**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

| **(Mark One)** |                                                                                                                                        |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------|
| x              | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE  FISCAL YEAR ENDED DECEMBER 31, 2005** |
|           | OR                                                                                                                                          |
| o              | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                          |

 

**Commission file number 0-22480**

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**The J. Jill Group, Inc.**

(Exact Name of Registrant as Specified in its Charter)

| **Delaware**                                                     | ** ** | **04-2973769**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |
| **4 Batterymarch Park, Quincy, MA**                              | ** ** | **02169**                             |
| (Address of  Principal Executive Offices)                        |       | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code:  **(617) 376-4300**

Securities registeredpursuant to Section 12(b) of the Act:  **None**

Securities registeredpursuant to Section 12(g) of the Act:

Title of Each Class

Common Stock, $0.01 parvalue

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes o  No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o  No x

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.  x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one)

| Large Accelerated  Filer o | Accelerated  Filer x | Non-Accelerated  Filer o |
|---------------------------------|---------------------------|-------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Act).  Yes o  No x

At June 25, 2005, the aggregate market value ofcommon stock held by non-affiliates of the Registrant was $287,142,000 based onthe closing price ($14.36 per share) for the common stock as reported on TheNASDAQ Stock Market on June 25, 2005.

**Sharesoutstanding of the Registrant’s common stock at March 10,**2006: 20,480,861

 

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**THEJ. JILL GROUP, INC.INDEX TO ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2005**

|                   | ** ** | ** **                                                                                                         | ** ** | **Page** | ** ** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **Part I**   |       |                                                                                                               |       |     |       |   |   |
| Item 1.           |       | Business                                                                                                           |       |     | 3          |   |   |
| Item 1A.          |       | Risk Factors                                                                                                       |       |     | 9          |   |   |
| Item 1B.          |       | Unresolved Staff Comments                                                                                          |       |     | 12         |   |   |
| Item 2.           |       | Properties                                                                                                         |       |     | 12         |   |   |
| Item 3.           |       | Legal Proceedings                                                                                                  |       |     | 13         |   |   |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                                                |       |     | 13         |   |   |
| **Part II**  |       |                                                                                                               |       |     |       |   |   |
| Item 5.           |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       |     | 14         |   |   |
| Item 6.           |       | Selected Consolidated Financial Data                                                                               |       |     | 15         |   |   |
| Item 7.           |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |       |     | 17         |   |   |
| Item 7A.          |       | Quantitative and Qualitative Disclosures about Market  Risk                                                        |       |     | 28         |   |   |
| Item 8.           |       | Consolidated Financial Statements and Supplementary  Data                                                          |       |     | 29         |   |   |
| Item 9.           |       | Changes in and Disagreements with Accountants on  Accounting and Consolidated Financial Disclosure                 |       |     | 59         |   |   |
| Item 9A.          |       | Controls and Procedures                                                                                            |       |     | 59         |   |   |
| Item 9B.          |       | Other  Information                                                                                                 |       |     | 59         |   |   |
| **Part III** |       |                                                                                                               |       |     |       |   |   |
| Item 10.          |       | Directors and Executive Officers of the Registrant                                                                 |       |     | 60         |   |   |
| Item 11.          |       | Executive Compensation                                                                                             |       |     | 62         |   |   |
| Item 12.          |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |       |     | 68         |   |   |
| Item 13.          |       | Certain Relationships and Related Transactions                                                                     |       |     | 71         |   |   |
| Item 14.          |       | Principal Accounting Fees and Services                                                                             |       |     | 71         |   |   |
| **Part IV**  |       |                                                                                                               |       |     |       |   |   |
| Item 15.          |       | Exhibits and Consolidated Financial Statement  Schedules                                                           |       |     | 73         |   |   |
| Signatures        |       |                                                                                                               | 83         |     |       |

 

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**PART I**

**Item 1.**                        Business

*This Annual Report on Form 10-K, includingthe following discussion, contains forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995 that involvesubstantial risks and uncertainties. See also “Item 1A. Risk Factors” and “Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.” We disclaim any intent or obligation to update any forward-lookingstatements.*

***Potential Sale of the Company***

On February 5, 2006,The J. Jill Group, Inc. (“J. Jill”) entered into an Agreement and Plan ofMerger (the “Merger Agreement”) with The Talbots, Inc., (“Talbots”) andJack Merger Sub, Inc., a wholly owned subsidiary of Talbots (“Merger Sub”).Pursuant to the Merger Agreement, Talbots will acquire J. Jill in a taxableall-cash transaction whereby Merger Sub will merge with and into J. Jill (the “Merger”).J. Jill will continue as the corporation surviving the Merger and will become awholly owned subsidiary of Talbots. The Merger Agreement provides, uponconsummation of the Merger, for our stockholders to receive $24.05 in cash,without interest, for each share of common stock of J. Jill. Optionsoutstanding under J. Jill’s stock option plans, whether or not exercisableor vested, will be cancelled as of the effective time of the Merger. Holders ofoptions will be entitled to receive a cash payment (less required taxwithholdings) equal to the excess, if any, of $24.05 over the exercise price of each such option, multiplied by theamount of shares covered by each such option. The Merger Agreement is subjectto adoption by J. Jill’s stockholders, as well as the satisfaction or waiver ofother conditions, including, among others, the expiration or termination ofapplicable waiting periods under the Hart-Scott-Rodino Antitrust ImprovementsAct of 1976, as amended. The Merger Agreement contains certain terminationrights and provides that, upon the termination of the Merger Agreement underspecified circumstances, J. Jill will be required to pay Talbots a terminationfee of $18.0 million.

***The Company***

We are a multi-channelspecialty retailer of women’s apparel, including accessories and footwear. Wecurrently have two reportable business segments, retail and direct. The retailsegment markets merchandise through our retail stores. The direct segmentmarkets merchandise through our catalogs and website. For more informationabout our reportable business segments, see “Note L” to the accompanyingconsolidated financial statements.

***Our Business Strategy***

Our strategic mission isto build J. Jill into a premier national brand by offering sophisticated casualapparel designed to appeal to active, affluent women age 35 and older throughour integrated multi-channel operating platform. Our current growth strategy isbased primarily on our retail store initiative. During fiscal 2005, we opened42 retail stores and ended the fiscal year with 192 retail stores in 35 states.In 2006, we expect to continue our retail segment growth by opening 40 additionalretail stores. We believe there is a total market potential for 300 to 500 ofour retail stores throughout the United States. Our direct segment performancecontinued to decline in fiscal 2005 primarily as a result of poor customerresponse to our merchandise offerings and cannibalization from our retailstores. We are currently working to improve the overall appeal and productivityof our catalogs by refocusing our attention on our core customer. Over the pasttwo years, we have tested different catalog layouts, models and copy formats inan attempt to broaden the appeal of our catalogs. The response to theseinitiatives has been lackluster, and we are now returning to the overallcreative approach that worked for us in the early 2000’s. We are alsoincreasing the 

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penetrationof extended sizes, shoes and accessories in our catalogs and replacing certainmulti-channel product offerings with catalog-only product offerings thatspecifically target our catalog customer.

***The J. Jill Brand***

Our target customers areactive, affluent women age 35 or older. We offer our customers a broad range ofapparel in a wide range of sizes. Our brand tenets attempt to reflect our corecustomers’ beliefs and needs—comfort, individuality, artistic simplicity, awoman’s version of femininity and social responsibility. Our creative approachaims to capture and communicate these brand tenets consistently and clearlyacross all of our distribution channels. We seek to differentiate our brandthrough the use of lifestyle photography that depicts women with whom our corecustomers can identify—women with graceful confidence, women with strongconnections to friends, family and community and women who are alluring yetreal.

***Brand Marketing***

In fiscal 2005, we hired abranding agency to assist us with market positioning and establishing specificbrand-enhancing opportunities for J. Jill. We conducted extensive consumer andmarket research based on three primary metrics: quantitative consumersegmentation, qualitative consumer insights and competitive positioning. In October 2005,we hired a new Chief Marketing Officer who worked closely with our brandingagency to analyze the research results and develop a brand platform to guideour strategic marketing decisions. Our newly articulated brand platformprovides a concise description of what our brand stands for, who our customeris and how we meet her needs and desires. In 2006 we plan to develop acommunication strategy that will promote the core signature, look and voice ofthe J. Jill brand.

***Merchandising, Design and Product Development***

Our merchandising, design and product development goalis to offer trend relevant, sophisticated casual clothing and complementaryaccessories and footwear that appeal to our target customer. We design, developand oversee the execution of virtually all of our apparel offerings in-house.Our apparel is manufactured domestically and abroad. Our apparel styles areoffered in a broad assortment of sizes including misses’, petite’s, women’s andtall’s in our catalogs and on our website and misses’ and petite’s in ourretail stores. Although third party vendors continue to design accessories andouterwear styles for us with our input, over the past two years we haveincreased the level of our in-house accessory design and development. The onlythird party brand name products we offer are in jewelry, socks, gift items(e.g., books, candles, etc.) and footwear.

Over the past two years we have been in amerchandising transition and during this time we endeavored to broaden theappeal of the J. Jill brand by standardizing our fits, improving the quality ofour apparel, increasing the penetration of color and novelty in our assortmentand becoming more contemporary in our design elements. While we believe we haveachieved success with respect to improving the quality and fit of our apparel,some of the changes we made with respect to color, novelty and silhouettenegatively impacted our performance over the past two years. In hindsight, webelieve that some of our color choices, our increased use of boldembellishments and our migration toward a narrower fit were not appropriatefor, and ultimately decreased the desirability of our product offerings to, ourcustomer. At the same time, the merchandise changes we made did not attract thenumber of new customers we expected them to.  As a result, our direct business has declinedsignificantly in the past two years and our retail store productivity has notincreased to the level we expected.

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We are takingseveral steps in the merchandising and design areas to modify our strategy andadjust our merchandise offerings in the future, the most important of which isrefocusing our attention to our core customer. In this regard, we intend to:

·       Returnto neutral, subtle, wardrobe-building colors that are appropriate year around;

·       Featurerelaxed, forgiving styling that is body aware but not form-fitting;

·       Adjuststyling details to be more subtle, feminine and appropriate to our corecustomer;

·       Featuredyed-to-match head-to-toe dressing; and

·       Provide versatilemulti-purpose items and cozy, comforting materials.

***Sourcing and Product Integrity***

Our sourcing and productintegrity strategy is based on building key strategic relationships with oursupply chain vendors. We seek to create these strategic relationships byproviding a clear set of product standards and compliance requirements as wellas the technical support and training that our vendors need in order to deliverthe best possible quality. Over the past two years we have built a sourcingteam that has been key to driving significant improvements in the quality ofour merchandise. We have also diversified our vendor base to minimize ourconcentration risk in China and Hong Kong and to increase competition among ourvendors. In fiscal 2005, we did not purchase more than 10% of our inventorydirectly from any one vendor.

***Retail Business***

Our retail business is our primary growth vehicle. Weplan to continue to roll out new retail stores in lifestyle centers and malllocations throughout the United States. In 2006, we expect to open 40additional retail stores. Excluding our four misses’/petite combination stores,our stores range in size from 2,400 to 6,100 square feet. Our current realestate strategy is to focus primarily on locations approximately 2,800 to 3,300square feet in size. Recently we have shifted our focus away from malls andtoward lifestyle centers as locations of choice for new stores. At December 31,2005, 69% of our retail stores were located in malls and 31% in lifestylecenters or street locations.  We expectover 70% of our 2006 retail store openings to be in lifestyle centers. Itgenerally takes two to three months to construct one of our retail stores. Ourcurrent prototype for a standard store provides for a total gross store buildout cost of approximately $700,000 less $400,000 in expected landlordallowances. We look for locations where the economics can deliver an 18-monthpayback and a 70% term return on net investment.

