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

                                   FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended June 30, 1998

                                       OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from ______________to _____________________.

                           Commission File No. 1-5863

 
                                 JACLYN, INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

             Delaware                                   22-1432053
--------------------------------              -----------------------------
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                         Identification No.)

635 59th Street, West New York, New Jersey                  07093
------------------------------------------    -----------------------------  
 (Address of principal executive offices)                 (Zip Code)

Registrant's telephone number, including area code: (201) 868-9400

Securities registered pursuant to Section 12(b) of the Act:

                                         Name of each exchange
            Title of Class                on which registered
            --------------             -------------------------

     Common Stock, $1 par value         American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:   None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock (based on the closing price of
such stock on the American Stock Exchange) held by non-affiliates of the
Registrant at September 15, 1998 was approximately $11,184,000.

There were 2,711,391 shares of Common Stock outstanding at September 15, 1998.

                                       1
<PAGE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE

PART III       Certain Portions of the Registrant's Proxy Statement for the
               Registrant's Annual Meeting of Stockholders scheduled to be held
               on December 2, 1998.

                                       2
<PAGE>

                               TABLE OF CONTENTS
                               -----------------
 
              Item                                                   Page
              ----                                                   ----
             
PART I         1.   Business.........................................   1
         
         
               2.   Properties.......................................   4
         
               3.   Legal Proceedings................................   5
         
               4.   Submission of Matters to a
                    Vote of Security Holders.........................   5
         
PART II        5.   Market for the Registrant's Common Equity
                    and Related Stockholder Matters..................   6
         
               6.   Selected Financial Data..........................   7
         
               7.   Management's Discussion and Analysis of
                    Financial Condition and Results of
                    Operations.......................................   8
         
              7A.   Quantitative and Qualitative disclosures about
                    Market & Risk....................................  12
         
               8.   Financial Statements and Supplementary
                    Data.............................................  12
         
               9.   Changes in and Disagreements with
                    Accountants on Accounting and Financial
                    Disclosure.......................................  12
         
PART III      10.   Directors and Executive Officers
                    of the Registrant................................  12
         
              11.   Executive Compensation...........................  12
         
              12.   Security Ownership of Certain
                    Beneficial Owners and Management.................  13
         
              13.   Certain Relationships and Related
                    Transactions.....................................  13
         
PART IV       14.   Exhibits, Financial Statement
                            Schedules and Reports on Form 8-K.......   13
             
SIGNATURES..........................................................   17
<PAGE>
 
                                    PART I
                                    ------



Item 1.   Business.
------    --------

          Jaclyn, Inc. (incorporated in the State of Delaware in 1968)
("Jaclyn") and its subsidiaries (collectively the "Registrant") are primarily
engaged in the design, manufacture, distribution and sale of vinyl, leather
and fabric handbags, sport bags  and related products (collectively, "handbag
products"), and apparel items.  The Registrant markets its handbag products in a
variety of popularly priced fashions and designs, with an emphasis on casual,
travel and sport styles.  The Registrant's apparel lines are wide ranging and
include vests, loungewear, sleepwear, dresses, sportswear, as well as lingerie.

          General.  Styling is an important factor in the merchandising of all
          -------                                                             
of the Registrant's products.  The Registrant's staff of full-time designers
studies fashion trends in order to anticipate consumer demand.  The design staff
works closely with the purchasing department to determine the styling and
material components for its handbag products, and concepts and fabrics for its
apparel products. The design staff also works with the production and
engineering staffs to determine the costs of production and the technical
problems involved in producing a new style.  The Registrant changes many of its
designs from season to season.

          Finished merchandise is received at the Registrant's warehouses
located in West New York, New Jersey and Ferris, Texas, and in several
independently owned warehouses in New Jersey, Florida, Indiana and California,
and from these locations is shipped under different selling names to customers
all over the country. The Registrant's handbag products are intended to retail
at between $6 and $275. The Registrant's better price and designer lines of
handbag products, which are sold under the "Anne Klein"(TM) and "Susan Gail"
names, are marketed through better department stores and specialty shops. The
Registrant's other handbag products are marketed primarily through general
merchandise, chain and department stores. In addition, the Registrant markets
its apparel lines to existing customers of its handbag products as premium
and/or special order items, as well as to major mail order catalog chains and
other retailers.

          The Registrant markets its handbag products under trademarks and trade
names which it owns, including "Saddle River," "Shane," "Aetna," "Susan Gail,"
"Robyn Lyn" and "Marilyn USA." In addition, the Registrant is licensed to
manufacture and market handbag products under the names "Looney Tunes"(TM) under
an agreement which expires December 31, 1998, "Riders"(TM) under an agreement
which expires December 31, 1998, "Crayola"(TM) under an agreement which expires
December 31, 1998, "Dr. Seuss"(TM) under an agreement which expires December 31,
1999, and "Anne Klein"(TM) under an agreement which expires December 31, 2001.
The Registrant's apparel lines are marketed under the names "Robyn Lyn," "Saddle
River," "Susan Gail," and "Emerson Road." The Registrant also manufactures
apparel items for sale as private-label merchandise. The Registrant considers
all of its trademarks, trade names and other intellectual property rights to be
of significant value in the marketing of its products.

                                      -1-
<PAGE>
 
          The Registrant sells throughout the United States through its own
salesmen and through independent sales representatives.  Sales of domestically
manufactured merchandise, including those assembled in Central America and in
Mexico from domestically produced components, accounted for approximately 33% of
the Registrant's consolidated net sales for the fiscal year ended June 30, 1998.
During fiscal 1997, sales of such merchandise, including those assembled in
Central America and in Mexico from domestically  manufactured components,
accounted for approximately 29% of consolidated net sales.

          In fiscal 1998, the Registrant's imports of merchandise manufactured
in the Far East accounted for approximately 67% of consolidated net sales,
compared to approximately 71% of consolidated net sales in fiscal 1997. Imports
offer the Registrant the benefit of a greater diversification of styling
resulting from volume purchases and the benefit of cost savings related to such
purchases. While the Registrant's operations are subject to the usual risks
associated with purchases from foreign countries, the Registrant's other foreign
and  domestic manufacturing sources provide it with alternative sources and
facilities.

          Approximately  64% of the Registrant's consolidated net sales for
fiscal 1998 were to general merchandise, chain and department stores, with the
balance consisting of sales to smaller specialty shops, smaller retail stores
and cosmetic firms. During the fiscal year ended June 30, 1998, four customers
of the Registrant accounted for 44% of the Registrant's consolidated net sales,
of which the Registrant's three largest customers ( Estee Lauder, Wal-Mart
Stores, Inc., and Target Stores) accounted for 15%, 12% and 10% of such sales,
respectively.  Three major customers of the Registrant accounted for
approximately 34% of the Registrant's consolidated net sales for the fiscal year
ended June 30, 1997, of which the Registrant's two largest customers (Wal-Mart
Stores, Inc. and Estee Lauder) accounted for 13% and 12% of such sales,
respectively.  Sales of apparel items during each of the fiscal years ended June
30, 1998, 1997 and 1996 represented 38%, 36% and 30%, respectively, of
consolidated net sales.  Sales of handbag products represented the remainder of
the Registrant's consolidated net sales.  The Registrant's sales are customarily
offered on credit terms. The Registrant does not have long-term contracts with
any of its customers.

          The Registrant purchases its handbag and apparel raw materials,
primarily fabrics, vinyl and urethane plastics, leather, frames, ornaments, trim
and other materials, and certain of its finished products, from a variety of
sources.  In most cases, the Registrant assists its suppliers and contractors in
the design and style of the materials it purchases.  The Registrant's largest
expenditures for raw materials are for fabrics, leather, vinyl and urethane
plastics, which the Registrant purchases from several suppliers, one of which
provided about 14% of its raw material needs in fiscal 1998. While the
Registrant has no long-term supply contracts, the raw materials it uses are
available from various sources and it anticipates no difficulty in the future in
obtaining the necessary raw materials for its operations.  With respect to its
domestic manufacturing and imported purchases from the Far East and Europe of
finished handbags and related products, the Registrant deals with a number of
sources, both domestically and in the Far East and Europe, no one of which
accounted for more than 15% of the Registrant's total cost of goods sold.  The
Registrant has no long-term supply contracts with its Far East or European
sources of finished handbags and related products or apparel items and is
subject to the usual risks associated therewith.

                                      -2-
<PAGE>
 
          The Registrant generally offers Fall/Winter, Holiday and Spring/Summer
product lines and in most instances manufactures product to meet the specific
requirements of its customers. The Registrant's business is somewhat seasonal in
nature, with shipments historically being greater in the first two quarters of
its fiscal years and lower in the third and fourth quarters.  Reference is made
to Note O, "Unaudited Quarterly Financial Data," of the Notes to Consolidated
Financial Statements on page F-23 of this Form 10-K for additional information
about quarterly results.

          At September 15, 1998, the Registrant had unfilled orders of
approximately $18,834,000, compared to approximately $31,735,000 at September
15, 1997.  The decrease in backlog is primarily attributable to decreases in the
volume of certain of the Company's divisions due to the non-renewal of the
Registrant's "Winnie The Pooh"(TM) license which expired June 30, 1997 and from
lower retail demand for non-brand handbag and accessories merchandise.  In the
ordinary course of business, the amount of unfilled orders at a particular point
in time is affected by several factors, including scheduling of the manufacture
and shipping of goods (which, in turn, may be dependent on the requirements of
customers).  Accordingly, a comparison of backlog from period to period is not
necessarily meaningful and may not be indicative of future sales patterns or
shipments.

          The Registrant employed 221 persons as of June 30, 1998, of whom 101
were on a salaried basis and the balance on an hourly basis.  At June 30, 1998,
22 of the Registrant's employees were members of the Four Joint Boards of New
York, New Jersey, Pennsylvania and New England, affiliated with the
International Leather Goods, Plastics and Novelty Workers Union, AFL-CIO.  The
Registrant considers its relations with its employees to be satisfactory.

