit lines
and/or lease financing, if available.

                                    Page 13
<PAGE>
                           PART II. OTHER INFORMATION


Item 1.  Legal Proceedings

None

Item 2.  Changes in Securities

None

Item 3.  Defaults upon Senior Securities

None

Item 4.  Submission of Matters to a Vote of Security Holders

Pursuant to due notice, the Annual Meeting of Shareholders of Jay Jacobs, Inc.
was held on July 9, 1998 at the Company's corporate offices. The purpose of the
meeting was to elect the Company's 1998 Board of Directors as presented and no
other matter was voted upon at the meeting. The proposed Board of Directors was
approved by a majority of the shareholders. The votes were as follows:

<TABLE>
<CAPTION>
                 Item                  For   Against   Abstaining   Broker non-votes
------------------------------   ---------   -------   ----------   ----------------
<S>                              <C>               <C>          <C>                <C>
Michael D. Sullivan              3,898,942         0            0                  0
Edward L. Cahill                 3,898,942         0            0                  0
Kim Z. Golden                    3,898,942         0            0                  0
Rex Loren Steffey                3,898,942         0            0                  0
William L. Lawrence, Jr.         3,898,942         0            0                  0
</TABLE>


Item 5.  Other Information

None

Item 6.  Exhibits and Reports on Form 8-K

(a)   Exhibits

3.1   Restated Articles of Incorporation (Incorporated by reference to Exhibit
      3.1 to the Company's Registration Statement on Form S-1, Registration No.
      33-13112, declared effective May 19, 1987 (the "Form S-1"))
3.2   Articles of Amendment to the Registrant's Restated Articles of
      Incorporation (Incorporated by reference to Exhibit 3.2 to the Company's
      Form 10-Q filed June 16, 1998 (the "Form 10-Q"))
3.3   Bylaws (Incorporated by reference to Exhibit 3.3 to the Form S-1)
4.1   Form of Warrant (Incorporated by reference to Exhibit 6 to the Schedule
      13D Amendment Number 1 filed on behalf of Cahill, Warnock Strategic
      Partners Fund, L.P.; Strategic Associates, L.P.; Cahill Warnock Strategic
      Partners, L.P.; Cahill, Warnock & Co., L.L.C.; Edward L. Cahill and David
      L. Warnock on March 23, 1998 (the "Schedule 13D")
4.2   Form of Debenture (Incorporated by reference to Exhibit 4.2 to the Form
      10-Q)
4.3   Registration Rights Agreement (Incorporated by reference to Exhibit 5 to
      the Schedule 13D)

                                    Page 14
<PAGE>
10.1  Subordinated Debenture Agreement (Incorporated by reference to Exhibit 4.4
      to the Company's Form 8-K filed on December 15, 1997)
10.2  FINOVA Line of Credit
27    Financial Data Schedule

(b)  Reports on Form 8-K

None





SIGNATURES

Pursuant to 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.

JAY JACOBS, INC.

Sept. 11, 1998




/s/  WILLIAM L. LAWRENCE, JR.
William L. Lawrence, Jr.
Executive Vice President, Chief Financial Officer and
Treasurer (Principal Financial and Accounting Officer)

                                    Page 15