The intranet site at theconcierge desk in our retail stores continues to play a pivotal role inensuring that our retail customers have access to virtually all products thatwe currently offer. This service generated roughly 8% of total retail net salesin fiscal 2005, enabling us not only to provide superior customer service butalso to capture incremental sales.

***Direct Business—Catalog and Internet***

In fiscal 2005, we circulated approximately55.6 million catalogs and increased our customer e-mail addresses to 1.3million. In recent years, an increasing percentage of our direct business hasbeen derived from our website. In fiscal 2005, internet sales represented 51.2%of total direct segment net sales. The internet is a more cost effective way oftaking orders as well as a powerful overstock liquidation tool. Our circulationstrategy has historically focused on mailing to customers who had alreadypurchased from us and acquiring new customers through targeted prospecting. Ourcurrent goal is to circulate at breakeven or above (that is, to increasecirculation only to the point where the incremental projected net sales are atleast equal to the incremental costs associated with mailing additionalcatalogs).  Pursuit of this goal in 

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fiscal 2005, led tosignificantly reduced prospecting circulation, as the declining profitabilityof the direct business that we have experienced during our merchandizingtransition reduced the breakeven point.

We acquire lists ofprospective customers by renting or exchanging lists with database cooperativesand other sources, including direct competitors. The most productive prospectstend to come from the customer lists of other women’s apparel catalogs. Todetermine which prospective customers will receive a particular catalogmailing, we analyze available information concerning such prospects and, to theextent possible, use the same type of statistical modeling techniques used totarget mailings to our own customers.

***Cross-Channel Customer Database***

We maintain all of our catalog, internet, intranet andretail customer and transaction data in our multi-channel customer database.This cross-channel customer database contains detailed purchasing informationand certain demographic information about our customers, e-mail addresses andthe names and addresses of individuals who have requested catalogs from us.This database enables us to see how our customers use our various channels toshop.

We currently capturecustomer information for 100% of our catalog, internet and intranet customersand roughly 75% of our retail store customers. At December 31, 2005, ourdatabase contained approximately 5.0 million individual customer names, ofwhich 1.8 million were customers who had placed a catalog, internet orintranet order with us or made a retail store purchase from us within theprevious 12 months. Since we are currently capturing only a portion of ourretail store customer information we believe this buyer count is somewhatunderstated.

***Private Label Credit Card***

We offer our own private label credit card. A third partyadministrator bears the credit risk associated with the credit card withoutrecourse to us. The card can be used in any of our distribution channels. Webelieve that customers who use the card tend to purchase more frequently andtend to have a larger average order size than those who do not. At December 31,2005, there were 836,000 J. Jill credit card holders.

All of our cardholders are automatically enrolled in our customer loyalty program called “Take5.” The program entitles a customer to a 10% discount on her first purchasewith the card and a 5% discount on any purchases made with the card thereafter.The financial impact of the 5% discount is offset somewhat by lower credit cardprocessing fees on the J. Jill card versus all other accepted credit cards.

J. Jill credit cardholders are also invited to periodic customer appreciation events. These eventsare designed to increase store sales and provide added benefits to our existingloyal customers such as one-on-one wardrobing tips and individualized salesassistance. During these special events, customers also receive an additionaldiscount on their purchases. During fiscal 2005, we hosted over 600 of theseevents.

***Inventory Management***

Our inventory management strategy is to maintainflexibility in deploying inventory across all distribution channels whilemaintaining appropriate in-stock positions in the retail channel andappropriate levels of fulfillment in the catalog and internet channels. We usea centralized warehouse management system, under which all merchandise isreceived, processed and distributed through our operations, fulfillment anddistribution center in Tilton, New Hampshire (the “Tilton facility”).Merchandise received at the Tilton facility is allocated to either retail ordirect. Retail merchandise is subsequently assigned to individual retailstores, packed for delivery and shipped to the stores. We ship merchandise toour retail stores virtually every week. Direct segment receipts are used tofulfill orders and the remainder is put into assigned locations awaiting futurecustomer orders. We believe that our 

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centralized warehousingsystem as well as our ability to sell our products through multipledistribution channels allows us to take better advantage of sales trends and toliquidate overstocks more efficiently.

Our inventory managementprocess begins with pre-season merchandise planning. In-season inventorymanagement in retail includes the weekly allocation and replenishment processand the management of markdowns, sell-through and clearance of monthlymerchandise flows. In direct, we offer certain overstocked items to ourcustomers at the time they place orders for other merchandise in an attempt toincrease sales of the overstocked items. We also plan several sales events throughoutthe year including periodic value-priced offerings in our full price catalogs,sales catalogs and package inserts. We also use our website and outbound e-mailcapabilities to liquidate overstocked items. Finally, end-of-season overstocksare sold through our outlet stores, and to a lesser degree through inventoryliquidators. We have eight outlet stores that are used solely for the purposeof liquidating overstocks. In 2006, we plan to open six additional outletstores.

***Unconditional Merchandise Guarantee***

We offer an unconditionalmerchandise guarantee. If a customer is not completely satisfied with any itemfor any reason, the customer may return it through any of our distributionchannels for a merchandise exchange or a full refund. We believe that ourreturn rates are consistent with industry standards for comparable merchandise.Return trends for both the retail and direct channels are closely monitored toidentify any product quality or fit issues. Returned merchandise is inspectedcarefully and, unless damaged, is cleaned, repackaged if necessary and returnedto inventory.

***Seasonality and Quarterly Fluctuations***

We expect there to befluctuations in our net sales from quarter to quarter, with the highest netsales generally coming in the second and fourth quarters of our fiscal year andthe lowest in the first and third quarters. See “Note M” for selected quarterlyfinancial data, including information regarding our quarterly net sales. As ourretail segment becomes a greater portion of our overall business, our businessis becoming more seasonal. Our retail store rollout plan is expected tomaterially impact year-over-year comparisons of our net sales. Also, January isincluded in our first fiscal quarter, but is included in the fourth fiscal quarterfor many other retailers. Because January is a month that traditionallyinvolves significant promotional pricing, this difference needs to be takeninto account when making comparisons of our financial performance for interimperiods with that of other retailers.

***Information Systems and Technology***

Our information systems consist of a full range ofretail, financial and merchandising systems, including order management,warehouse management, sales reporting, merchandise reporting, inventoryplanning, allocation, forecasting and control, human resource management,accounts payable, purchasing and general ledger systems. We seek to protectcompany sensitive information on our servers from unauthorized access by usingindustry standard network security systems and monitoring procedures inaddition to anti-virus and firewall protection. We use encryption technology toassist us in protecting sensitive customer information.

We believe that our ability to capture and analyzeoperational and financial data and relevant information about our customers andtheir purchasing history is critical to our success. In fiscal 2005, weannounced our plan to invest approximately $7.0 million on three key systems tosupport our future growth—a product life-cycle management system (“PLM”), aninventory management and planning system and a corporate data warehouse. The PLM implementation began in fiscal 2005and will continue into 2006 and 2007. The merchandise management module of theinventory management and planning system is expected to be implemented in 2006.The first phase of the corporate data warehouse implementation is 

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currentlyscheduled for 2006. We spent $2.3 million in fiscal 2005 on theseinitiatives and we expect to spend approximately $1.6 million on these systemsin 2006.

In addition to ourin-house data processing and information systems resources, we also use severalthird party vendors for key services such as website hosting, networkmonitoring, list management, gift card and credit card administration andapproval.

***Community Outreach***

We are committed toestablishing long-term relationships with nonprofit community-basedorganizations that serve women and children in need. Profits from the sale ofselected items as well as direct company contributions to the J. JillCompassion Fund at the Boston Foundation are used to support the work thatthese organizations do to improve the lives of women and children. Throughcontributions to the Compassion Fund, as well as direct donations to selectedorganizations, we donated approximately $475,000 in fiscal 2005. In addition,we provide all of our full-time employees with the opportunity to directlysupport their communities by allowing them to use one paid work-day per year toparticipate in a volunteer service activity. We believe it is important to showour commitment to the communities in which we live.

***Competition***

The women’s apparel marketis highly competitive. We compete with other direct marketers, specialtyapparel and accessory retailers and traditional department store retailers. Ourretail initiative has exposed us to additional competitors. The perceivedgrowth opportunities within the women’s apparel market has encouraged the entryof many new competitors, including a few large, well known and established specialtyretailers, as well as increased competition from existing competitors. Many ofour competitors are considerably larger and have substantially greaterfinancial, marketing and other resources. We believe that we competeprincipally on the basis of the lifestyle element of the J. Jill brand.

***Employees***

As of March 10, 2006,we employed approximately 3,400 individuals, of whom approximately 1,600 werefull-time (those employees scheduled to work 30 hours or more per week).None of our employees are represented by a union. We consider our employeerelations to be good.

***Trademarks and Service Marks***

We have registered varioustrademarks and service marks with the United States Patent and TrademarkOffice, including “J. Jill.” The J. Jill trademark is a key component of ourbrand building strategy.

***Information Available on our Website***

Our corporate internet address is *www.jjill.com*. Our website provides a linkto a third party website through which our annual, quarterly and currentreports, amendments to those reports, as well as other documents we fileelectronically with the Securities and Exchange Commission (“SEC”) areavailable free of charge. We believe these reports are made available as soonas reasonably practicable after we electronically file them with, or furnishthem to, the SEC. We do not provide any information directly to the third partywebsite, and we do not check its accuracy. Copies of these reports can also beobtained from the SEC’s website at *www.sec.gov*.

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**Item 1A.**                RiskFactors

**Potential Sale of the Company**

*For additional information with respect to thepotential Merger with Talbots, see “Item 1. Business.”*

***A significant delay in consummating or a failure toconsummate the proposed Merger with Talbots could have a material adverseeffect on our stock price and operating results.***

If the proposed Mergerwith Talbots is not completed, it could have a material adverse effect on ourstock price. In addition, any significant delay in consummating the Mergercould have a material adverse effect on our operating results, adversely affectour vendor and customer relationships and would likely lead to significantdiversion of management and employee attention and potential employeeattrition.

***Expenses related to the proposed Merger with Talbotsare significant and will adversely affect our operating results in 2006.***

We have incurred andexpect to incur significant expenses in connection with the proposed Mergerwith Talbots, including legal and investment banker fees and retention bonusexpenses. We expect these costs to have an adverse effect on our operatingresults in 2006.

***Restrictions on the conduct of our business prior tothe completion of the proposed Merger with Talbots may have a negative impacton our operating results.***

We have agreed to certainrestrictions on the conduct of our business in connection with the proposedMerger with Talbots, that require us to conduct our business only in theordinary course, subject to specific limitations. These restrictions may delayor prevent us from undertaking business opportunities that may arise pendingcompletion of the transaction.

***Our future success depends on our ability to produce amerchandise assortment that resonates with our target customer.***

Over the past two years wehave been in a merchandising transition and during this time we endeavored tobroaden the appeal of the J. Jill brand by standardizing our fits, improvingthe quality of our apparel, increasing the penetration of color and novelty inour assortment and becoming more contemporary in our design elements. While webelieve we have achieved success with respect to improving the quality and fitof our apparel, some of the changes we made with respect to color, novelty andsilhouette negatively impacted our performance over the past two years. At thesame time, the merchandise changes we made did not attract the number of newcustomers we expected them to. We are taking several steps in the merchandisingand design areas to modify our strategy and adjust our merchandise offerings,but there can be no assurance that we will be able to produce a merchandiseassortment that resonates with our target customer.

***Our ability to increase our overall profitability willdepend upon our ability to successfully grow our retail business while, at thesame time, stabilizing and improving our direct segment’s performance.***

Our current growthstrategy is based primarily on our retail store initiative. During fiscal 2005we opened 42 retail stores and we expect to continue our retail segment growthby opening an additional 40 retail stores in 2006. There can be no assurance,however, that we will be able to manage this growth effectively, and if we areunsuccessful in doing so, our business and financial condition will be adverselyaffected. In addition, during the past two years our direct segment performancehas declined primarily as a result of poor customer response to our merchandiseofferings and cannibalization from our retail stores. Although we are takingsteps to stabilize and improve the direct segment’s performance, there can beno assurance that our direct business will not continue to be negativelyaffected as our retail business grows or 

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that thesteps we are taking to stabilize and improve the direct segment’s performancewill result in increased direct segment sales and profitability.