          The Registrant competes with hundreds of domestic and foreign
manufacturers of popular priced handbags and apparel, very few of which are
believed to account for as much as 1% of industry sales.  In addition, the
Registrant competes with numerous manufacturers of apparel items.  The
Registrant believes its sales of apparel items are not significant in light of
total apparel industry sales.  The Registrant's business is dependent, among
other things, on its ability to anticipate and respond to changing consumer
preferences, to remain competitive in price, style and quality and to meet its
customers' production and delivery requirements.  While some of the Registrant's
competitors may be larger or may have greater resources than the Registrant, the
Registrant believes that its size and financial position will allow it to
continue to respond to changes in consumer demand and meet its competition.

          In January 1996, the Registrant entered into a sales agreement to
manufacture and distribute an existing line of women's robes and sleepwear. In
addition, in April 1998, the Registrant entered into a sales agreement to
manufacture and distribute an existing line of junior intimates and daywear. The
Registrant did not incur any significant expenditures as a result of either of
these agreements.

          On June 18, 1996, the Registrant acquired certain trademarks and other
assets from McCrackin Industries, Inc. ("McCrackin") and its affiliates for a
purchase price of $1,500,000.  The trademarks included "Saddle River," under
which the Registrant has been manufacturing and distributing ladies' handbags
for more than 9 years.  The Registrant also acquired certain office equipment,
furnishings and fixtures located at McCrackin's New York City showroom, which is
now operated by the Registrant.  

                                      -3-
<PAGE>
 
In addition, two of the principals of McCrackin have entered into a consulting
agreement to make available to the Registrant marketing and consulting services.
The Registrant also granted to those principals an option (which was not
exercised) to repurchase the trademarks on or prior to December 31, 1997.

Item 2.   Properties.
------    ---------- 

          The Registrant's executive offices and one of its warehouse
facilities, containing 140,000 square feet, are located in West New York, New
Jersey. The Registrant occupied these facilities under long-term leases from
1968 to 1981, when these facilities were purchased by the Registrant. The
Registrant currently leases to outside parties approximately 59,000 square feet
of the West New York facilities. The Registrant also leases three showroom and
office facilities in New York City totaling approximately 20,000 square feet.
The executive offices, and manufacturing, distribution and warehouse facilities,
of JLN, Inc., containing 93,250 square feet, are located in Ferris, Texas. All
of the Registrant's facilities are well maintained structures, in good physical
condition and are adequate to meet its current and foreseeable needs.

          Reference is made to Note E, "Commitments," of the Notes to
Consolidated Financial Statements on page F-13 of this Form 10-K for additional
information about the Registrant's commitments under the terms of non-cancelable
leases.

                                      -4-
<PAGE>
 
Item 3.   Legal Proceedings.
------    -----------------

          (a)    The Registrant is not a party to, nor is any of its property
the subject of, any material pending legal proceeding.


          (b)    No material pending legal proceeding was terminated during the
three-months ended June 30, 1998.
 
Item 4.   Submission of Matters to a Vote of Security Holders.
------    ---------------------------------------------------

          The Registrant did not submit any matters to a vote of its security
holders, through the solicitation of proxies or otherwise, during the three-
months ended June 30, 1998.

                                      -5-
<PAGE>

                                    PART II
                                    -------

Item 5.     Market for the Registrant's Common Equity
------      and Related Stockholder Matters.
            -----------------------------------------

                 The Registrant's Common Stock, $1.00 par value per share, is
traded on the American Stock Exchange (Symbol: "JLN"). The following table sets
forth the high and low closing sales prices for the Registrant's Common Stock,
as reported by the American Stock Exchange, for each quarterly period during the
Registrant's fiscal years ended June 30, 1998 and June 30, 1997 .

<TABLE>
<CAPTION>
 
 
                 Fiscal Year Ended June 30, 1998      High       Low       
                 -------------------------------      ----       --- 
<S>                                                   <C>        <C> 
                                                                     
                 First Quarter                        5 1/8     3 7/8
                 Second Quarter                       4 15/16   4 3/16
                 Third Quarter                        5  5/16   4    
                 Fourth Quarter                       5 13/16   4 3/4
                                                                     
                 Fiscal Year Ended June 30, 1997      High       Low 
                 -------------------------------      ----       --- 
                                                                     
                 First Quarter                        5 3/4   4 1/16 
                 Second Quarter                       5 7/16  4 7/16 
                 Third Quarter                        5 7/16  4 3/4  
                 Fourth Quarter                       4 7/8   3 11/16 
 
</TABLE>

                 The Registrant did not pay cash dividends during fiscal 1998 or
1997 and does not anticipate the payment of cash dividends in the foreseeable
future.

                 At June 30, 1998, there were approximately 711 holders of
record of the Registrant's Common Stock.

                 In accordance with a letter agreement dated December 29, 1997,
the Registrant granted to Robert Chestnov, President and Chief Executive Officer
of the Registrant, a restricted stock award of 20,000 shares of Common Stock
(the "Award Shares") in consideration for services rendered to the Registrant.
The Award Shares have not been registered under the Securities Act of 1933, as
amended (the "Act"), in reliance upon the exemption from registration afforded
by Section 4(2) of the Act for transactions by an issuer which do not involve a
public offering. Mr. Chestnov has represented that he is acquiring the Award
Shares for his own account and not with a view to the distribution thereof
within the meaning of the Act and has agreed not to pledge, sell, assign,
transfer or otherwise dispose of all or any of the Award Shares until January 1,
2000.

                                      -6-
<PAGE>
 
Item 6. Selected Financial Data.
------  ----------------------- 

<TABLE>
<CAPTION>
Years ended June 30,                             1998           1997           1996           1995            1994
<S>                                           <C>            <C>            <C>            <C>             <C>
Net Sales                                     $68,263,000    $77,156,000    $72,312,000    $73,577,000     $82,393,000

Cost of Goods Sold                             51,401,000     56,825,000     53,836,000     58,639,000      58,298,000

Gross Profit                                   16,862,000     20,331,000     18,476,000     14,938,000      24,095,000

Shipping, selling and administrative
 expenses                                      16,822,000     19,185,000     17,543,000     17,834,000      21,741,000

Restructuring costs                                                    -              -        995,000               -

Interest expense                                  182,000        181,000        119,000        309,000         224,000

Other income, net                                 246,000        266,000        328,000        317,000         422,000

Provision (benefit) for income taxes               37,000        468,000        457,000     (1,563,000)        965,000
 
NET EARNINGS (LOSS)                           $    67,000    $   763,000    $   685,000    $(2,320,000)    $ 1,587,000

Weighted average shares outstanding             2,707,000      2,705,000      2,692,000      2,691,000       2,689,000

   Net Earnings per common share-
    Basic and Diluted                               $0.02          $0.28          $0.25    $     (0.86)    $      0.59

Cash dividends paid                           $         -    $         -    $         -    $      0.25     $      0.50

TOTAL ASSETS                                  $24,572,000    $34,063,000    $31,981,000    $28,409,000     $34,886,000
Long term debt:

    Guaranteed bank loan - ESOP               $    56,000    $   509,000    $   704,000    $   888,000     $ 1,150,000

    Other non-current liabilities             $    20,000    $    28,000    $    32,000    $    33,000     $    31,000

Stockholders' equity                          $18,395,000    $17,785,000    $16,838,000    $15,942,000     $18,703,000

Stockholders' equity per share                $      6.80    $      6.57    $      6.26    $      5.92     $      6.95
</TABLE>

                                      -7-
<PAGE>
 
Item 7.   Management's Discussion and Analysis of
------    Financial Condition and Results of Operations.
          ----------------------------------------------

Liquidity and Capital Resources

The net increase in cash and cash equivalents in the fiscal years ended June 30,
1998, 1997 and 1996 was $596,000, $915,000 and $422,000, respectively. The net
increase in fiscal 1998 was the result of an excess of funds provided from
operating activities totaling $4,042,000 and investing activities of $633,000,
over funds used in financing activities of $4,079,000. Funds provided by
operating activities were principally from a $1,985,000 decrease in inventory
(resulting from lower first quarter fiscal 1999 shipping) and a $5,505,000
decrease in accounts receivable (attributable to a lower level of shipping in
the fourth quarter of fiscal 1998 compared to the comparable quarter in fiscal
1997). The resulting cash flows were mostly used to decrease accounts payable
and other current liabilities by $5,056,000. Cash provided by investing
activities resulted mainly from an excess of proceeds from securities available
for sale over purchases of such securities and the purchases of property and
equipment. Funds used in financing activities were mostly to pay down all
outstanding notes payable to the Company's bank under the existing credit
facility.

     Through a $23,000,000 credit line with its bank, the Company has short-term
borrowing capabilities, under which letters of credit for purchase commitments
and bankers acceptances may be issued. Within this line of credit, the Company
has available up to $10,000,000 of short-term loans and bankers acceptances at
either prime or LIBOR rates. All borrowing, with the exception of bankers
acceptances, is unsecured. There were no amounts outstanding under the Company's
line of credit at June 30, 1998. Reference is made to Note F "Credit
Facilities," of the Notes to Consolidated Financial Statements on page F-13 of
this Form 10-K for additional information about the Company's credit lines.

     There were no material commitments for capital expenditures at June 30,    
1998.

     The net increase in cash and cash equivalents in fiscal 1997 was the result
of an excess of funds from financing activities (bank borrowings under the
Company's credit line) of $3,063,000 over funds used in investing activities of
$467,000 and funds used in operating activities of $1,681,000. Funds from
operating activities were used mainly to reduce accounts payable and other
current liabilities totaling $1,677,000 and to finance the $1,179,000 increase
in accounts receivable. These funds were principally offset by a decrease in
inventories of $1,010,000 which resulted from higher shipping in June 1997
compared to June 1996 and net earnings from operations of $763,000. Cash used in
investing activities was primarily for property and equipment additions.