***Our future success will depend upon our ability tobuild brand awareness and the effectiveness of our brand development andmarketing programs.***

Our future success willdepend upon our ability to effectively define, evolve and promote the J. Jillbrand.  In fiscal 2005, we madesignificant investments in the area of brand development and marketing. Wehired a branding agency to assist us with market positioning and establishingspecific brand-enhancing opportunities for J. Jill. We also hired a new ChiefMarketing Officer. While we believe that our investments in this area will helpto build brand awareness and attract new customers, we can provide no assurancethat these investments will result in increased sales or profitability in thefuture.

***Our overseas merchandise purchasing strategy makes usvulnerable to a number of risks.***

We purchase a significant portion of our merchandisedirectly from foreign sources. Approximately 86% of the merchandise we purchased in fiscal2005 was purchased directly from foreign sources, primarily located in China. Anyevent causing a disruption in manufacturing or imports from the countries fromwhich we currently source goods, or the imposition of additional importrestrictions (particularly with respect to China), could have a materialadverse effect on our operations.

We seek to enforce a codeof conduct that sets guidelines for our vendors regarding employment practicessuch as wages and benefits, health and safety, working hours and working age,and for environmental, ethical and legal matters. Although we believe we areallocating appropriate resources to monitor for compliance with our standards,if we or an outside third party discovers that any of our vendors is engaged inpractices that materially violate our vendor code of conduct or other generallyaccepted social responsibility standards, our sales could be materiallyaffected by any resulting negative publicity.

***The loss of either of our two primary buying agentscould disrupt our operations.***

We place significantreliance on our relationship with two foreign buying agents. We believe thatthis concentration risk is mitigated by the fact that these buying agentspurchase our inventory directly from a variety of foreign vendors. Duringfiscal 2005, we did not purchase more than 10% of our inventory directly fromany one vendor. However, we did purchase approximately 80% of our importedinventory through these two buying agents during fiscal 2005. Although we couldpurchase inventory through alternative buying agents or directly from vendors,loss of these buying agents could disrupt our operations.

***The women’s apparel market is highly competitive.***

We are in a highlycompetitive market. The perceived growth opportunities within the women’sapparel market has encouraged the entry of many new competitors, including afew large, well known and established specialty retailers, as well as increasedcompetition from existing competitors. Many of our competitors are considerablylarger and have substantially greater financial, marketing and other resources,and we can provide no assurance that we will be able to compete successfullywith them in the future.

***Our success depends on our ability to respond to changesin customer demands and fashion trends in a timely manner.***

We have historicallyexperienced fluctuations in customer response to our merchandise assortments. Ourfuture success depends on our ability to consistently anticipate, assess andreact to the changing demands of our customer. If we fail to anticipate fashiontrends, select the right merchandise assortment, 

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maintainappropriate inventory levels and creatively present merchandise in a way thatis appealing to our customer on a consistent basis, our sales could declinesignificantly, and we could then be required to mark down certain merchandiseto significantly lower prices to sell excess inventory, which would result inlower gross margins. As a private label merchandiser, we assume certain risks,including long product lead times and high initial purchase commitments, thatamplify the consequences of any miscalculation that we might make inanticipating fashion trends or interpreting them for our customer. We canprovide no assurance that we will be able to identify and offer merchandisethat appeals to our customer.

***Our direct business is subject to a number of risksand uncertainties.***

The operation ofour direct business presents a number of risks and uncertainties, including thefollowing:

·       The preparation of ourcatalogs requires long lead times and, as a result, our ability to makeadjustments based on customer response is limited. Any miscalculations incatalog layout, model selection, copy format or merchandising selections couldcause reduced demand and lower net sales;

·       Each edition of a catalogrequires substantial investments in layout and design, paper, printing, postageand inventory prior to mailing which are all costs that cannot be adjusted fora particular mailing in response to the actual performance of the catalog;

·       The operation of our directbusiness is dependent on our ability to prepare catalogs in a timely manner.Any delay in the completion or delivery of a catalog could cause customers toforego or defer purchases from us;

·       Some of our catalogmarketing programs rely on prospect mailings and as a result involve risks notpresent in mailings to our existing customers, including potentially lower andless predictable response rates and the possibility that third parties whoprovide customer lists may stop making them available; and

·       The operation of our directbusiness is dependent on our ability to maintain the efficient anduninterrupted operation of our order taking and fulfillment operations and ourwebsite. Disruptions or slowdowns in these areas could result in a reduction innet sales as well as increased administrative and order processing costs.

There can be no assurancethat we will be able to successfully address the risks that the operation ofour direct business entails.

***Our retail business is subject to a number of risksand uncertainties.***

The operation ofretail stores presents a number of risks and uncertainties, including thefollowing:

·       We are required to makelong-term financial commitments when leasing retail store locations;

·       We make substantialinvestments in store design, leasehold improvements and other areas prior tothe opening of each store, and thereafter, we must continue to maintain ourstore facilities;

·       Our retail store assets andpersonnel are substantially under the control of individual store management. Werely on our store managers to ensure that our assets are secure, our storeemployees are properly trained and managed and our stores are operatingeffectively. If we are unable to effectively manage our retail stores,our sales could decline and our assets could be inadequately safeguarded; and

·       The success of ourindividual stores may depend significantly on the success of the shopping mallsor lifestyle centers in which they are located.

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There can be no assurancethat we will be able to successfully address the risks that the operation ofretail stores entails.

***Our sales tax collection policy may expose us tocertain risks.***

Prior to the merger of ourretail subsidiary and our catalog/internet subsidiary in July 2003, ourcatalog/internet subsidiary collected sales tax on our catalog and internetsales only in Massachusetts. Since the time of the merger, we have beencollecting sales tax on our catalog and internet sales in states where we havestores. Many states have attempted to require that out-of-state directmarketers and internet retailers collect sales taxes on sales of productsshipped to their residents, but the legality of the imposition of such taxes isunsettled. Although we believe that we have collected sales tax where we arerequired to do so under existing law, state tax authorities may disagree.

***Our operating results fluctuate.***

Our annual and quarterly operating results havefluctuated, and we expect these fluctuations to continue. Among the factorsthat may cause our operating results to fluctuate are customer response tomerchandise offerings, the timing of the rollout of our new retail stores,seasonal variations in sales, the timing and size of catalog mailings, the costsof producing and mailing catalogs, the timing of merchandise receipts, thelevel of merchandise returns, changes in merchandise mix and presentation, andunanticipated operating costs and other factors beyond our control, such asgeneral economic conditions and actions of competitors.

Our current expense levels are based in part on ourexpectations of future net sales and, as a result, net income for a givenperiod could be disproportionately affected by any reduction in net sales forthat period. In addition, our retail store business is more seasonal than ourdirect business.

As a result of all ofthese factors, we believe that period-to-period comparisons of our historicaland future results will not necessarily be meaningful and should not be reliedon as an indication of future performance.

**Item 1B.**               UnresolvedStaff Comments

Not applicable.

**Item 2.**                        Properties

Thefollowing table sets forth certain information relating to our facilities at December 31,2005:

| **Location**                               | ** ** | **Square  Footage** | ** ** | **Function**                         | ** ** | **Type of  Interest (1)** | ** ** | **Lease  Termination** | ** ** |
|--------------------------------------------|------------|---------------------|------------|--------------------------------------|------------|-------------------------------------|------------|------------------------|------------|
| Tilton, New  Hampshire                     |       | 573,000             |  (2)  | Operations, Fulfillment   & |       |                                | Owned      |                   |       | — |   |
| (approx. 360  acres)                       |       |                |       | Distribution Center                  |       |                                |       |                   |       |   |   |
| Quincy,  Massachusetts                     |       | 96,000              |       | Corporate Offices                    |       |                                | Leased     |                   |       | 10/31/09–12/31/09 |   |
| 192 Retail stores  in 35 states            |       | 2,400–7,000    |       | Retail store space                   |       |                                | Leased     |                   |       | 1/31/10–1/31/16 |   |
| Eight Outlet  stores in seven states  |       | 3,000–4,400    |       | Outlet store space                   |       |                                | Leased     |                   |       | 6/30/06–1/31/16 |   |

 

(1)           The Tilton facility is owned by Birch Pond RealtyCorporation, a wholly owned subsidiary of The J. Jill Group, Inc. (See “NoteE” to the accompanying consolidated financial statements.)

(2)           Includes approximately 152,000 square feet of mezzaninespace.

Between December 31,2005 and March 10, 2006, we entered into leases for eight additionalretail stores, each having lease termination dates between 2017 and 2018.

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**Item 3.**                        LegalProceedings

In August 2003, aComplaint was served on The Birch Pond Group, Inc. (a subsidiary of The J.Jill Group, Inc. which was later converted into, and is now known as, J.Jill, LLC) in a civil action filed in the California Superior Court, RiversideCounty, against The Birch Pond Group, Inc. and certain fictitiously namedand unknown defendants who allegedly were operating J. Jill stores within theState of California. This action, allegedly on behalf of a class of salariedand non-salaried store workers, alleged, among other things, violations ofvarious provisions of the California Labor Code and related regulationsregarding meal periods, rest periods and coerced patronage, and unfaircompetition. In April 2005, the parties executed a settlement agreementand the Court certified a class (for settlement purposes only) andpreliminarily approved the settlement agreement. In September 2005, theCourt approved the settlement agreement and entered an order and final judgment.In November 2005, we made payments of claims to class members as well asattorney’s fees, costs and class representative enhancements. In December 2005,we filed with the Court and served on class counsel written certification ofsettlement administration. On February 10, 2006, class counsel filed withthe Court and served us an acknowledgement of full satisfaction of judgment.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

No matters were submittedto a vote of our security holders during the fourth quarter of fiscal 2005.

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**PART II**

**Item 5.**                        Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

Our common stock is traded on The NASDAQ StockMarket  (“NASDAQ”) under the symbol “JILL.”  As of March 10, 2006, the number ofholders of record of our common stock was 576.

The following table setsforth, for the periods indicated, the high and low sale prices for our common stockas reported by NASDAQ:

| ** **                             | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------|------------|----------|------------|---------|------------|
| **Fiscal 2005:**                       |       |     |       |    |       |
| Quarter ended  December 31, 2005  |       | $        | 19.50      |    | $          | 12.16 |   |
| Quarter ended  September 24, 2005 |       | 19.50    |       | 13.25   |       |
| Quarter ended  June 25, 2005      |       | 16.00    |       | 12.05   |       |
| Quarter ended  March 26, 2005     |       | 16.15    |       | 11.50   |       |
|                                        |            |          |            |         |            |  |  |

 

| **Fiscal 2004:**                       |   |   |   |   |   |
|----------------------------------------|--------|--------|--------|--------|--------|
| Quarter ended  December 25, 2004  |   | $      | 20.20  |   | $      | 15.10 |   |
| Quarter ended  September 25, 2004 |   | 24.72  |   | 15.14  |   |
| Quarter ended  June 26, 2004      |   | 24.85  |   | 19.36  |   |
| Quarter ended  March 27, 2004     |   | 20.01  |   | 12.25  |   |
|                                        |        |        |        |        |        |  |  |

 

We have never declared or paid any cash dividends onour common stock. We currently intend to retain any earnings for use in theoperation and expansion of our business and, therefore, do not anticipatepaying any cash dividends in the foreseeable future.

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**Item 6.**                        SelectedConsolidated Financial Data

Our selected consolidated statement of operations andbalance sheet data have been derived from our consolidated financial statementsfor the periods indicated and should be read in conjunction with the discussionunder “Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations” and our consolidated financial statements and footnotes.

Our fiscal year ends on the last Saturday in December.The 12 months ended December 31, 2005 (“fiscal 2005”) was a 53-weekfiscal year. In a 53-week fiscal year, three of the quarters are 13-weekperiods, and one is a 14-week period. The fourth quarter of fiscal 2005was a 14-week period. The 12 months ended December 25, 2004 (“fiscal2004”), December 27, 2003 (“fiscal 2003”), December 28, 2002 (“fiscal2002”) and December 29, 2001 (“fiscal 2001”) were 52-week fiscalyears.

Duringfiscal 2002, we effected a three-for-two stock split in the form of a stockdividend paid on June 28, 2002 to shareholders of record on June 14,2002. All share and per share data have been adjusted for the stock split.

| ** **                                     | ** ** | **Twelve Months Ended**                                                                        | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Dec. 31,**                                                                                        | ** ** | **Dec. 25,** | ** ** | **Dec. 27,** | ** ** | **Dec. 28,** | ** ** | **Dec. 29,** | ** ** |
| ** **                                     | ** ** | **2005**                                                                                                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                     | ** ** | **(53 weeks)**                                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per share and selected operating data)** | ** ** |
| **Consolidated Statement of Operations Data:** | ** ** | ** **                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Net sales                                      |       | $                                                                                                        | 449,712    |   | $ | 434,867 |   | $ | 376,904 |   | $ | 347,574 |   | $ | 287,043 |   |
| Income before taxes                            |       | 2,729                                                                                                    |       | 15,002 |   | 11,898 |   | 31,187 |   | 21,849 |   |
| Net income                                     |       | 1,514                                                                                                    |       | 8,706 |   | 7,025 |   | 18,434 |   | 12,672 |   |
| Earnings per share  (diluted)                  |       | $                                                                                                        | 0.07       |   | $ | 0.42 |   | $ | 0.35 |   | $ | 0.92 |   | $ | 0.68 |   |
| Weighted average shares  outstanding (diluted) |       | 20,536                                                                                                   |       | 20,546 |   | 20,060 |   | 20,096 |   | 18,697 |   |
| **Consolidated Balance Sheet Data:**           | ** ** | ** **                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Total assets                                   |       | $                                                                                                        | 287,475    |   | $ | 282,696 |   | $ | 253,970 |   | $ | 228,260 |   | $ | 180,968 |   |
| Working capital                                |       | 85,558                                                                                                   |       | 89,603 |   | 77,946 |   | 73,224 |   | 54,345 |   |
| Long-term debt, less  current portion          |       | 9,395                                                                                                    |       | 10,431 |   | 12,236 |   | 13,802 |   | 15,590 |   |
| Total stockholders’  equity               |       | $                                                                                                        | 168,121    |   | $ | 164,057 |   | $ | 151,079 |   | $ | 143,128 |   | $ | 111,442 |   |
| **Selected Operating Data:**                   |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| ***Retail:***(1)                               |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Stores open:                                   |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Beginning of period                            |       | 150                                                                                                      |       | 122 |   | 88 |   | 51 |   | 22 |   |
| End of period                                  |       | 192                                                                                                      |       | 150 |   | 122 |   | 88 |   | 51 |   |
| Weighted average stores  open (2)              |       | 164                                                                                                      |       | 131 |   | 100 |   | 66 |   | 32 |   |
| Weighted average square  footage (3)           |       | 705,600                                                                                                  |       | 594,000 |   | 472,500 |   | 323,800 |   | 164,600 |   |
| Comparable store sales  (4)                    |       | (1.2                                                                                                     | )%         | 11.1 | % | n/a |   | n/a |   | n/a |   |
| ***Direct:***                                  |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Circulation: (5)                               |       |                                                                                                     |       |   |   |   |   |   |   |   |   |
| Catalogs (in thousands)                        |       | 55,600                                                                                                   |       | 71,500 |   | 73,100 |   | 77,800 |   | 62,200 |   |
| Square inches (in  millions)                   |       | 348,400                                                                                                  |       | 426,800 |   | 503,100 |   | 497,200 |   | 407,400 |   |
| ***Other:***                                   | ** ** | ** **                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Total 12-month buyers (6)                      | ** ** | 1,842,000                                                                                                |       | 1,799,000 |   | n/a |   | n/a |   | n/a |   |
| J. Jill credit card  holders                   | ** ** | 836,000                                                                                                  |       | 713,000 |   | 576,000 |   | 433,000 |   | 307,000 |   |
| E-mail addresses                               | ** ** | 1,310,000                                                                                                |       | 1,180,000 |   | 867,000 |   | 718,000 |   | 740,000 |   |

 

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(1)          Retail informationrelates to our retail stores only and does not include data for our outletstores.

(2)          Weighted average storesopen refers to the number of retail stores open during the period weighted forthe number of days that each store was open during the period.

(3)          Weighted average squarefootage refers to the square footage of retail stores open during the periodweighted for the number of days that each store was open during the period.

(4)          Comparable store sales (“comparablestore sales”), a retail operating statistic, is calculated for retail storesthat have been open for at least one full fiscal year. Retail stores that havebeen renovated or the size of which has materially increased or decreased arenot considered in the comparable store sales calculation until they have beenin operation as a renovated or resized store for at least one full fiscal year.The calculation of comparable store sales excludes certain amounts included inthe calculation of net sales, such as accruals for returns allowances andcertain other items. The comparable store sales calculation for fiscal 2005compares the 53 weeks ended December 31, 2005 to the 53 weeks ended January 1,2005. Before the first quarter of fiscal 2004 we did not disclose comparablestore sales, as we did not believe that we had a significant retail store base.Accordingly, no comparable stores sales percentage is reported in the tableabove for periods preceding fiscal 2004.

(5)          In order to more closelymatch net sales to circulation, we calculate circulation on a percentage ofcompletion basis. Catalog circulation takes into account the total number ofcatalogs mailed during all periods and our estimate of the expected sales lifeof each catalog edition. Square inches circulated also takes into account the page countand page size of the catalogs circulated during the period. Catalogcirculation and square inches circulated statistics do not include catalogsmailed to retail-only customers.

(6)          The term “Total 12-monthbuyers” represents customers identified by our multi-channel database as havingplaced a catalog, internet or intranet order with us or made a retail storepurchase from us within the previous 12 months. We currently capture customerinformation for roughly 75% of our retail store customers and, accordingly, webelieve this buyer count is somewhat understated. In the periods precedingfiscal 2004, the 12-month buyer statistic generally did not includeretail store customers. For fiscal 2003, fiscal 2002 and fiscal 2001, the 12-monthbuyer counts as historically presented were****998,000,1,055,000 and 1,017,000, respectively.

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*This Annual Reporton Form 10-K, including the following discussion, contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995 that involve substantial risks and uncertainties. For this purpose, anystatements contained herein that are not statements of historical fact may bedeemed to be forward-looking statements. Without limiting the generalityof the foregoing, the words “projected,” “anticipated,” “planned,” “expected”and similar expressions are intended to identify forward-lookingstatements. In particular, statements regarding future financial targets ortrends are forward-looking statements. Forward-looking statements are notguarantees of our future financial performance, and undue reliance should notbe placed on them. Our actual results, performance or achievements may differsignificantly from the results, performance and achievements discussed in or impliedby the forward-looking statements. Factors that could cause such adifference include material changes to J. Jill’s business or prospects, inconsumer spending, fashion trends or consumer preferences, or in generalpolitical, economic, business or capital market conditions and other risks anduncertainties, including but not limited to the other factors that are detailedin “Item 1A. Risk Factors.”   We disclaimany intent or obligation to update any forward-looking statements.*

The following discussion and analysis of our financialcondition and results of operations is based upon the accompanying consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America and should beread in conjunction with those financial statements and footnotes.

We are a multi-channelspecialty retailer of women’s apparel, including accessories and footwear. Wecurrently have two reportable business segments, retail and direct. The retailsegment markets merchandise through our retail stores. The direct segmentmarkets merchandise through our catalogs and website. For more informationabout our reportable business segments, see “Note L”****to the accompanying consolidated financial statements.

***Fiscal Year***

Our fiscal year ends onthe last Saturday in December.  The 12months ended December 31, 2005 (“fiscal 2005”) was a 53-week fiscalyear. In a 53-week fiscal year, three of the quarters are 13-weekperiods, and one is a 14-week period. The fourth quarter of fiscal 2005was a 14-week period.  The 12months ended December 25, 2004 (“fiscal 2004”) and December 27, 2003(“fiscal 2003”) were 52-week fiscal years.

***Potential Sale of the Company***

On February 5, 2006,The J. Jill Group, Inc., (“J. Jill”) entered into an Agreement and Plan ofMerger (the “Merger Agreement”) with The Talbots, Inc., (“Talbots”) andJack Merger Sub, Inc., a wholly owned subsidiary of Talbots (“Merger Sub”).Pursuant to the Merger Agreement, Talbots will acquire J. Jill in a taxableall-cash transaction whereby Merger Sub will merge with and into J. Jill (the “Merger”).J. Jill will continue as the corporation surviving the Merger and will become awholly owned subsidiary of Talbots. The Merger Agreement provides, upon consummationof the Merger, for our stockholders to receive $24.05 in cash, withoutinterest, for each share of common stock of J. Jill. Options outstanding underJ. Jill’s stock option plans, whether or not exercisable or vested, will becancelled as of the effective time of the Merger. Holders of options will beentitled to receive a cash payment (less required tax withholdings) equal tothe excess, if any, of $24.05 over the exercise price of each such option,multiplied by the amount of shares covered by each such option. The MergerAgreement is subject to adoption by J. Jill’s stockholders,  as well as the satisfaction or waiver ofother conditions, including, among others, the expiration or termination ofapplicable waiting periods under the Hart-Scott-Rodino Antitrust ImprovementsAct of 1976, as amended. The Merger Agreement contains certain terminationrights and 

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providesthat, upon the termination of the Merger Agreement under specifiedcircumstances, J. Jill will be required to pay Talbots a termination fee of$18.0 million.

***Fiscal 2005 Overview***

Fiscal 2005 was a challenging year for us. Wegenerated operating income of $2.6 million, or 0.6% of net sales, in fiscal2005 compared to $15.3 million, or 3.5% of net sales, in fiscal 2004. Netincome for fiscal 2005 was $1.5 million, or $0.07 per diluted share, comparedto $8.7 million, or $0.42 per diluted share, for fiscal 2004.

We attribute our disappointing results primarily tocustomer dissatisfaction with our merchandise offerings. Over the past two yearswe have been in a merchandising transition and during this time we haveendeavored to broaden the appeal of the J. Jill brand by standardizing ourfits, improving the quality of our apparel, increasing the penetration of colorand novelty in our assortment and becoming more contemporary in our designelements. While we believe we have achieved success with respect to improvingthe quality and fit of our apparel, some of the changes we made with respect tocolor, novelty and silhouette negatively impacted our performance over the pasttwo years. In hindsight, we believe that some of our color choices, ourincreased use of bold embellishments and our migration toward a narrower fitwere not appropriate for, and ultimately decreased the desirability of ourproduct offerings to, our core customer. At the same time, the merchandisechanges we made did not attract the number of new customers we expected them to.As a result, our direct business has declined significantly in the past twoyears and our retail store productivity has not increased to the level weexpected.

Direct segment net sales decreased by 16.3% duringfiscal 2005, as an 18.4% decrease in square inches circulated failed togenerate the levels of sales productivity we expected. Retail segment net salesincreased by 18.4% during fiscal 2005 primarily as a result of opening stores. Comparablestore sales decreased by 1.2% during fiscal 2005. In response to weaker thanexpected customer response to our merchandise offerings we increasedpromotional activity and markdowns, both of which negatively affected our grossmargin. As a percentage of net sales our gross margin decreased by 2.3percentage points to 33.7% during fiscal 2005 from 36.0% during fiscal 2004. Theweak top-line and lower gross margin, combined with the de-leveraging ofcertain fixed costs over a modest 3.4% increase in overall net sales, resultedin disappointing financial results in fiscal 2005.