     The net increase in cash and cash equivalents in the fiscal year ended June
30, 1996 was $422,000. This increase was the result of an excess of funds
provided by operating activities of $3,176,000 over funds used in investing
activities of $315,000 and financing activities of $2,439,000. Funds provided by
operating activities increased mainly due to an increase in accounts payable of
$5,010,000 mostly financing the increase in inventory and net earnings from
operations totaling $685,000. These funds were principally offset by an increase
in inventories of $3,330,000 due to increased orders for goods planned to be
shipped in the first quarter of fiscal 1997. Cash used in investing activities
was primarily for the purchase of bonds (securities available for sale) of
$3,673,000 and for the purchase of certain trademarks and other assets from
McCrackin Industries, Inc. for $1,500,000. Reference is made to Note M "Purchase
of Trademarks" of the Notes to Consolidated Financial Statements on page F-21 of
this Form 10-K. These items were offset, in part, 

                                      -8-
<PAGE>
 
by sales of securities available for sale totaling $5,034,000. Funds used in
financing activities of $2,439,000 were entirely related to the pay down of
outstanding notes payable to the Company's bank under an existing bank line of
credit.
 
        The Company has an Employee Stock Ownership Plan ("ESOP"). During fiscal
1994, the Company guaranteed a bank loan to the ESOP in the amount of
$1,150,000, the proceeds of which were also used to purchase shares of the
Company's Common Stock. At June 30, 1998, the loan balance was $56,000.
Reference is made to Note L, "Employee Stock Ownership Plan and Trust," of the
Notes to Consolidated Financial Statements on page F-21 of this Form 10-K.

        As of  June 30, 1998, 1997 and 1996, working capital was  $16,715,000,
$16,697,000 and $15,993,000 , respectively.  The ratio of current assets to
current liabilities for those same periods was 4.4 to 1, 2.2 to 1 and 2.3 to 1,
respectively.  The increase in the current ratio in fiscal 1998 is the result of
the relative relationship of lower levels of inventory and accounts receivable
and a corresponding lower level of both notes payable to the Company's bank and
of accounts payable and other current liabilities. The Company's cash, cash
equivalents and marketable securities totaled  $4,911,000, $5,187,000 and
$4,279,000,  at June 30, 1998, 1997 and 1996, respectively.  The Company
believes that funds provided by operations, existing working capital and the
Company's current bank lines will be sufficient to meet its anticipated short-
term and long-term working capital needs.

Results of Operations

1998 Compared to 1997

        Net sales of $68,263,000 were $8,893,000 below fiscal 1997. This
decrease was due primarily to significantly lower sales volume in the Company's
children's division resulting mostly from the non-renewal of the Company's
"Winnie The Pooh"(TM) license and lower volume in the Company's medium priced
handbag business, due to lower retail demand for non-brand handbag and
accessories merchandise, offset partly by improved premium and women's apparel
sales.

        The gross profit margin for fiscal 1998 was 24.7%, or a decline of 1.7%
from the prior year, which resulted from a higher level of inventory markdowns
and off-price sales in the children's and medium priced handbag business.
Margins improved somewhat, however, in the premium and the women's apparel
business. Shipping, selling and administrative expenses decreased by $2,363,000.
As a percentage of net sales, this decrease in the current fiscal year was 24.6%
compared to 24.9% in the prior fiscal year, attributable to lower fiscal 1998
shipping, royalty and product development costs.

        Other income, comprised almost exclusively from interest income,
declined slightly from the prior fiscal year generally due to a lower level of
interest rates on the investment portfolio.

        The decrease in earnings before income taxes for the fiscal year ended
June 30, 1998 compared to the prior year was primarily due to the decrease in
sales and the 1.7% decrease in the gross profit margin discussed above.

                                      -9-
<PAGE>
 
1997 Compared to 1996

        Net sales were $77,156,000, or $4,844,000 greater than fiscal 1996. This
increase was primarily due to increased apparel sales, an increase in the
premium business and an increase in the children's licensing business offset
somewhat by a decrease in moderately priced handbag line.

        Gross profit margins totaling 26.4% improved slightly due to stronger
margins from licensed products and from improved apparel business margins.

        Other income, almost exclusively from investments, declined due to a
lower level of investments in fiscal 1997 compared to fiscal 1996.

        The earnings increase for the fiscal year ended June 30, 1997 compared
to the prior year was due to slightly higher gross profit margins on increased
sales and a slightly lower effective tax rate compared to the prior fiscal year
offset by higher shipping, selling and administrative expenses.

1996 Compared to 1995

        Net sales were $72,312,000 which was slightly lower than net sales of
$73,577,000 in fiscal 1995. This reduction was part of lower anticipated sales
based on the Company's 1995 restructuring which included emphasis on improving
the gross profit margin and of buying inventory for certain divisions by
specific order rather than for stock.

        Gross profit in 1996 increased due to relatively fewer markdowns taken
after the Company's fiscal 1995 restructuring. Shipping, selling and
administrative expense decreased due to a reduction in certain fixed expenses
following the Company's fiscal 1995 restructuring. Interest expense decreased
due to lower aggregate average borrowing in fiscal 1996 compared to fiscal 1995.

        Other income, almost exclusively from investments, was slightly higher
than the same 1995 period due to a small increase in the overall average
investment interest rate.

        The earnings increase for the fiscal year ended June 30, 1996 was due
mainly to better gross profit margins, lower shipping, selling and
administrative expense as well as lower interest expense. The loss for the
fiscal year ended June 30, 1995 was due mainly from decreased sales volume and
lower margins, offset by decreased shipping, selling, administrative expenses as
well as costs associated with the restructuring.

Recently Issued Accounting Standards

         In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS 131, "Disclosure about Segments
of an Enterprise and Related Information." These statements, which are effective
for the Company for the year ending June 30, 1999, expand and modify disclosures
and accordingly will have no impact on the Company's consolidated balance sheet
or statement of earnings.
 
Year 2000 Compliance

         The Company has completed its assessment of the changes that are needed
to make its critical and other data processing systems year 2000 compliant. The
changes, which include a combination of software modifications and upgrades and
hardware changes, have substantially been

                                      -10-
<PAGE>
 
completed, with significant customer testing underway. The Company's internal
target date to be fully compliant and tested is March 1999. The Company has
targeted March 1999 in an effort to provide it with a full nine months to
continue to test its systems, thereby minimizing the risks associated with Year
2000 systems changes.

         Existing data processing personnel are being utilized in implementing
Year 2000 changes.  To date, total costs incurred have been approximately
$6,000, with total aggregate costs to become Year 2000 compliant not expected to
exceed $10,000.

         Most of the Company's major customers have already indicated that they
are or will be year 2000 compliant by the end of calendar year 1998. The Company
is not computer interdependent with its significant suppliers and, accordingly,
does not believe that the failure of suppliers to be Year 2000 compliant will
pose any significant risk to the Company's business operation. In any event, the
Company presently has and expects it will have alternative sources of supply if
existing vendors are unable to supply the Company if they are not Year 2000
compliant.

         The foregoing constitute forward looking statements based upon
management's best estimates concerning future events. Actual results could
differ as a result of a number of factors, including future costs of Year 2000
compliance, success of testing, successful completion by third parties with
their respective Year 2000 compliance programs, and similar uncertainties.

                                      -11-
<PAGE>
 
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.
-------   ----------------------------------------------------------

       The Registrant, in the normal course of doing business, is theoretically
exposed to interest rate change market risk with respect to its Securities
Available for Sale and its line of credit. As borrowing patterns are seasonal,
the Registrant is not dependant on borrowing throughout the year.  Therefore, a
sudden increase in interest rates (which under the line of credit is at the
prime rate or lower) may, during peak borrowing, have a negative impact on
short-term results, but would unlikely impact longer-term results since a cost
pass-through would offset such higher interest expense.

       All of the Registrant's Securities Available for Sale are state
government or municipal bonds. As of June 30, 1998, the cost and market value of
such bonds was $2,625,000 and  $2,683,540, respectively.  A significant increase
in interest rates would result in a decrease in the bond prices.  However, to
minimize risk, the Registrant has a policy of investing only in high rated
instruments ( substantially all have Aa or better Moody's bond ratings) and
generally uses short-term maturities (currently the average life is about three
years).  In addition, the proceeds from such securities are not essential to the
working capital needs of the business and therefore could be held to maturity
for full face value.

Item 8.  Financial Statements and Supplementary Data.
------   -------------------------------------------

            (a)    Financial Statements
                   --------------------

            The report dated September 25, 1998 of Deloitte & Touche LLP,
independent auditors, the consolidated balance sheets of Jaclyn, Inc. and
subsidiaries as of June 30, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1998 and Notes to Consolidated
Financial Statements appear on pages F-2 through F-15 of this Form 10-K.

            (b)    Supplementary Data
                   ------------------

            Selected unaudited quarterly financial data for the fiscal years
ended June 30, 1998 and June 30, 1997 is set forth at Note O, "Unaudited
Quarterly Financial Data" on page F-16 of this Form 10-K.

Item 9.  Changes in and Disagreements with Accountants
-------  on Accounting and Financial Disclosure.
         ---------------------------------------------

               Not Applicable.


                                    PART III
                                    --------

Item 10.  Directors and Executive Officers of the Registrant.
-------   --------------------------------------------------

              The information required by this item is incorporated herein by
reference to the Registrant's definitive Proxy Statement relating to the
Registrant's 1998 Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.

Item 11.  Executive Compensation.
-------   ----------------------

              The information required by this item is incorporated herein by
reference to the Registrant's definitive Proxy Statement relating to the
Registrant's 1998 Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.

                                      -12-
<PAGE>
 
Item 12.  Security Ownership of Certain Beneficial Owners and Management.
--------  ---------------------------------------------------------------

              The information required by this item is incorporated herein by
reference to the Registrant's definitive Proxy Statement relating to the
Registrant's 1998 Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.