Our direct business in particular experienced asignificant decrease in its top line and a corresponding decrease in itscontribution in fiscal 2005. Over the past two years, we have tested differentcatalog layouts, models and copy formats in an attempt to broaden the appeal ofour catalogs. The response to these initiatives has been lackluster, and we arenow returning to the overall creative approach that worked for us in the early2000’s. We are also increasing the penetration of extended sizes, shoes andaccessories in our catalogs and replacing certain multi-channel productofferings with catalog-only product offerings that specifically target ourcatalog customer.

We are taking several steps in the merchandising anddesign areas to modify our strategy and adjust our merchandise offerings in thefuture, the most important of which is refocusing our attention on our corecustomer. In this regard, we intend to return to neutral, subtle,wardrobe-building colors and relaxed, forgiving styling. While we remainoptimistic about our opportunities for success in 2006, achieving our goalswill ultimately depend on our ability to produce a merchandise assortment thatresonates with our target customer.

Due to the long lead timesassociated with developing and producing private label apparel, the changes wehave begun to make to our merchandise will appear gradually within ourassortment. Until our merchandise offerings are adjusted, we expect ourcustomers to react to our product offerings in much the same way as they did infiscal 2005. In the interim, we are making immediate changes to our merchandisingand marketing strategies, particularly in our catalogs, and we expect thosechanges to help mitigate some 

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of thetrends we experienced in fiscal 2005. To date in 2006 our business in bothsegments has been weak with sales through February trending below lastyear in the direct segment and below last year on a per store basis in theretail segment. In addition, we have incurred and expect to continue to incursignificant expenses in connection with the proposed Merger with Talbots,including legal and investment banker fees and retention bonus expenses. Weexpect these costs to have an adverse effect on our operating results in 2006.

***Results of Operations***

The following table presents our consolidatedstatements of operations expressed as a percentage of net sales:

| ** **                                    | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|
| ** **                                    | ** ** | **December 31,  2005**       | ** ** | **December 25,  2004** | ** ** | **December 27,  2003** | ** ** |
| Net sales                                     |       |                              | 100.0      | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of products  and merchandising           |       |                              | 66.3       |   |   |   | 64.0 |   |   |   | 66.4 |   |   |
| Gross margin                                  |       |                              | 33.7       |   |   |   | 36.0 |   |   |   | 33.6 |   |   |
| Selling, general  and administrative expenses |       |                              | 33.1       |   |   |   | 32.5 |   |   |   | 30.2 |   |   |
| Operating income                              |       |                              | 0.6        |   |   |   | 3.5 |   |   |   | 3.4 |   |   |
| Interest income                               |       |                              | 0.2        |   |   |   | 0.2 |   |   |   | 0.1 |   |   |
| Interest expense                              |       |                              | 0.2        |   |   |   | 0.3 |   |   |   | 0.3 |   |   |
| Interest, net                                 |       |                              | —     |   |   |   | 0.1 |   |   |   | 0.2 |   |   |
| Income before taxes                           |       |                              | 0.6        |   |   |   | 3.4 |   |   |   | 3.2 |   |   |
| Income tax  provision                         |       |                              | 0.3        |   |   |   | 1.4 |   |   |   | 1.3 |   |   |
| Net income                                    |       |                              | 0.3        | % |   |   | 2.0 | % |   |   | 1.9 | % |   |

 

Thefollowing table summarizes net sales by segment (in thousands):

| ** **      | ** ** | **Twelve Months Ended** | ** ** |
|-----------------|------------|-----------------------------------|------------|
| ** **      | ** ** | **December 31,  2005**       | ** ** | **December 25,   2004** | ** ** | **December 27,  2003** | ** ** |
| ** **      | ** ** | **(53 weeks)**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Retail          |       |                              | $          | 282,751 |   |   |   | $ | 238,776 |   |   |   | $ | 176,762 |   |   |
| Direct          |       |                              | 159,978    |   |   |   | 191,074 |   |   |   | 194,993 |   |   |
| Other (1)       |       |                              | 6,983      |   |   |   | 5,017 |   |   |   | 5,149 |   |   |
| Total net sales |       |                              | $          | 449,712 |   |   |   | $ | 434,867 |   |   |   | $ | 376,904 |   |   |

 

(1)          Otherrepresents outlet store net sales.

***Comparison of Fiscal 2005 to Fiscal 2004***

Net sales increased by $14.8 million, or 3.4%, to$449.7 million during fiscal 2005 from $434.9 million during fiscal 2004.Retail segment net sales increased by $44.0 million, or 18.4%, during fiscal2005 primarily as a result of opening stores. The weighted average squarefootage of retail stores open during the year increased by 18.8% in fiscal 2005but retail segment sales productivity, as measured by net sales per weightedaverage square foot, decreased by 0.3%. During fiscal 2005, we opened 42 retailstores and ended the year with 192 retail stores. Comparable store salesdecreased by 1.2% during fiscal 2005. Direct segment net sales decreased by$31.1 million, or 16.3%, during fiscal 2005, as an 18.4% decrease in squareinches circulated failed to generate the levels of sales productivity weexpected. Direct segment sales productivity, as measured by net sales per 1,000square inches circulated, increased by a modest 2.6%. Internet salesrepresented 51.2% of total direct segment net sales during fiscal 2005 comparedto 42.2% during fiscal 2004. The increase in internet net sales is primarilyattributable to the increased use of out-

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bound e-mails andcross-channel marketing. We expect internet net sales to represent anincreasing portion of our total direct business over time. We expect most ofour future growth to come from our retail segment.

Gross margin represents net sales less cost ofproducts and merchandising. Cost of products and merchandising consistsprimarily of product costs (e.g., product development, sourcing, merchandising,inventory control and inventory acquisition costs and inventory markdowns) andoperating costs (e.g., occupancy and depreciation costs for our retail stores,order processing costs and distribution facility costs). As a percentage of netsales, gross margin decreased to 33.7% during fiscal 2005 from 36.0% duringfiscal 2004. This decrease was attributable to a 1.6 percentage point increasein product costs and a 0.7****percentagepoint increase in operating costs, both as a percentage of net sales. Productcosts as a percentage of net sales increased primarily as a result of increasedpromotional activity, higher inventory markdowns and a shift in the mix ofsales toward off price. These factors were only partially offset by thepositive impact of higher initial mark-ups. The increase in operating costs asa percentage of net sales was primarily attributable to the de-leveragingeffect of higher retail segment operating costs associated with our retail storerollout over a disproportionately smaller increase in total company net salespartially offset by the leveraging effect of lower direct segment operatingcosts over increased total company net sales.  Additionally, gross margin as a percentage ofnet sales was negatively affected by the shift in the mix of our businesstoward retail and the fact that retail segment gross margin is currently loweras a percentage of net sales than direct segment gross margin. We expect thedifferences between our retail and direct segment cost structures to continueuntil we are able to increase the overall productivity and profitability of ourretail stores.

Selling, general andadministrative expenses consist primarily of retail store selling costs, coststo produce, print and distribute catalogs, and website and corporateadministrative costs. As a percentage of net sales, selling, general andadministrative expenses increased to 33.1% during fiscal 2005 from 32.5% duringfiscal 2004. This increase was attributable to a 0.8****percentage point increase in selling expenses partiallyoffset by a 0.2****percentage pointdecrease in general and administrative expenses, both as a percentage of netsales. The increase in selling expenses as a percentage of net sales was primarilyattributable to the de-leveraging effect of higher retail segment sellingexpenses primarily associated with our retail store rollout over adisproportionately smaller increase in total company net sales partially offsetby the leveraging effect of lower direct segment selling expenses overincreased total company net sales.  Additionally, selling expenses as a percentageof net sales was negatively affected by the shift in the mix of our businesstoward retail and the fact that retail segment selling expenses are currentlyhigher as a percentage of net sales than direct segment selling expenses. Weexpect the differences between our retail and direct segment cost structures tocontinue until we are able to increase the overall productivity and profitabilityof our retail stores. General and administrative expenses as a percentage ofnet sales decreased primarily as a result of decreased spending on performancebonuses and professional fees partially offset by increased employee-relatedcosts, together representing a $0.4 million year-over-year decrease in expenses. Professional fees include expensestotaling $0.9 million associated with our decision in early December toexplore strategic alternatives to enhance shareholder value.

***Comparisonof Fiscal 2004 to Fiscal 2003***

Net sales increased by $58.0 million, or 15.4%, to$434.9 million during fiscal 2004 from $376.9 million during fiscal 2003primarily as a result of increased store count and higher sales productivity inboth segments partially offset by lower circulation in our direct segment.  Retail segment net sales increased by $62.0million, or 35.1%, during fiscal 2004. This increase is attributable to a 25.7%increase in the weighted average square footage of retail stores open duringthe year and a 7.5% increase in retail segment sales productivity. Duringfiscal 2004, we opened 28 retail stores and ended the year with 150 retailstores. Comparable store sales increased by 11.1% during fiscal 2004. Directsegment net sales decreased by 

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$3.9 million, or2.0%, during fiscal 2004, as square inches circulated decreased by 15.2% whiledirect segment sales productivity increased by 15.5%. The increases in thesales productivity of the retail and direct segments during fiscal 2004 areprimarily attributable to the positive customer reaction to our spring seasonmerchandise. In addition, direct segment sales productivity was also positivelyaffected by planned page count reductions and lower customer return rates.Internet net sales represented 42.2% of total direct segment net sales duringfiscal 2004 compared to 35.4% during fiscal 2003. The increase in internet netsales is primarily attributable to the increased use of out-bound e-mails andcross-channel marketing.

As a percentage of net sales, gross margin increasedto 36.0% during fiscal 2004 from 33.6% during fiscal 2003. This increase wasattributable to a 1.6 percentage point decrease in product costs and a 0.8****percentage point decrease in operatingcosts, both as a percentage of net sales. Product costs as a percentage of netsales decreased primarily as a result of lower inventory markdowns and a shiftin the mix of sales toward full price, particularly in our retail segment. Thedecrease in operating costs as a percentage of net sales was attributable tothe leveraging effect of an 11.4% increase in operating expenses over a 15.4%year-over-year increase in net sales. These factors were partially offset bythe shift in the mix of our business toward retail and the fact that retailsegment operating costs are higher as a percentage of net sales than directsegment operating costs.

As a percentage of netsales, selling, general and administrative expenses increased to 32.5% duringfiscal 2004 from 30.2% during fiscal 2003. This increase was attributable to a0.7****percentage point increase inselling expenses and a 1.6****percentagepoint increase in general and administrative expenses, both as a percentage ofnet sales. The increase in selling expenses as a percentage of net sales wasattributable to the de-leveraging effect of higher retail segment sellingexpenses, including a significant increase in costs associated with mailingcatalogs to retail-only customers, over a disproportionately smaller increasein total company net sales partially offset by the leveraging effect of lowerdirect segment selling expenses over increased total company net sales. Inaddition, selling expenses as a percentage of net sales was negatively affectedby the shift in the mix of our business toward retail and the fact that retailsegment selling expenses are higher as a percentage of net sales than directsegment selling expenses. General and administrative expenses as a percentageof net sales increased primarily as a result of increased spending onprofessional fees and employee-related costs, together representing a $7.5million year-over-year increase in expenses. In fiscal 2004, professional feesincurred in connection with our efforts to comply with the Sarbanes-Oxley Act,excluding independent registered accounting firm fees of approximately $0.7 million,totaled approximately $1.7 million. In addition, during fiscal 2004 we incurredconsulting and legal fees of approximately $0.9 million in connection with theimplementation of changes in our operating structure.