Item 13.  Certain Relationships and Related Transactions.
--------  -----------------------------------------------

              The information required by this item is incorporated herein by
reference to the Registrant's definitive Proxy Statement relating to the
Registrant's 1998 Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.


                                    PART IV
                                    -------

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.
--------  ----------------------------------------------------------------

(a)       The following financial statements and financial statement schedules
          are filed as part of this report:

          (1) Financial Statements:
              -------------------- 

              Independent Auditors' Report

              Consolidated Balance Sheets -- June 30, 1998 and 1997

              Consolidated Statements of Operations -- years ended June 30,
              1998, 1997 and 1996

              Consolidated Statements of Stockholders' Equity -- years ended
              June 30, 1998, 1997 and 1996

              Consolidated Statements of Cash Flows -- years ended June 30,
              1998, 1997 and 1996

              Notes to Consolidated Financial Statements

          (b) Financial Statement Schedules:
              ----------------------------- 

              Schedule II - Valuation and Qualifying Accounts


              All other schedules are omitted because they are either
inapplicable, not required, or because the required information is included in
the consolidated financial statements or notes thereto.

          (c) Exhibits:
              -------- 

Exhibit No.                   Description
-----------                   -----------

3(a)           Certificate of Incorporation of the Registrant (incorporated
               herein by reference to Exhibit 3(a) to the Registrant's Annual
               Report on Form 10-K, File No. 1-5863, for the fiscal year ended
               June 30, 1994).

                                      -13-
<PAGE>
 
3(b)           By-Laws of the Registrant (incorporated herein by reference to
               Exhibit 3(b) to the Registrant's Annual Report on Form 10-K, File
               No. 1-5863, for the fiscal year ended June 30, 1991).

10(a)          Lease dated as of February 11, 1993 with 33 East 33rd Street
               Realty Associates relating to showroom, warehouse and
               distribution facilities of the Registrant located in New York,
               New York (incorporated herein by reference to Exhibit 10(d) to
               the Registrant's Annual Report on Form 10-K, File No. 1-5863, for
               the fiscal year ended June 30, 1993).

10(b)          Lease dated January 28, 1994 with 330 Realty Company relating to
               office and showroom facilities located in New York, New York
               (incorporated herein by reference to Exhibit 10(e) to the
               Registrant's Annual Report on Form 10-K, File No. 1-5863, for the
               fiscal year ended June 30, 1994).

10(c)          Lease dated January 28, 1994 between E.H. Handbag Co. and 330
               Realty Company relating to office and showroom facilities located
               in New York, New York (incorporated herein by reference to
               Exhibit 10(f) to the Registrant's Annual Report on Form 10-K,
               File No. 1-5863, for the fiscal year ended June 30, 1993)

10(d)          Incentive Stock Option Plan of the Registrant (incorporated
               herein by reference to Exhibit 10(f) to the Registrant's Annual
               Report on Form 10-K, File No. 1-5863, for the fiscal year ended
               June 30, 1988).*

10(e)          1984 Employee Stock Option Plan of the Registrant (incorporated
               herein by reference to Exhibit 10(f) to the Registrant's Annual
               Report on Form 10-K, File No. 1-5863, for the fiscal year ended
               June 30, 1989).*

10(f)          1990 Stock Option Plan of the Registrant, as amended
               (incorporated herein by reference to Exhibit 10(g) to the
               Registrant's Annual Report on Form 10-K, File No. 1-5863, for the
               fiscal year ended June 30, 1991).*

10(g)          Amended and Restated Stockholders' Agreement dated July 30, 1996
               among the Registrant and the persons listed on Schedule A thereto
               (incorporated herein by reference to Exhibit 10(j) to the
               Registrant's Annual Report on Form 10K, file number 1-5863, for
               the fiscal year ended June 30, 1996).

10(h)          Key Executive Disability Plan of the Registrant (incorporated
               herein by reference to Exhibit 10(m) to the Registrant's Annual
               Report on Form 10-K, File No. 1-5863, for the fiscal year ended
               June 30, 1988).*

                                      -14-
<PAGE>
 
10(i)          Loan and Security Agreement dated February 15, 1994 between the
               Jaclyn, Inc. Employee Stock Ownership Plan and Trust and National
               Westminster Bank, New Jersey (incorporated herein by reference to
               Exhibit 10(l) to the Registrant's Annual Report on Form 10-K,
               File No. 1-5863, for the fiscal year ended June 30, 1994).

10(j)          Guaranty dated February 15, 1994 of Empress Handbag Co., Inc.,
               The Bag Factory Shops, Inc., JLN, Inc. and the Registrant in
               favor of National Westminster Bank, New Jersey (incorporated
               herein by reference to Exhibit 10(m) to the Registrant's Annual
               Report on Form 10-K, File No. 1-5863, for the fiscal year ended
               June 30, 1994).

10(k)          Amendment to Loan and Security Agreement dated August 2, 1994
               between the Jaclyn, Inc. Employee Stock Ownership Plan and Trust
               and National Westminster Bank, New Jersey (incorporated herein by
               reference to Exhibit 10(n) to the Registrant's Annual Report on
               Form 10-K, File No. 1-5863, for the fiscal year ended June 30,
               1994).

10(l)          Split-Dollar Insurance Agreement dated August 15, 1987 between
               the Registrant and Robert Chestnov (incorporated herein by
               reference to Exhibit 10(m) to the Registrant's Annual Report on
               Form 10-K, File No. 1-5863, for the fiscal year ended June 30,
               1990).*

10(m)          Split-Dollar Insurance Agreement dated August 15, 1987 between
               the Registrant and Howard Ginsburg (incorporated herein by
               reference to Exhibit 10(n) to the Registrant's Annual Report on
               Form 10-K, File No. 1-5863, for the fiscal year ended June 30,
               1990).*

10(n)          Split-Dollar Insurance Agreement dated August 15, 1987 between
               the Registrant and Allan Ginsburg (incorporated herein by
               reference to Exhibit 10(o) to the Registrant's Annual Report on
               Form 10-K, File No. 1-5863, for the fiscal year ended June 30,
               1990).

10(o)          1996 Non-Employee Director Stock Option Plan (incorporated by
               reference to Exhibit 10(o) to the Registrant's Annual Report on
               Form 10-K, File No. 1-5863, for the fiscal year ended June 30,
               1997).*

10(p)          Non-Qualified Stock Option Contract dated December 3,1996 between
               the Registrant and Martin Brody (incorporated by reference to
               Exhibit 10(p) to the Registrant's Annual Report on Form 10-K,
               File No. 1-5863, for the fiscal year ended June 30, 1997).

10(q)          Non-Qualified Stock Option Contract dated December 3, 1996
               between the Registrant and Richard Chestnov (incorporated by

                                      -15-
<PAGE>
 
               reference to Exhibit 10(q) to the Registrant's Annual Report on
               Form 10-K, File No. 1-5863, for the fiscal year ended June 30,
               1997).

10(r)          Non-Qualified Stock Option Contract dated August 19, 1997 between
               the Registrant and Al Safer (incorporated by reference to Exhibit
               10(r) to the Registrant's Annual Report on Form 10-K, File No. 1-
               5863, for the fiscal year ended June 30, 1997).

10(s)          Non-Qualified Stock Option Contract dated December 3, 1997
               between the Registrant and Martin Brody.

10(t)          Non-Qualified Stock Option Contract dated December 3, 1997
               between the Registrant and Richard Chestnov.

10(u)          Non-Qualified Stock Option Contract dated December 3, 1997
               between the Registrant and Albert Safer.

10(v)          Letter Agreement dated as of December 29, 1997 between the
               Registrant and Robert Chestnov.*

21             Subsidiaries of the Registrant (incorporated herein by reference
               to Exhibit 21 to the Registrant's Annual Report on Form 10-K,
               File No. 1-5863, for the fiscal year ended June 30, 1995).

27             Financial Data Schedule.

____________________
*Management contract or compensatory plan or arrangement


(b)    Reports on Form 8-K.

              No reports on Form 8-K were filed by the Registrant during the
three months ended June 30, 1998.

(c)    Exhibits.

              Exhibits are listed in response to Item 14(a)3.

(d)    Financial Statement Schedules.

              Financial Statement Schedules are listed in response to Item
14(a)2.

                                      -16-
<PAGE>
 
                                   SIGNATURES
                                   ----------

          Pursuant to the requirements of Section 13 or 15(d) 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.

                                    JACLYN, INC.

                                    By: /s/ Allan Ginsburg
                                        ------------------------
September 25, 1998                      ALLAN GINSBURG, Chairman
                                         of the Board

          Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<S>                        <C>                        <C>
/s/ Allan Ginsburg         Chairman of the Board      September 25, 1998
------------------------   and Director 
ALLAN GINSBURG              
 
/s/ Robert Chestnov        President, Principal       September  25, 1998
------------------------   Executive Officer and
ROBERT CHESTNOV            Director
 
 /s/ Anthony Christon      Chief Financial Officer,   September 25, 1998
------------------------   Principal Financial and
ANTHONY CHRISTON           Accounting Officer
 
 /s/ Abe Ginsburg          Director                   September 25, 1998
------------------------
ABE GINSBURG
 
/s/ Howard Ginsburg        Director                   September  25, 1998
------------------------
HOWARD GINSBURG
 
                           Director                   September  25, 1998
------------------------
MARTIN BRODY
 
 /s/ Richard Chestnov      Director                   September 25, 1998
------------------------
RICHARD CHESTNOV
 
/s/ Al Safer               Director                   September 25, 1998
------------------------
AL SAFER
</TABLE>

                                      -17-
<PAGE>
 
                         JACLYN, INC. AND SUBSIDIARIES
                     Consolidated Financial Statements and
                  Additional Information for the Years Ended
                       June 30, 1998, 1997 and 1996 and 


                         Independent Auditors' Report
<PAGE>
 
JACLYN, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



                                                                         Page
INDEPENDENT AUDITORS' REPORT                                              F-1

FINANCIAL STATEMENTS:

     Consolidated Balance Sheets                                          F-2

     Consolidated Statements of Earnings                                  F-4

     Consolidated Statements of Cash Flows                               F-5-6

     Consolidated Statements of Changes in Stockholders' Equity           F-8

     Notes to Consolidated Financial Statements                          F-9-23

SUPPLEMENTAL SCHEDULE:

     Valuation and Qualifying Accounts                                    F-24
     
<PAGE>
 
INDEPENDENT AUDITOR'S REPORT



To the Board of Directors and Stockholders of
Jaclyn, Inc.
West New York, New Jersey


We have audited the accompanying consolidated balance sheets of Jaclyn, Inc. and
Subsidiaries as of June 30, 1998 and 1997, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1998. Our audits also included the
consolidated financial statement schedule of Jaclyn Inc. and Subsidiaries listed
in item 14(a)2. These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Jaclyn, Inc. and Subsidiaries as of
June 30, 1998 and 1997, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles.

Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.


Deloitte & Touche, LLP
September 24, 1998
New York, New York

                                      F-1
<PAGE>
 
JACLYN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997

<TABLE> 
<CAPTION> 
                                                          1998           1997
<S>                                                   <C>            <C> 
ASSETS                                                              
CURRENT ASSETS:                                                     
CASH AND CASH EQUIVALENTS                             $ 2,176,000    $ 1,580,000
SECURITIES AVAILABLE FOR SALE                           2,735,000      3,607,000
ACCOUNTS RECEIVABLE, LESS ALLOWANCE FOR DOUBTFUL                                
  ACCOUNTS: 1998, $483,000, 1997, $724,000              5,979,000     11,484,000
INVENTORIES                                             8,077,000     10,062,000
PREPAID EXPENSES AND OTHER CURRENT ASSETS                 533,000      1,258,000
DEFERRED INCOME TAXES                                   2,050,000      2,329,000
PREPAID AND REFUNDABLE INCOME TAXES                        82,000        513,000
  TOTAL CURRENT ASSETS                                 21,632,000     30,833,000
PROPERTY, PLANT AND EQUIPMENT - NET                     1,516,000      1,638,000
OTHER ASSETS                                            1,424,000      1,592,000
                                                      $24,572,000    $34,063,000
LIABILITIES AND STOCKHOLDERS' EQUITY                                            
CURRENT LIABILITIES:                                                            
NOTES PAYABLE - BANK                                  $         -    $ 4,163,000
ACCOUNTS PAYABLE                                        2,676,000      6,477,000
COMMISSIONS PAYABLE                                       144,000        150,000
ACCRUED PAYROLL AND RELATED EXPENSES                      829,000      1,046,000
OTHER CURRENT LIABILITIES                               1,268,000      2,300,000
  TOTAL CURRENT LIABILITIES                             4,917,000     14,136,000
GUARANTEED BANK LOAN - ESOP                                56,000        509,000
OTHER NON-CURRENT LIABILITIES                              20,000         28,000
DEFERRED INCOME TAXES                                   1,185,000      1,605,000
COMMITMENTS                                                                     
STOCKHOLDERS' EQUITY:                                                           
PREFERRED STOCK, PAR VALUE $1: AUTHORIZED,                                      
  1,000,000 SHARES; ISSUED AND OUTSTANDING, NONE                -              -
COMMON STOCK, PAR VALUE $1: AUTHORIZED,                             
  5,000,000 SHARES                                      3,369,000      3,369,000
ADDITIONAL PAID-IN CAPITAL                             12,117,000     12,117,000
RETAINED EARNINGS                                       9,733,000      9,789,000
                                                       25,219,000     25,275,000
LESS: TREASURY STOCK AT COST                            6,804,000      7,011,000
    GUARANTEED BANK LOAN - ESOP                            56,000        509,000
ADD: UNREALIZED GAIN ON SECURITIES AVAILABLE FOR                    
  SALE                                                     35,000         30,000
  TOTAL STOCKHOLDERS' EQUITY                           18,394,000     17,785,000
</TABLE> 

                                      F-2
<PAGE>
 
<TABLE> 
<S>                                                   <C>            <C> 
                                                      $24,572,000    $34,063,000
</TABLE> 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                      F-3
<PAGE>
 
JACLYN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996

<TABLE> 
<CAPTION> 
                                            1998           1997          1996
<S>                                      <C>           <C>           <C> 
                                                                     
Net sales                                $68,263,000   $77,156,000   $72,312,000

Cost of goods sold                        51,401,000    56,825,000    53,836,000

Gross profit                              16,862,000    20,331,000    18,476,000

Shipping, selling and administrative                                            
    expenses                              16,822,000    19,185,000    17,543,000

Earnings from operations                      40,000     1,146,000       933,000

Interest expense                             182,000       181,000       119,000

Other income, net                            246,000       266,000       328,000

EARNINGS BEFORE INCOME TAXES                 104,000     1,231,000     1,142,000

PROVISION FOR INCOME TAXES                    37,000       468,000       457,000

NET EARNINGS                             $    67,000   $   763,000   $   685,000

NET EARNINGS PER COMMON SHARE -                                                 
    BASIC AND DILUTED                    $      0.02   $      0.28   $      0.25

Weighted average number of shares                                               
    outstanding                            2,707,000     2,705,000     2,692,000
</TABLE> 

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

                                      F-4
<PAGE>
 
JACLYN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996

<TABLE> 
<CAPTION> 
                                                             1998           1997           1996
<S>                                                      <C>            <C>            <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:                                                  

Net earnings                                             $    67,000    $   763,000    $   685,000

Adjustments to reconcile net earnings to net                                           
    cash provided by (used in) operating activities:                                   

        Depreciation and amortization                        362,000        316,000        311,000

        Deferred income taxes                               (141,000)        14,000       (367,000)

        Loss (gain) on sale of equipment                       4,000        (10,000)        (2,000)

        Amortization of goodwill                             155,000        155,000        108,000

Changes in assets and liabilities:                                                     

        Decrease (increase) in accounts receivable         5,505,000     (1,179,000)       245,000

        Decrease (increase) in inventories                 1,985,000      1,010,000     (3,330,000)

        Decrease (increase) in prepaid expenses                                        
            and other current assets                         725,000       (837,000)       162,000

        Decrease (increase) in prepaid and refundable                                   
            income taxes                                     431,000       (242,000)       325,000

        Decrease in security deposits, other assets                                     
            and non current liabilities                        5,000          6,000         29,000

        (Decrease) increase in accounts payable                                         
            and other current liabilities                 (5,056,000)    (1,677,000)     5,010,000

Net cash provided by (used in) operating activities        4,042,000     (1,681,000)     3,176,000

</TABLE> 
                                                                     (Continued)

                                      F-5
<PAGE>
 
JACLYN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996

<TABLE> 
<CAPTION> 
                                                               1998          1997           1996
<S>                                                        <C>            <C>           <C> 
CASH FLOWS FROM INVESTING ACTIVITIES:                                                   

    Purchase of property and equipment                        (304,000)     (515,000)      (202,000)

    Proceeds from sale of property                              60,000        52,000         26,000

    Purchases of securities available for sale              (1,103,000)     (184,000)    (3,673,000)

    Proceeds from sales of securities available for sale     1,980,000       180,000      5,034,000

    Purchase of trademarks                                           -             -     (1,500,000)

Net cash provided by (used in) investing activities            633,000      (467,000)     1,185,000
                                                                                        
CASH FLOWS FROM FINANCING ACTIVITIES:                                                   

    (Decrease) increase in notes payable - bank             (4,163,000)    3,063,000     (2,439,000)

    Proceeds from issuance of treasury stock                    84,000             -              -

Net cash (used in) provided by financing activities         (4,079,000)    3,063,000     (2,439,000)

NET INCREASE IN CASH AND CASH EQUIVALENTS                      596,000       915,000        422,000

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD               1,580,000       665,000        243,000

CASH AND CASH EQUIVALENTS, END OF PERIOD                   $ 2,176,000    $1,580,000    $   665,000

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                       
Cash paid during the year for:                                                          
    Interest                                               $   182,000    $  181,000    $   119,000

    Income taxes                                           $   872,000    $  863,000    $   203,000

NON-CASH ITEMS:                                                                         
    Unrealized gain on securities available for sale       $    35,000    $   30,000    $    41,000
</TABLE> 

The accompanying notes are an integral part of these financial statements

                                                                     (Concluded)

                                      F-6
<PAGE>
 


                                      F-7
<PAGE>
 
JACLYN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
<TABLE> 
<CAPTION> 
                                                                                                Unrealized             
                                                                                                Gain (Loss)             
                                                  COMMON STOCK               Additional         Securities 
                                            Shares            Amount           Paid-in           Available           Retained
                                                                               Capital           for Sale            Earnings     
<S>                                         <C>           <C>               <C>               <C>                 <C> 
BALANCE, JUNE 30, 1995                      3,368,733     $    3,369,000    $  12,117,000     $        14,000     $    8,341,000 
                                                                                                    
Unrealized gain on securities         
available for sale  at July 1, 1995                 -                  -                -              27,000                  -  
                                      
Net earnings, year ended June 30, 1996              -                  -                -                   -            685,000  
                                      
ESOP loan repayment                                 -                  -                -                   -                  -  
                                      
BALANCE, JUNE 30, 1996                      3,368,733          3,369,000       12,117,000              41,000          9,026,000  

Unrealized loss on securities         
available for sale  at July 1, 1996                 -                  -                -             (11,000)                 -  
                                      
Net earnings, year ended June 30,1997               -                  -                -                   -            763,000  
                                      
ESOP loan repayment                                 -                  -                -                   -                  -  
                                      
BALANCE, JUNE 30, 1997                      3,368,733     $    3,369,000    $  12,117,000     $        30,000     $    9,789,000
                                      
Unrealized gain on securities         
available for sale at July 1, 1997                                                                      5,000
                                      
Net earnings, year ended June                                                                                             67,000
                                      
Issuance of treasury shares                         -                  -                -                   -           (123,000)  
                                      
ESOP loan repayment                                 -                  -                -                   -                  -  
                                      
BALANCE, JUNE 30, 1998                      3,368,733     $    3,369,000    $  12,117,000      $       35,000    $     9,733,000  
<CAPTION> 
                                                   TREASURY STOCK                                   
                                                                               Guaranteed        
                                                                               Bank Loan -          
                                                Shares          Amount            ESOP                      

BALANCE, JUNE 30, 1995                          677,328      $  7,011,000    $      888,000                      
                                                                           
Unrealized gain on securities                                                                    
available for sale  at July 1, 1995                   -                 -                 -      
                                            
Net earnings, year ended June 30, 1996                -                 -                 -       

ESOP loan repayment                                   -                 -          (184,000)       
                                                
BALANCE, JUNE 30, 1996                          677,328         7,011,000           704,000     
                                           
Unrealized loss on securities              
available for sale  at July 1, 1996                   -                 -                 -         
                                            
Net earnings, year ended June 30,1997                 -                 -                 -         
                                           
ESOP loan repayment                                   -                 -          (195,000)               
                                                                                                    
BALANCE, JUNE 30, 1997                          677,328      $  7,011,000    $      509,000   
                                                                                                    
Unrealized gain on securities                                                                       
available for sale at July 1, 1997                                                                  
                           
Net earnings, year ended June                                                                      
                           
Issuance of treasury shares                     (20,000)         (207,000)                           
                                            
ESOP loan repayment                                   -                 -          (453,000)                            
BALANCE, JUNE 30, 1998                      $   657,328      $  6,804,000    $       56,000                     
</TABLE>                                                                      

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

                                      F-8
<PAGE>
 
JACLYN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------

NOTE A - SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Jaclyn, Inc. and its subsidiaries (the "Company") are engaged in the design,
manufacture, marketing and sale of handbags, accessories, apparel and related
products. The Company sells its products to retailers, including department and
specialty stores, national chains, major discounters and mass volume retailers,
throughout the United States.

The consolidated financial statements include the accounts of the Company and
all of its wholly-owned subsidiaries. All significant intercompany transactions
and balances have been eliminated.

Use of estimates

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

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or
market.

Property, plant and equipment

Property, plant and equipment are stated at cost. The Company provides for
depreciation and amortization on the straight-line method over the following
estimated useful lives:

Buildings                     25 to 40 years

Machinery and equipment       5 years

Furniture and fixtures        5 years

Leasehold improvements        Lesser of life of the asset or life of the lease

Automobiles and trucks        3 to 5 years

Intangible Assets

                                      F-9
<PAGE>
 
Goodwill and trademarks arising from acquisitions are being amortized on a
straight-line basis over periods not exceeding 20 years. The Company regularly
reviews the individual components of the balances by evaluating the future cash
flows of the businesses to determine the recoverability of the assets and
recognizes, on a current basis, any diminution in value.

                                      F-10
<PAGE>
 
Revenue Recognition

Revenue is recognized at the time merchandise is shipped. Retail factory outlet
store revenues are recognized at the time of sale.

Recently Issued Accounting Standards

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", SFAS No. 132, "Employers' Disclosures about
Pension and Other Post Retirement Benefits." These statements, which are
effective for the Company for the year ended June 30, 1999, expand and modify
disclosures and accordingly will have no impact on the Company's Consolidated
Balance Sheet or Statement of Earnings.

Cash and Cash Equivalents

Cash in excess of daily requirements is invested in certificates of deposits and
money market funds with maturities of three months or less. Such investments are
deemed to be cash equivalents.

Fair Value of Financial Instruments

The carrying amount of cash, accounts receivable, accounts and notes payable and
accrued expenses are assumed to approximate fair value due to their short
maturities. The carrying value of the long-term bank loan, which bears interest
at a variable rate, approximates fair value. Securities are recorded at fair
value, which is based principally on quoted market prices.

Net Earnings per common share

During the second quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share," as required. The
Company has restated all previously recorded net earnings per share for all
periods presented.

Reclassifications

Certain items in prior years of the accompanying consolidated financial
statements and notes to consolidated financial statements have been reclassified
for comparative purposes.

                                      F-11
<PAGE>
 
NOTE B - SECURITIES

Securities available for sale at June 30, 1998 and June 30, 1997 follow:
<TABLE> 
<CAPTION> 
                                               1998            1997
<S>                                        <C>             <C> 
Cost: $2,676,000 at June 30, 1998 and 
$3,558,000 at June 30, 1997                $ 2,735,000     $ 3,607,000
</TABLE> 

As of June 30, 1998 and 1997, securities had net unrealized gains of $59,000 and
49,000 respectively.


NOTE C - INVENTORIES

Inventories consist of the following:
<TABLE> 
<CAPTION> 

                                                 June 30,              
                                         1998                 1997     
<S>                                   <C>                 <C>    
           Raw material               $2,937,000          $ 3,237,000  
           Work in process               835,000            1,319,000  
           Finished goods              4,305,000            5,506,000  
                                      $8,077,000          $10,062,000  
</TABLE> 

NOTE D - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is summarized as follows:

                                                       June 30,            
                                               1998                1997    
        Land                                 $182,000            $182,000  
        Buildings                           1,311,000           1,311,000  
        Machinery and equipment             1,697,000           1,561,000  
        Furniture and fixtures                394,000             390,000  
        Leasehold improvements                722,000             745,000  
        Automobiles and trucks                 99,000              99,000  
                                            4,405,000           4,288,000  
        Less accumulated depreciation                                      
           and amortization                 2,889,000           2,650,000  
                                           $1,516,000          $1,638,000  

                                      F-12
<PAGE>
 
NOTE E - COMMITMENTS

The Company leases office and retail sales facilities under non-cancelable
leases that expire in various years through the year 2001.

Future minimum payments under non-cancelable operating leases with initial or
remaining terms of one year or more are as follows:

<TABLE> 
<CAPTION> 
                              Year Ended                 Office and 
                               June 30,                    Showroom     
                                                         Facilities          
<S>                           <C>                        <C> 
                                 1999                    $  328,000     

                                 2000                       196,000     

                                 2001                       152,000     
</TABLE> 

Rental expense, including real estate taxes, for all operating leases, totaled
$634,000, $683,000, and $938,000 for 1998, 1997 and 1996, respectively.

NOTE F - CREDIT FACILITIES

The Company has a line of credit with a bank for short-term loans, letters of
credit and bankers acceptances amounting to $23,000,000. At June 30, 1998 and
1997, the Company was contingently obligated on open letters of credit for
approximately $3,257,000 and $14,789,000, respectively. Within the $23,000,000
credit line, the Company can borrow up to $10,000,000 on an unsecured short-term
line of credit and a banker's acceptance line. Borrowing on the unsecured
short-term line of credit was $-0- and $600,000 as of June 30, 1998 and 1997,
respectively. Borrowing on the bankers acceptance line was $-0- and $3,563,000
as of June 30, 1998 and 1997, respectively. These loans were at the bank's prime
rate or below (LIBOR) at the option of the Company. The bank's prime rate at
June 30, 1998 was 8.50%. During fiscal 1998, the average amount outstanding
under the short-term line was $2,569,000 with a weighted average interest rate
of 7.3%. During 1997, the average amount outstanding under the short-term line
was $2,259,000 with a weighted average interest rate of 8.0%. The maximum amount
outstanding during fiscal 1998 and fiscal 1997 was $9,130,000 and $6,800,000,
respectively.

                                      F-13
<PAGE>
 
NOTE G - STOCK OPTIONS

The Company has an Incentive Stock Option Plan permitting the granting of
options to purchase up to 500,000 shares of common stock. Under the Plan, the
option price cannot be less than the fair market value of the stock as of the
date of the granting of the option and 110% of the fair market value for certain
management employees. Options, which may be granted to December 2000, are
exercisable as determined by the Board of Directors.

Statement of Financial Accounting Standards No. 123, "Accounting Stock-Based
Compensation" (SFAS 123) was effective for the Company for fiscal 1997. SFAS No.
123 encourages (but does not require) compensation expense to be measured based
on the fair value of the equity instrument awarded. In accordance with APB No.
25, no compensation cost has been recognized in the Consolidated Statements of
Operations for the Company's stock option plans. If compensation cost for the
Company's stock option plans had been determined in accordance with the fair
value method prescribed by SFAS No. 123, the Company's net earnings would have
been $43,000 and $739,000 for 1998 and 1997, or $.02 and $.26 per share,
respectively. This pro forma information may not be representative of the
amounts to be expected in future years as the fair value method of accounting
prescribed by SFAS No. 123 has not been applied to options granted prior to
1996.