***Income Taxes***

We provide for incometaxes at an effective tax rate that includes the full federal and statestatutory tax rates. Our effective tax rates for fiscal 2005, fiscal 2004 andfiscal 2003, were 44.5%, 42.0% and 41.0%, respectively. Our effective tax ratefor fiscal 2005 was negatively affected as a result of, among other things, thetaxable income levels in certain states given our organizational structure. Oureffective tax rate for fiscal 2005 was positively affected by municipalinterest received on our marketable securities which is exempt from federaltaxation. Our effective tax rate for fiscal 2004 was negatively affected by anincrease in the projected amount of non-deductible expenses and a valuationallowance that we established at December 25, 2004 for $0.2 million. Thisvaluation allowance relates to certain state net operating loss carryforwardswhere we believe that it is more likely than not that the associated taxbenefit will not be realized. The effective tax rate for fiscal 2003 includes theimpact of the reversal of a $0.1 million valuation allowance.

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***Segment Discussion and Analysis***

For a summary of our business segments and relatedaccounting, see “Note L” to the accompanying consolidated financial statements.

Thefollowing table provides a reconciliation of segment contribution to operatingincome (in thousands):

| ** **                           | ** ** | **Twelve Months Ended** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **December 31,  2005**       | ** ** | **December 25,  2004** | ** ** | **December 27,  2003** | ** ** |
| ** **                           | ** ** | **(53 weeks)**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Retail segment  contribution         |       |                              | $          | 16,398 |   |   |   | $ | 19,736 |   |   |   | $ | 3,621 |   |   |
| Direct segment  contribution         |       |                              | 36,915     |   |   |   | 44,059 |   |   |   | 45,267 |   |   |
| Other (1)                            |       |                              | (17,935    | ) |   |   | (16,040 | ) |   |   | (13,817 | ) |   |
| General and  administrative expenses |       |                              | (32,762    | ) |   |   | (32,419 | ) |   |   | (22,434 | ) |   |
| Operating income                     |       |                              | $          | 2,616 |   |   |   | $ | 15,336 |   |   |   | $ | 12,637 |   |   |

 

(1)          Otherrepresents unallocated shared-service costs and outlet store revenues andexpenses.

***Segment Comparison of Fiscal 2005 to Fiscal 2004***

*Retail segmentcontribution*

The retail segment’scontribution as a percentage of segment net sales decreased by 2.5****percentage points in fiscal 2005 comparedto fiscal 2004. This decrease was attributable to a 1.3 percentage pointincrease in product costs and a 1.2 percentage point increase in sellingexpenses, both as a percentage of net sales. Segment operating expenses as apercentage of net sales were flat to last year. Segment product costs as apercentage of net sales increased primarily as a result of higher inventorymarkdowns and increased promotional activity partially offset by higher initialmark-ups. Segment selling expenses as a percentage of net sales increasedprimarily as a result of higher advertising and in-store visual presentationcosts and increased employee-related expenses.

*Direct segmentcontribution*

The direct segment’scontribution as a percentage of segment net sales remained flat at 23.1% duringboth fiscal 2005 and fiscal 2004. A 0.7 percentage point increase in operatingcosts was offset by a 0.7 percentage point decrease in selling expenses, bothas a percentage of net sales. Segment product costs as a percentage of netsales remained flat to last year primarily as a result of a shift in the mix ofsales toward off price being offset by higher initial mark-ups. Segmentoperating costs as a percentage of net sales increased primarily as a result ofinefficiencies in order processing (e.g. order taking and fulfillment expenses)and the de-leveraging of these costs over lower segment net sales. Segmentselling expenses as a percentage of net sales decreased primarily as a resultof increased sales productivity.

*Other*

Othernet expenses increased by $1.9****million during fiscal 2005 compared to fiscal2004, primarily as a result of increased product development andmerchandising expenses, higher unallocated distribution facility anddepreciation costs and lower outlet store contribution, together representing a$2.4 million increase in expenses. These factors were partially offset by a$0.5 million decrease in performance bonus expense.

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*General andadministrative expenses*

Please see our discussionof general and administrative expenses under the heading “*Comparison of Fiscal 2005 to Fiscal 2004*”above.

***Segment Comparison of Fiscal 2004 to Fiscal 2003***

*Retail segmentcontribution*

The retail segment’scontribution as a percentage of segment net sales increased by 6.2****percentage points in fiscal 2004 comparedto fiscal 2003. This increase was attributable to a 6.0 percentage pointdecrease in product costs and a 1.8****percentagepoint decrease in operating costs partially offset by a 1.6****percentage point increase in sellingexpenses, all as a percentage of net sales. Segment product costs as a percentage of net sales decreased primarilyas a result of a shift in the mix of sales toward full price and lowerinventory markdowns. Segment operating costs as a percentage of net salesdecreased primarily as a result of the positive leverage on fixed operatingcosts such as occupancy and depreciation that comes from higher salesproductivity per square foot.  Segmentselling expenses as a percentage of net sales increased primarily as a resultof higher advertising costs, including costs associated with catalogs mailed toretail-only customers, and in-store visual costs. Advertising and visual costsmore than doubled in fiscal 2004 as compared to fiscal 2003.

*Direct segment contribution*

The direct segment’scontribution as a percentage of segment net sales decreased by 0.2****percentage points in fiscal 2004 comparedto fiscal 2003. This decrease was attributable to a 0.8 percentage pointincrease in product costs and a 0.3 percentage point increase in operatingcosts partially offset by a 0.9 percentage point decrease in selling expenses,all as a percentage of net sales. Segment product costs as a percentage of netsales increased primarily as a result of deeper discounting of our off priceofferings partially offset by lower inventory markdowns. Segment operatingcosts as a percentage of net sales increased primarily as a result of higherorder processing costs (e.g., order taking and fulfillment expenses). Segmentselling expenses as a percentage of net sales decreased primarily as a resultof the leveraging of lower catalog costs over net sales. Catalog costs werelower during fiscal 2004 as compared to fiscal 2003 primarily as a result ofplanned page count reductions.

*Other*

Other net expensesincreased by $2.2****million during fiscal 2004compared to fiscal 2003, primarily as a result of a $3.4 million increase inproduct development and merchandising expenses partially offset by a $1.3million decrease in depreciation primarily associated with certain fullydepreciated systems and equipment.

*General andadministrative expenses*

Please see our discussionof general and administrative expenses under the heading “*Comparison of Fiscal 2004 to Fiscal 2003*”above.

***Seasonality and Quarterly Fluctuations***

We expect there to befluctuations in our net sales from quarter to quarter, with the highest netsales generally coming in the second and fourth quarters of our fiscal year andthe lowest in the first and third quarters. See “Note M” for selected quarterlyfinancial data, including information regarding our quarterly net sales. As ourretail segment becomes a greater portion of our overall business, our businessis becoming more seasonal. Our retail store rollout plan is expected tomaterially impact year-over-year 

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comparisonsof our net sales. Also, January is included in our first fiscal quarter,but is included in the fourth fiscal quarter for many other retailers. Because January isa month that traditionally involves significant promotional pricing, thisdifference needs to be taken into account when making comparisons of ourfinancial performance for interim periods with that of other retailers.

***Liquidity and Capital Resources***

Our principal working capital needs arise from theneed to support costs incurred in advance of revenue generation, primarilyinventory acquisition, catalog development, production and mailing costs. Wehave two selling seasons that correspond to the fashion seasons. The springseason begins in January and ends in July. The fall season begins in July andends in January. Our capital investment needs arise from initiatives intendedto support our growth, including our retail store rollout and improvements toour physical and operating infrastructure. During fiscal 2005, we funded ourworking capital and capital investment needs with cash generated fromoperations and cash on hand.

Cashand cash equivalents (“cash”) increased by $3.7 million during fiscal 2005 anddecreased by $27.3 million during fiscal 2004. The following tablesummarizes the changes in cash by major component (in thousands):

| ** **                                                | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                | ** ** | **December 31,  2005**       | ** ** | **December 25,  2004** | ** ** |
| ** **                                                | ** ** | **(53 weeks)**               | ** ** | ** ** | ** ** |
| Net cash  generated from operations                       |       |                              | $          | 31,950 |   |   |   | $ | 35,461 |   |   |
| Net proceeds from  (investments in) marketable securities |       |                              | 9,262      |   |   |   | (34,246 | ) |   |
| Investments in  property and equipment                    |       |                              | (36,020    | ) |   |   | (28,784 | ) |   |
| Other                                                     |       |                              | (1,458     | ) |   |   | 248 |   |   |
| Increase (decrease) in cash                               |       |                              | $          | 3,734 |   |   |   | $ | (27,321 | ) |   |

 

During fiscal 2005 and fiscal 2004, the primarysources of cash from operations were net income before depreciation andamortization, additional deferred credits from landlords and higher amountsaccrued. In fiscal 2005, the primary use of cash from operations related todecreases in accounts payable. In fiscal 2004, the primary use of cash fromoperations related to increases in inventory.

At December 31, 2005 and December 25, 2004,the aggregate fair value of our marketable securities was $24.2 million and$34.1 million, respectively. Our marketable securities consist primarily ofinvestments in municipal debt securities. We intend to maintain a liquidportfolio consisting primarily of fixed-income securities.

Accounts receivable balances at December 31, 2005were 21.4%, or $4.0 million, lower than at December 25, 2004 primarily asa result of a decrease in receivables associated with our deferred billingprogram. At December 31, 2005 and December 25, 2004, there were $4.8million and $8.8 million, respectively, of trade receivables outstandingrelated to our deferred billing program. For a summary of our deferred billingprogram and related accounting, see “Note B” to the accompanying consolidatedfinancial statements.

Inventory at December 31, 2005 was 4.6%, or $1.7million, lower than at December 25, 2004 largely as a result of lowerretail segment inventory per store and lower direct segment inventory balancesassociated with the decrease in the size of the direct business since fiscal2004. These decreases in inventory more than offset the increase associatedwith the 42 new retail stores and three outlet stores opened since December 25,2004. Retail segment inventory per store was 22.5% lower at December 31,2005 than at December 25, 2004, primarily as a result of the extra week ofselling in fiscal 2005 which was a 53-week fiscal year, a moreconservative inventory purchasing strategy with respect to the fall season andfuture spring season inventory and 

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thetiming of transfers of overstocked retail store inventory to outlet storeinventory. Retail segment inventory turns decreased by 6.8% to 4.1 times peryear during fiscal 2005 from 4.4 times per year during fiscal 2004. Retailsegment inventory per square foot at December 31, 2005 was slightly lowercompared to last December.

Asummary of our inventory balances follows (in thousands):

| ** ** | ** ** | **December 31,  2005** | ** ** | **December 25,  2004** | ** ** |
|------------|------------|-----------------------------|------------|-----------------------------|------------|
| Retail     |       |                        | $          | 21,718                      |       |   |   | $ | 21,892 |   |   |
| Direct     |       |                        | 11,185     |                        |       |   | 13,759 |   |   |
| Other (1)  |       |                        | 1,659      |                        |       |   | 561 |   |   |
| Total      |       |                        | $          | 34,562                      |       |   |   | $ | 36,212 |   |   |

 

(1)          Otherconsists of inventory related to outlet stores.

Accounts payable balances at December 31,2005 were 58.9%, or $10.3 million, lower than at December 25, 2004primarily due to lower amounts of outstanding checks being classified as accountspayable at December 31, 2005 than at December 25, 2004. We also hadlower amounts payable for inventory at December 31, 2005 compared to December 25,2004.

Accrued expenses at December 31,2005 were 18.5%, or $5.0 million, higher than at December 25, 2004primarily as a result of increased amounts accrued for deferred compensation,income taxes, our retail store rollout and associated expenses, gift cards andemployee-related expenses.

Deferred credits from landlords and other at December 31,2005 were 22.9%, or $10.8 million, higher than at December 25, 2004primarily as a result of opening additional retail stores. See “Note B and Note K”to the accompanying consolidated financial statements for additionalinformation.