Stock option transactions are summarized below:
<TABLE> 
<CAPTION> 
                                               1998                   1997                      1996
                                                 Weighted              Weighted                   Weighted
                                                  Average               Average                    Average
                                                 Exercise              Exercise                   Exercise 
                                    Shares        Price      Shares     Price        Shares        Price 
<S>                                 <C>          <C>         <C>        <C>              <C>       <C>  
Outstanding - beginning of year
                                     270,817     $  9.33     133,168    $ 11.85     154,585        $  11.73
                                                                                                            
Granted                                    -           -     159,000      4.29           -               -
Exercised                                  -           -     (6,739)      9.18           -               -
Forfeited                             (3,772)       8.58    (14,612)      10.62    (21,417)           11.00
Outstanding - end of year            267,045     $  9.35     270,817    $ 9.33     133,168         $  11.85
Exercisable - end of year            267,045     $  9.35     117,817    $ 11.96    120,668         $  11.85
</TABLE> 

                                      F-14
<PAGE>
 
<TABLE> 
<CAPTION> 
<S>                                 <C>       <C>               <C>       <C>              <C>       <C>  
Weighted-average fair  
value of options granted 
during the year                      -        $     -            -        $ 2.41            -        $    - 
</TABLE> 

                                      F-15
<PAGE>
 
The following table summarizes information about stock options outstanding at
June 30, 1998:
<TABLE> 
<CAPTION> 
                                                       Options Outstanding                       Option Exercisable

                                            Weighted-
                            Number            Average                                   Number
   Range of         Outstanding at          Remaining     Weighted Average      Exercisable at     Weighted Average
   Exercise          June 30, 1998   Contractual Life       Exercise Price       June 30, 1998       Exercise Price
    Prices                                      (Yrs)
<S>                 <C>              <C>                  <C>                   <C>                <C>    
   $4.06-$13.61            267,045               3.96                $9.35             267,045                $9.35 
</TABLE> 

The fair value of each option grant is estimated on the date of each grant using
the Black-Scholes option-pricing model, there were no additional options granted
in 1998 and the following weighted average assumptions were used for grants in
1997: risk-free interest rate of 6.43%; expected life of 10 years; expected
volatility of 36.37%; dividend yield of 0%. The fair values generated by the
Black-Scholes model may not be indicative of the future benefit, if any, that
may be received by the option holder.



NOTE H- PREFERRED STOCK

The Board of Directors of the Company has authority (without action by the
stockholders) to issue the authorized and unissued preferred stock in one or
more series and, within certain limitations, to determine the voting rights,
preference as to dividends and in liquidation, conversion and other rights of
each such series. No shares of preferred stock have been issued.

NOTE I - INCOME TAXES

The components of the Company's tax provision (benefit) for each of the three 
years ended June 30, follow:
<TABLE> 
<CAPTION> 
                                                     June 30,
                                          1998         1997         1996    
<S>                                     <C>          <C>          <C> 
      Current:                                                              
          Federal                        ($9,000)     ($6,000)    $148,000  
          State and Local                 17,000       90,000       31,000  
          Foreign                        170,000      370,000      645,000  
                                         178,000      454,000      824,000  
      Deferred:                                                             
          Federal and State             (141,000)       14,000    (367,000)  
</TABLE>                                                                    

                                      F-16
<PAGE>
 
<TABLE> 
<CAPTION> 
<S>                                      <C>         <C>          <C> 
      Provision (benefit)                $37,000     $468,000     $457,000  
</TABLE> 

                                      F-17
<PAGE>
 
A reconciliation between the provision for income taxes computed by applying the
federal statutory rate to income before income taxes and the actual provision
for income taxes is as follows:

<TABLE> 
<CAPTION> 
                                                              1998       1997       1996
<S>                                                           <C>        <C>        <C> 
Provision for income taxes at statutory rate                  34.0%      34.0%      34.0%
State and local income taxes net of federal tax benefit        5.0        7.4        7.4
Tax exempt interest                                           (2.0)      (1.4)      (1.7)
Other                                                         (1.0)      (2.0)       0.3
Effective tax rate %                                          36.0%      38.0%      40.0%
</TABLE> 

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The income tax effects of
significant items comprising the Company's net deferred tax assets and 
liabilities 30, 1998 and 1997 are as follows:

<TABLE> 
<CAPTION> 
                                                                      June 30,
                                                   1998                                       1997
                                            Assets           Liabilities               Assets           Liabilities
<S>                                     <C>                  <C>                   <C>                  <C> 
Depreciation                                                                                       
and amortization                                 -              $852,000           $        -              $824,000
Leases                                                           169,000                                    199,000
Foreign taxes                                                    140,000                                    561,000
Inventory                                  628,000                                  1,102,000
Bad debt and                                                                   
other reserves                             189,000                                    281,000
Reserve for                                
sales allowances                           377,000                                    578,000 
NOL and tax credit                          
carryforwards                              518,000                                    149,000
Other                                      338,000                24,000              219,000                21,000
                                        $2,050,000            $1,185,000           $2,329,000            $1,605,000
</TABLE> 

                                      F-18
<PAGE>
 
NOTE J - EMPLOYEE'S PENSION TRUST

The Company and its subsidiaries have a trusteed defined benefit pension plan
for certain of their salaried and hourly personnel. The plan provides pension
benefits that are based on a fixed amount of compensation per year of service,
career average pay or on the employee's compensation during a specified number
of years before retirement. The Company's funding policy is to make annual
contributions required by the Employee Retirement Security Act of 1974.

The net pension expense includes the following components:
<TABLE> 
<CAPTION> 
                                                                                   June 30,
                                                                   1998               1997             1996
<S>                                                            <C>                <C>             <C> 
Service cost - benefits earned during the period                    $194,000          $214,000          $184,000
Interest cost on projected benefit obligations                       176,000           164,000           175,000
Actual return on assets                                             (163,000)         (143,000)         (155,000)
Net amortization and deferral                                          3,000          (11,000)            12,000
Net pension expense                                                 $210,000          $224,000          $216,000
</TABLE> 

Assumptions used in determining the net pension charges were:

<TABLE> 
<CAPTION> 
                                                                                 1998          1997          1996
<S>                                                                              <C>           <C>           <C> 
Discount rates                                                                   6.75%         7.00%         7.25%
Rates of increase in compensation levels                                         3.00%         4.00%         3.00%
Expected long-term rate of return on assets                                      6.25%         6.25%         6.50%
</TABLE> 

The following table sets forth the plan's funded status and amount recognized in
the Company's balance sheets:
<TABLE> 
<CAPTION> 
                                                                                          June 30,
                                                                                    1998                1997
                    <S>                                                          <C>                 <C> 
                    Actuarial present value of benefit obligations:
                             Vested benefit obligation                           $2,060,000          $1,633,000
                             Accumulated benefit obligation                      $2,179,000          $1,805,000
                    Plan assets at fair value                                    $2,383,000          $2,423,000
                    Less projected benefit obligation                             2,872,000           2,640,000
                    Projected benefit obligation in excess of plan
                    assets                                                         (489,000)           (217,000)
                    Unrecognized prior service cost                                   4,000               5,000
                    Unrecognized net loss                                           555,000             530,000
                    Unrecognized net asset                                         (243,000)           (282,000)
</TABLE> 

                                      F-19
<PAGE>
 
<TABLE> 
                    <S>                                                          <C>                    <C> 
                    Prepaid (accrued) pension costs                              ($173,000)             $36,000
</TABLE> 

Plan assets as of June 30, 1998 and June 30, 1997, consisted primarily of U.S.
Government securities and high-grade corporate notes. Also included in plan
assets at those dates were 22,654 shares of the common stock of the Company with
a market value of $93,000 and $102,000, respectively.

                                      F-20
<PAGE>
 
NOTE K - SALES TO MAJOR CUSTOMERS AND PURCHASES FROM MAJOR SUPPLIERS

During the year ended June 30, 1998, 1997 and 1996, revenues derived from sales
to one customer were 15%, 13% and 15%, respectively. Sales to a second customer
were 12%, 12% and 12%, respectively, and to a third customer were 10%, 9% and
11% respectively.

The Company relies on suppliers to purchase a variety of raw materials. The
Company had one supplier who in the aggregate constituted 14% of the Company's
purchases for the year ended June 30, 1998.

NOTE L - EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST

The Company maintains a non-contributory Employee Stock Ownership Plan (the
"ESOP") and Trust, for its employees who are not covered by a collective
bargaining agreement.

On February 15, 1994, the ESOP authorized the Trust to borrow $1,150,000 from a
bank, which loan is guaranteed by the Company. The debt bears interest at the
prime rate and is payable in a minimum of ten annual installments. As of June
30, 1998, the guaranteed ESOP bank loan was $56,000.

Contributions to the ESOP are at the discretion of the Company's Board of
Directors. ESOP expense was approximately $250,000 for the years ended June
30,1998 and June 30, 1997, which includes $211,000 and $195,000 of compensation
expense and $39,000 and $55,000 of interest expense, respectively. Compensation
expense related to the plan is based upon the number of shares allocated to
participants in the current year.

Vesting occurs after five years of service. However, if the ESOP is deemed
"top-heavy", vesting will occur at the rate of 20% per year after the completion
of the second year of service.

NOTE M - PURCHASE OF TRADEMARKS

During June 1996, the Company acquired certain trademarks and other assets from
McCrackin Industries, Inc. and its affiliates, for a purchase price of
$1,500,000. The trademarks include "Saddle River," under which the Company has
been manufacturing and distributing women's handbags for the past 9 years. In
connection with the acquisition, two of the principals of McCrackin Industries
have entered into a separate consulting agreement with the Company for a period
of 18 months for marketing and consulting services. During this period, those
principals had an option to buy back the trademarks for pre-determined prices
in excess of the purchase price, which has not been exercised.

                                      F-21
<PAGE>
 
NOTE N - NET EARNINGS PER SHARE

The Company's calculation of Basic and Diluted Net Earnings Per Share are as
follows (in thousands, except per share amounts):
<TABLE> 
<CAPTION> 
                                                                               Year Ended June 30,
                                                                   1998               1997                1996
<S>                                                          <C>                <C>                 <C> 
Basic Net Income Per Share:
--------------------------
Net Earnings                                                 $            67    $            763    $            685
Basic Weighted Average Shares Outstanding                              2,701               2,691               2,691
Basic Net Income Per Common Share                                       $.02                $.28                $.25

Diluted Net Income Per Share:
----------------------------
Net Earnings                                                 $            67    $            763    $            685
Basic Weighted Average Shares Outstanding                              2,701               2,691               2,691
Add: Dilutive Options                                                      6                  14                   1
Diluted Weighted Average Shares Outstanding                            2,707               2,705               2,692
Diluted Net Earnings Per Common Share                                   $.02                $.28                $.25
</TABLE> 

Options to purchase 89,92, and 131 common shares were outstanding as of June 30,
1998, 1997, and 1996, respectively, but were not included in the computation of
diluted earnings per share because the exercise price of the options exceeds the
average market price and would have been anti-dilutive.