At December 31, 2005 we had 192 retail stores andeight outlet stores open. During fiscal 2005 we opened 42 retail stores andthree outlet stores. We currently plan to open an additional 40 retail storesand six outlet stores in 2006. The initial net cash requirements related to ourretail store rollout are significant and are primarily comprised of leaseholdimprovements, net of landlord allowances, and initial inventory acquisitioncosts. Construction commitments are typically made one to six months in advanceof a new retail store opening and actual construction typically begins two tothree months before the store opens. The initial net cash requirements foropening a new retail store are currently estimated at an average ofapproximately $0.4 million per store.

In fiscal 2005, we announced our plan to investapproximately $7.0 million on three key systems to support our future growth—aproduct life-cycle management system (“PLM”), an inventory management andplanning system and a corporate data warehouse. The PLM implementation began in fiscal 2005 andwill continue into 2006 and 2007. The merchandise management module of theinventory management and planning system is expected to be implemented in 2006.The first phase of the corporate data warehouse implementation is currentlyscheduled for 2006. We spent $2.3 million in fiscal 2005 on these initiativesand we expect to spend approximately $1.6 million on these systems in 2006.

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Thefollowing table summarizes our contractual obligations, aggregated by type, at December 31,2005 (in thousands):

| ** **                                  | ** ** | **Payments Due By Period (1)** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                          | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
| Operating lease  obligations (2)            |       | $                                                  | 251,886    |   | $ | 31,266 |   | $ | 70,246 |   | $ | 68,038 |   |   | $ | 82,336 |   |   |
| Long-term debt  obligations (3)             |       | 10,431                                             |       | 1,036 |   | 959 |   | 8,436 |   |   | — |   |   |
| Fixed future  interest payments on debt (4) |       | 2,249                                              |       | 718 |   | 1,326 |   | 205 |   |   | — |   |   |
| Inventory  purchase obligations (5)         |       | 106,836                                            |       | 106,836 |   | — |   | — |   |   | — |   |   |
| Non-inventory  purchase obligations (6)     |       | 26,565                                             |       | 22,652 |   | 3,913 |   | — |   |   | — |   |   |
| Total (7)                                   |       | $                                                  | 397,967    |   | $ | 162,508 |   | $ | 76,444 |   | $ | 76,679 |   |   | $ | 82,336 |   |   |

 

(1)          Theamounts set forth in the “Less than 1 Year” column represent amounts to be paidin 2006, the “1-3 Years” column represents amounts to be paid in 2007 and2008, the “3-5 Years” column represents amounts to be paid in 2009 and2010 and the “More than 5 Years” column represents amounts to be paid after2010.

(2)          See“Note K” to the accompanying consolidated financial statements.

(3)          Doesnot include interest payments. See the accompanying consolidated statement ofoperations for our gross interest expense for the last three fiscal years. See “NoteE” to the accompanying consolidated financial statements for a summary of ourlong-term debt outstanding at December 31, 2005 and December 25, 2004.The weighted average interest rate for amounts outstanding under our creditfacilities during fiscal 2005 and fiscal 2004 was 7.04% and 6.83% per annum,respectively. Cash paid for interest during fiscal 2005 and fiscal 2004 was$0.8 million and $0.9 million, respectively*.*

(4)          Representsfuture fixed interest payments under our real estate and equipment loans.

(5)          Representsamounts to be paid under agreements to purchase inventory that are enforceableand legally binding and that specify all significant terms at December 31,2005.

(6)          Representsamounts to be paid under agreements that are enforceable and legally bindingand that specify all significant terms at December 31, 2005. Amountsinclude, but are not limited to (i) obligations relating to retail storeconstruction or other property and equipment; (ii) obligations relating togoods or services ordered in the ordinary course of business; (iii) obligationsarising as a result of minimum service level provisions in certain contracts;(iv) obligations where an early termination penalty might be assessed inthe event of early termination of the contract; and (v) obligations undercertain employment agreements.

(7)          Contingentobligations including (i) amounts that might become due as a result of theproposed Merger with Talbots, including, but not limited to, investment bankerfees and amounts payable under a separation agreement with a former executive; (ii) amountsthat might become due under change in-control severance arrangements withcertain executives; and (iii) amounts that may become due under contractsor open purchase orders that are dependent on future period volume, are notincluded in the table.

For a summary of ourcredit facilities at December 31, 2005 see “Note E” to the accompanyingconsolidated financial statements. We were in compliance with the covenantsassociated with our credit facilities as of and for the fiscal years ended December 31,2005, December 25, 2004 and December 27, 2003.

Our sources of cashinclude cash on hand, our investments in marketable securities, availableborrowing capacity under our Revolving Credit Facility of $20.0 million as of December 31,2005 and anticipated cash flow from operations. Our principal uses of cashinclude cash required to support current operations as well as investments ininfrastructure and our retail store rollout. Based on current operating 

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conditions,we believe we have sufficient sources of cash to execute our operating plansand fund our planned operating and systems infrastructure investments, capitalexpenditures and commitments for the foreseeable future. Should currentoperating conditions deteriorate, we believe we have some flexibility to adjustour mid-to-long-term operating plans, including our retail store rollout andour catalog circulation strategies.

***Critical AccountingPolicies***

In the normal course ofbusiness, we record inventory markdowns associated with our overstockedmerchandise. We look at past and projected sales performance and inventory onhand and on order when calculating an expected level of overstocks. Based onthe estimated level of overstocks and the estimated net realizable amount ofthe overstocks, we record inventory markdowns in order to state our inventoryat the lower of cost or market. We have internal and external liquidationvehicles that we utilize to liquidate our overstocks. Internal channels,including sales catalogs, price reductions in the retail stores and our eightoutlet stores generally require lower markdowns and are considered first. Afterthe internal capacity is exceeded, external channels are considered. Externalchannels include discount marketers and inventory liquidators. If thecumulative write-downs associated with inventory markdowns are not accurate ourgross margin and inventory balances may be overstated or understated.

We record accruals forestimated product returns for direct segment sales using the following process.First, we determine an appropriate return rate for each current catalog. Indoing so, we consider a number of factors, including prior years’ and priorseasons’ return rates for comparable J. Jill catalogs and internet offerings,trends in return rates from season to season and within the current season andapplicable operational factors. Once a return rate is determined, it ismonitored and updated periodically as appropriate to reflect changes inunderlying assumptions based on actual experience. The return rate is used tocalculate an appropriate returns allowance for the applicable catalog orinternet offering for the applicable period. We also provide a returnsallowance for retail segment sales. We provide this allowance based on projectedmerchandise returns, taking into consideration historical experience and otherfactors. These returns allowances are recorded as a reduction to net sales forthe estimated retail value of the projected merchandise returns and as areduction to cost of products for the corresponding cost amount. If ourestimated returns allowances are not accurate, our returns reserves may beunderstated or overstated, resulting in an overstatement or understatement,respectively, of net sales and net income.

We incur costs to produce,print and distribute our catalogs (“catalog costs”). Catalog costs in ourdirect segment are considered direct response advertising and as such arecapitalized as incurred and amortized over the expected sales life of eachcatalog, which is generally a period not exceeding six months. Creative costsfor a season, which will benefit multiple catalogs, are allocated to eachcatalog taking into consideration relative catalog size and circulation. Theamortization of our direct segment catalog costs is meant to match revenueswith expenses. The expected sales life of each catalog is determined based on adetailed marketing forecast, which considers historical experience for similarcatalogs as well as current sales trends. These forecasts are updatedfrequently during the most active period of selling for each catalog todetermine the expected total sales for the catalog. We monitor changes to theforecast and adjust the amortization period accordingly. If our calculation ofthe amortization period is incorrect, it could result in a mismatch of revenuesand expenses in a particular period. Catalog costs in our retail segment areconsidered advertising and as such are expensed as incurred.

We periodically considerwhether there has been a permanent impairment in the value of our long-livedassets, primarily property and equipment. We evaluate various factors after astart-up phase, including current and projected future operating results andthe undiscounted cash flows for the underperforming long-lived assets. We thencompare the carrying amount of the asset to the estimated future undiscountedcash flows expected to result from use of the asset. To the extent that theestimated future undiscounted cash flows are less than the carrying amount ofthe asset, the asset is written down to its estimated fair market value and animpairment loss is recognized. The value of impaired long-lived 

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assetsmay be subject to further write-downs based on changes in these factors. Anyadjustments to the value of our long-lived assets are included in either costof products and merchandising or selling, general and administrative expensesdepending on where depreciation related to that asset has been historicallyrecorded. If our estimate of the future undiscounted cash flows expected toresult from the use of the asset is incorrect, the carrying value of ourlong-lived assets may be overstated or understated.

We make certain judgmentsand interpretations with respect to enacted tax laws and other publishedguidance in determining our effective tax rate and in identifying and valuingour deferred tax assets and liabilities. If our judgments or interpretationsare incorrect with respect to certain permanent differences between the tax andbook treatment of certain income and expenses, it could result in anunderstatement or overstatement of our effective tax rate resulting in anoverstatement or understatement, respectively, of our net income. In addition,if our judgments or interpretations are incorrect with respect to certaintemporary differences between the tax and book treatment of certain income andexpenses or if our judgment as to the realizability of our net deferred taxassets is incorrect, the value of our deferred tax assets and liabilities couldbe overstated or understated.

***Recent AccountingStandards***

For a summary of ourrecent accounting pronouncements, see “Note B” to the accompanying consolidatedfinancial statements.

**Item7A.**                Quantitative andQualitative Disclosures about Market Risk

Our objective in managingour long-term exposure to interest rate and foreign currency rate changes is tolimit any material impact of the changes on cash flows and earnings and tolower our overall borrowing costs. To achieve our objectives, we periodicallyidentify these risks and manage them through our regular operating andfinancing activities. These activities include periodic refinancing of debtobligations to increase availability while minimizing financing costs,considering fixed and variable rate debt positions and periodic review of thereturn on investment of our marketable securities portfolio.  Marketable securities investments are subjectto interest rate and credit risks. Changes in interest rates may affect ouroperating results. We currently invest in highly liquid, interest bearinginstruments, primarily municipal debt securities. Our investments includesecurities with a minimum credit rating of A1 by Moody’s and A+ by Standard andPoor and no individual investment in the portfolio, except investments in U.S.Treasury and federal agency securities, is greater than 10% of the totalportfolio, so potential losses on individual securities is minimized. Ourinvestment policy limits interest rate risk by requiring the investmentportfolio to be structured such that securities mature to meet cashrequirements for ongoing operations, thereby avoiding the need to sellsecurities on the open market prior to maturity. In addition, operating fundsare invested primarily in shorter-term securities, money market mutual funds,or similar investment pools. We do not currently use derivative financialinstruments. We have calculated the effect of a 10% change in interest ratesover a month for both our debt obligations and our marketable securitiesinvestments and determined the effect to be immaterial. We do not foresee anysignificant changes in the management of foreign currency or interest rateexposures or in the strategies we employ to manage such exposures in the nearfuture.

We have established atrust in connection with our deferred compensation plans. The trust assets areinvested in corporate owned life insurance in a manner that is designed toapproximate the measurement designations of the participants in the plans, forboth vested and unvested balances. Investments are exposed to various risks,such as interest rate, market and credit risks. Due to the level of riskassociated with certain investments, it is at least reasonably possible thatchanges in the values of these investments will occur in the near term and thatsuch changes will also impact participant deferred compensation balances basedon the measurement designations made by the participants in the plans. Changesin value of the trust assets are intended to mirror changes in the value of theparticipants’ deferred compensation accounts.