                                      F-22
<PAGE>
 
NOTE O - UNAUDITED QUARTERLY FINANCIAL DATA

Summarized quarterly financial data, in thousands of dollars except for per
share amounts, for the fiscal years ended June 30, 1998 and 1997, are as
follows:

<TABLE> 
<CAPTION> 
                                                                Three Months Ended
                                 =================================================================================
                                       June 30,          March 31,              December 31,            September 30,
                                         1998              1998                    1997                     1997
<S>                                    <C>               <C>                    <C>                     <C> 
Net sales                              $13,565            $13,999                 $21,369                 $19,330
Gross profit                            $3,474             $3,060                  $5,472                  $4,856
Net (loss) earnings                      ($394)               $25                    $147                    $289
Net (loss) earnings per common share  -
Basic and diluted                       ($.15)               $.01                    $.06                    $.10
</TABLE> 
<TABLE> 
<CAPTION> 
                                                                Three Months Ended
                                 =================================================================================
                                      June 30,            March 31,              December 31,            September 30,
                                       1997                 1997                    1996                    1996
<S>                                   <C>                 <C>                    <C>                     <C>  
Net sales                             $20,683             $13,778                 $19,718                 $22,977
Gross profit                           $5,855              $4,019                  $5,211                  $5,246
Net earnings                             $206                 $68                    $134                    $355
Earnings per common share
- Basic and diluted                      $.08                $.02                    $.05                    $.13
</TABLE> 

                                      F-23
<PAGE>
 
JACLYN, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
---------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                               Column A                Column C                           Column D            Column E
                                                       Additions

                                                 (Credited)          Charged   
                             Balance at       Charged to costs         to                                  Balance at end
                            beginning of        and expenses        accounts (1)        Deductions (2)       of period
Description                    period
<S>                         <C>               <C>                   <C>                 <C>                <C> 
Year ended June 30,            $724,000            ($143,000)          $1,000              $99,000            $483,000
1998

Year ended June 30,            $760,000             ($38,000)          $8,000               $6,000            $724,000
1997

Year ended June 30,            $301,000             $527,000          $32,000             $100,000            $760,000
1996
</TABLE> 

(1) Collection accounts previously written off.
(2) Doubtful accounts written off.

                                      F-24
<PAGE>
 
================================================================================


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                    ________________________________________



                                    EXHIBITS
                                       to
                           ANNUAL REPORT ON FORM 10-K
                              FOR THE FISCAL YEAR
                              ENDED JUNE 30, 1998



                    ________________________________________



                                  JACLYN, INC.


================================================================================
<PAGE>
 
                                 EXHIBIT INDEX
                                 -------------

Exhibit No.                     Description                                 Page
----------                      -----------                                 ----

3(a)         Certificate of Incorporation of the Registrant (incorporated
             herein by reference to Exhibit 3(a) to the Registrant's
             Annual Report on Form 10-K, File No. 1-5863, for the fiscal
             year ended June 30, 1994).
             
3(b)         By-Laws of the Registrant (incorporated herein by reference
             to Exhibit 3(b) to the Registrant's Annual Report on Form 10-
             K, File No. 1-5863, for the fiscal year ended June 30, 1991).
             
             
10(a)        Lease dated as of February 11, 1993 with 33 East 33rd Street
             Realty Associates relating to showroom, warehouse and
             distribution facilities of the Registrant located in New
             York, New York (incorporated herein by reference to Exhibit
             10(d) to the Registrant's Annual Report on Form 10-K, File
             No. 1-5863, for the fiscal year ended June 30, 1993).
             
10(b)        Lease dated January 28, 1994 with 330 Realty Company relating
             to office and showroom facilities located in New York, New
             York (incorporated herein by reference to Exhibit 10(e) to
             the Registrant's Annual Report on Form 10-K, File No. 1-5863,
             for the fiscal year ended June 30, 1994).
             
10(c)        Lease dated January 28, 1994 between E.H. Handbag Co. and 330
             Realty Company relating to office and showroom facilities
             located in New York, New York (incorporated herein by
             reference to Exhibit 10(f) to the Registrant's Annual Report
             on Form 10-K, File No. 1-5863, for the fiscal year ended June
             30, 1994).
             
10(d)        Incentive Stock Option Plan of the Registrant (incorporated
             herein by reference to Exhibit 10(f) to the Registrant's
             Annual Report on Form 10-K, File No. 1-5863, for the fiscal
             year ended June 30, 1988).*
             
10(e)        1984 Employee Stock Option Plan of the Registrant
             (incorporated herein by reference to Exhibit 10(f) to the
             Registrant's Annual Report on Form 10-K, File No. 1-5863, for
             the fiscal year ended June 30, 1989).*
             
10(f)        1990 Stock Option Plan of the Registrant, as amended
             (incorporated herein by reference to Exhibit 10(g) to the
             Registrant's Annual Report on Form 10-K, File No.1-5863, for
             the fiscal year ended June 30, 1991).*
             
10(g)        Amended and Restated Stockholders' Agreement dated as of July
             30, 1996 among the Registrant and the persons listed on
             Schedule A thereto (incorporated herein by reference to
             Exhibit 10(j) to the Registrant's Annual Report on Form 10K,
             file number 1-5863, for the fiscal year ended June 30, 1996).
             
10(h)        Key Executive Disability Plan of the Registrant (incorporated
             herein by reference to Exhibit 10(m) to the Registrant's
             Annual Report on Form 10-K, File No. 1-5863, for the fiscal
             year ended June 30, 1988).*
<PAGE>
 
Exhibit No.                     Description                                 Page
----------                      -----------                                 ----

10(i)        Loan and Security Agreement dated February 15, 1994 between
             the Jaclyn, Inc. Employee Stock Ownership Plan and Trust and
             National Westminster Bank, New Jersey (incorporated herein by
             reference to Exhibit 10(l) to the Registrant's Annual Report
             on Form 10-K, File No. 1-5863, for the fiscal year ended June
             30, 1994).
             
10(j)        Guaranty dated February 15, 1994 of Empress Handbag Co.,
             Inc., The Bag Factory Shops, Inc., JLN, Inc. and the
             Registrant in favor of National Westminster Bank, New Jersey
             (incorporated herein by reference to Exhibit 10(m) to the
             Registrant's Annual Report on Form 10-K, File No. 1-5863, for
             the fiscal year ended June 30, 1994).
             
10(k)        Amendment to Loan and Security Agreement dated August 2, 1994
             between the Jaclyn, Inc. Employee Stock Ownership Plan and
             Trust and National Westminster Bank, New Jersey (incorporated
             herein by reference to Exhibit 10(n) to the Registrant's
             Annual Report on Form 10-K, File No. 1-5863, for the fiscal
             year ended June 30, 1994).
             
10(l)        Split-Dollar Insurance Agreement dated August 15, 1987
             between the Registrant and Robert Chestnov (incorporated
             herein by reference to Exhibit 10(m) to the Registrant's
             Annual Report on Form 10-K, File No. 1-5863, for the fiscal
             year ended June 30, 1990).*
             
10(m)        Split-Dollar Insurance Agreement dated August 15, 1987
             between the Registrant and Howard Ginsburg (incorporated
             herein by reference to Exhibit 10(n) to the Registrant's
             Annual Report on Form 10-K, File No. 1-5863, for the fiscal
             year ended June 30, 1990).*
             
10(n)        Split-Dollar Insurance Agreement dated August 15, 1987
             between the Registrant and Allan Ginsburg (incorporated
             herein by reference to Exhibit 10(o) to the Registrant's
             Annual Report on Form 10-K, File No. 1-5863, for the fiscal
             year ended June 30, 1990).*
             
10(o)        1996 Non-Employee Director Stock Option Plan (incorporated by
             reference to Exhibit 10(o) to the Registrant's Annual Report
             on Form 10-K, File No. 1-5863, for the fiscal year ended June
             30, 1997).*
             
10(p)        Non-Qualified Stock Option Contract dated December 3,1996
             between the Registrant and Martin Brody (incorporated by
             reference to Exhibit 10(p) to the Registrant's Annual Report
             on Form 10-K, File No. 1-5863, for the fiscal year ended June
             30, 1997).
             
10(q)        Non-Qualified Stock Option Contract dated December 3, 1996
             between the Registrant and Richard Chestnov (incorporated by
             reference to Exhibit 10(q) to the Registrant's Annual Report
             on Form 10-K, File No. 1-5863, for the fiscal year ended June
             30, 1997).
             
10(r)        Non-Qualified Stock Option Contract dated August 19, 1997
             between the Registrant and Al Safer (incorporated by
             reference to Exhibit 10(r) to the Registrant's Annual Report
             on Form 10-K, File No. 1-5863, for the fiscal year ended June
             30, 1997).
<PAGE>
 
Exhibit No.                     Description                                 Page
----------                      -----------                                 ----

10(s)        Non-Qualified Stock Option Contract dated December 3, 1997
             between the Registrant and Martin Brody.
             
10(t)        Non-Qualified Stock Option Contract dated December 3, 1997
             between the Registrant and Richard Chestnov.
             
10(u)        Non-Qualified Stock Option Contract dated December 3, 1997
             between the Registrant and Albert Safer.
             
10(v)        Letter Agreement dated as of December 29, 1997 between the
             Registrant and Robert Chestnov.*
             
21           Subsidiaries of the Registrant (incorporated herein by
             reference to Exhibit 21 to the Registrant's Annual Report on
             Form 10-K, File No. 1-5863, for the fiscal year ended June
             30, 1995).
             
27           Financial Data Schedule.

*Management contract or compensatory plan or arrangement.