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**Item8.**                        ConsolidatedFinancial Statements and Supplementary Data

**THEJ. JILL GROUP, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                                                                     | ** ** |    | **Page** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----|----------|------------|------------|
| Report of Independent Registered Public Accounting  Firm                                                                                                            |       | 30 |     |
| Consolidated Balance Sheets at December 31, 2005  and December 25, 2004                                                                                   |       | 32 |     |
| Consolidated Statements of Operations for the 12  months ended December 31, 2005, December 25, 2004 and  December 27, 2003                           |       | 33 |     |
| Consolidated Statements of Changes in Stockholders’  Equity for the 12 months ended December 31, 2005, December 25, 2004  and December 27, 2003 |       | 34 |     |
| Consolidated Statements of Cash Flows for the 12  months ended December 31, 2005, December 25, 2004 and  December 27, 2003                           |       | 35 |     |
| Notes  to Consolidated Financial Statements                                                                                                                         |       | 36 |     |

 

 

29

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders ofThe J. Jill Group, Inc.:

We have completedintegrated audits of The J. Jill Group, Inc.’s 2005 and 2004 consolidatedfinancial statements and of its internal control over financial reporting as ofDecember 31, 2005, and an audit of its 2003 consolidated financialstatements in accordance with the standards of the Public Company AccountingOversight Board (United States). Ouropinions, based on our audits, are presented below.

*Consolidated financial statements and financial statementschedule*

In our opinion, the consolidated financial statements listed in the indexappearing under Item 8 present fairly, in all material respects, thefinancial position of The J. Jill Group, Inc. and its subsidiaries at December 31,2005 and December 25, 2004, and the results of their operations and theircash flows for each of the three years in the period ended December 31,2005 in conformity with accounting principles generally accepted in the UnitedStates of America. In addition, in ouropinion, the financial statement schedule listed in the index appearing under Item 8 presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements. These financial statements andfinancial statement schedule are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits. We conducted our audits ofthese statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit of financialstatements includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

*Internal controlover financial reporting*

Also, in our opinion, management’s assessment,included in Management’s Report on Internal Control Over Financial**Reporting appearing under Item 9A, that the Companymaintained effective internal control over financial reporting as of December 31,2005, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), is fairly stated, in all material respects, based on thosecriteria. Furthermore, in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2005, based on criteria established in *Internal Control—Integrated Framework* issued by the COSO.The Company’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to expressopinions on management’s assessment and on the effectiveness of theCompany’s internal control over financial reporting based on our audit. Weconducted our audit of internal control over financial reporting in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects. An audit of internal controlover financial reporting includes obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we consider necessary in the circumstances.We believe that our audit provides a reasonable basis for our opinions.

30

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A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

/s/ PricewaterhouseCoopersLLP

Boston, MassachusettsMarch 15, 2006

31

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**THE J. JILL GROUP, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share amounts)**

| ** **                                                                                                                                                                                   | ** ** | **December 31,  2005** | ** ** | **December 25,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                   |       |                        |       |                        |       |   |   |   |   |
| Current assets:                                                                                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                    |       |                        | $          | 35,700                      |       |   |   | $ | 31,966 |   |   |
| Cash held in escrow                                                                                                                                                                          |       |                        | 1,342      |                        |       |   | 872 |   |   |
| Marketable securities                                                                                                                                                                        |       |                        | 24,228     |                        |       |   | 34,062 |   |   |
| Accounts receivable, net                                                                                                                                                                     |       |                        | 14,595     |                        |       |   | 18,579 |   |   |
| Inventory                                                                                                                                                                                    |       |                        | 34,562     |                        |       |   | 36,212 |   |   |
| Prepaid catalog expenses                                                                                                                                                                     |       |                        | 4,306      |                        |       |   | 3,894 |   |   |
| Deferred income taxes                                                                                                                                                                        |       |                        | 10,312     |                        |       |   | 9,761 |   |   |
| Other current assets                                                                                                                                                                         |       |                        | 7,486      |                        |       |   | 8,237 |   |   |
| Total current assets                                                                                                                                                                         |       |                        | 132,531    |                        |       |   | 143,583 |   |   |
| Property and  equipment, net                                                                                                                                                                 |       |                        | 148,100    |                        |       |   | 133,972 |   |   |
| Other non-current  assets                                                                                                                                                                    |       |                        | 6,844      |                        |       |   | 5,141 |   |   |
| Total assets                                                                                                                                                                                 |       |                        | $          | 287,475                     |       |   |   | $ | 282,696 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                |       |                        |       |                        |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                         |       |                        |       |                        |       |   |   |   |   |
| Accounts payable                                                                                                                                                                             |       |                        | $          | 7,210                       |       |   |   | $ | 17,523 |   |   |
| Accrued expenses                                                                                                                                                                             |       |                        | 32,169     |                        |       |   | 27,158 |   |   |
| Accrued customer returns                                                                                                                                                                     |       |                        | 6,558      |                        |       |   | 7,494 |   |   |
| Current portion of long-term debt                                                                                                                                                            |       |                        | 1,036      |                        |       |   | 1,805 |   |   |
| Total current liabilities                                                                                                                                                                    |       |                        | 46,973     |                        |       |   | 53,980 |   |   |
| Long-term debt,  less current portion                                                                                                                                                        |       |                        | 9,395      |                        |       |   | 10,431 |   |   |
| Deferred credits  from landlords and other                                                                                                                                                   |       |                        | 58,223     |                        |       |   | 47,387 |   |   |
| Deferred income  taxes                                                                                                                                                                       |       |                        | 4,763      |                        |       |   | 6,841 |   |   |
| Commitments and  contingencies                                                                                                                                                               |       |                        |       |                        |       |   |   |   |   |
| Stockholders’ equity:                                                                                                                                                                   |       |                        |       |                        |       |   |   |   |   |
| Special preferred stock (par value $0.01) 1,000,000  shares authorized                                                                                                                       |       |                        | —     |                        |       |   | — |   |   |
| Common stock (par value $0.01) 30,000,000 shares  authorized, 20,354,196 and 20,109,789 shares issued and outstanding as of December 31,  2005 and December 25, 2004, respectively |       |                        | 204        |                        |       |   | 201 |   |   |
| Additional  paid-in capital                                                                                                                                                                  |       |                        | 115,082    |                        |       |   | 112,508 |   |   |
| Accumulated other  comprehensive loss                                                                                                                                                        |       |                        | (116       | )                           |       |   | (89 | ) |   |
| Retained earnings                                                                                                                                                                            |       |                        | 52,951     |                        |       |   | 51,437 |   |   |
| Total stockholders’ equity                                                                                                                                                              |       |                        | 168,121    |                        |       |   | 164,057 |   |   |
| Total liabilities  and stockholders’ equity                                                                                                                                             |       |                        | $          | 287,475                     |       |   |   | $ | 282,696 |   |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

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**THE J. JILL GROUP, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data)**

| ** **                                    | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|
| ** **                                    | ** ** | **December 31,  2005**       | ** ** | **December 25,  2004** | ** ** | **December 27,  2003** | ** ** |
| ** **                                    | ** ** | **(53 weeks)**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                     |       |                              | $          | 449,712 |   |   |   | $ | 434,867 |   |   |   | $ | 376,904 |   |   |
| Cost of products  and merchandising           |       |                              | 297,971    |   |   |   | 278,410 |   |   |   | 250,248 |   |   |
| Gross margin                                  |       |                              | 151,741    |   |   |   | 156,457 |   |   |   | 126,656 |   |   |
| Selling, general  and administrative expenses |       |                              | 149,125    |   |   |   | 141,121 |   |   |   | 114,019 |   |   |
| Operating income                              |       |                              | 2,616      |   |   |   | 15,336 |   |   |   | 12,637 |   |   |
| Interest income                               |       |                              | 1,069      |   |   |   | 716 |   |   |   | 460 |   |   |
| Interest expense                              |       |                              | 956        |   |   |   | 1,050 |   |   |   | 1,199 |   |   |
| Interest (income) expense, net                |       |                              | (113       | ) |   |   | 334 |   |   |   | 739 |   |   |
| Income before taxes                           |       |                              | 2,729      |   |   |   | 15,002 |   |   |   | 11,898 |   |   |
| Income tax  provision                         |       |                              | 1,215      |   |   |   | 6,296 |   |   |   | 4,873 |   |   |
| Net income                                    |       |                              | $          | 1,514 |   |   |   | $ | 8,706 |   |   |   | $ | 7,025 |   |   |
| **Earnings per share:**                       |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| *Basic*                                       |       |                              | $          | 0.07 |   |   |   | $ | 0.43 |   |   |   | $ | 0.36 |   |   |
| *Diluted*                                     |       |                              | $          | 0.07 |   |   |   | $ | 0.42 |   |   |   | $ | 0.35 |   |   |
| **Weighted average shares  outstanding:**     |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| *Basic*                                       |       |                              | 20,241     |   |   |   | 20,019 |   |   |   | 19,585 |   |   |
| *Diluted*                                     |       |                              | 20,536     |   |   |   | 20,546 |   |   |   | 20,060 |   |   |

 

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

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**THE J. JILL GROUP, INC.**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**(inthousands, except share amounts)**

| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **             | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|------------------------|------------|
| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Other**         | ** ** | **Total**              | ** ** |
| ** **                                            | ** ** | ** ** | ** ** | **Common** | ** ** | **Paid-In**    | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                            | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Loss**          | ** ** | **Equity**             | ** ** |
| **Balance  at December 28, 2002**                |       | 19,495,411 |       |       | $          | 195            |       |         |       | $                 | 107,227    |                   |       |   | $ | 35,706 |   |   |   | $ | — |   |   |   | $ | 143,128 |   |   |
| Net income                                            |       | —     |       |       | —     |           |       |         | —     |              |       |                   | 7,025      |   |   |   | — |   |   |   | 7,025 |   |   |
| Exercise of stock  options                            |       | 131,901    |       |       | 2          |           |       |         | 500        |              |       |                   | —     |   |   |   | — |   |   |   | 502 |   |   |
| Tax benefit from  exercise of stock options           |       | —     |       |       | —     |           |       |         | 56         |              |       |                   | —     |   |   |   | — |   |   |   | 56 |   |   |
| Stock granted  under employee stock purchase plan     |       | 30,991     |       |       | 0          |           |       |         | 368        |              |       |                   | —     |   |   |   | — |   |   |   | 368 |   |   |
| **Balance  at December 27, 2003**                |       | 19,658,303 |       |       | 197        |           |       |         | 108,151    |              |       |                   | 42,731     |   |   |   | — |   |   |   | 151,079 |   |   |
| Net income                                            |       | —     |       |       | —     |           |       |         | —     |              |       |                   | 8,706      |   |   |   | — |   |   |   | 8,706 |   |   |
| Unrealized loss on  marketable securities, net of tax |       | —     |       |       | —     |           |       |         | —     |              |       |                   | —     |   |   |   | (89 | ) |   |   | (89 | ) |   |
| Comprehensive  income                                 |       |       |       |       |       |           |       |         |       |              |       |                   |       |   |   |   |   |   |   |   | 8,617 |   |   |
| Exercise of stock  options                            |       | 415,224    |       |       | 4          |           |       |         | 2,746      |              |       |                   | —     |   |   |   | — |   |   |   | 2,750 |   |   |
| Tax benefit from  exercise of stock options           |       | —     |       |       | —     |           |       |         | 1,219      |              |       |                   | —     |   |   |   | — |   |   |   | 1,219 |   |   |
| Stock granted  under employee stock purchase plan     |       | 36,262     |       |       | 0          |           |       |         | 392        |              |       |                   | —     |   |   |   | — |   |   |   | 392 |   |   |
| **Balance  at December 25, 2004**                |       | 20,109,789 |       |       | 201        |           |       |         | 112,508    |              |       |                   | 51,437     |   |   |   | (89 | ) |   |   | 164,057 |   |   |
| Net income (53  weeks)                                |       | —     |       |       | —     |           |       |         | —     |              |       |                   | 1,514      |   |   |   | — |   |   |   | 1,514 |   |   |
| Unrealized loss on  marketable securities, net of tax |       | —     |       |       | —     |           |       |         | —     |              |       |                   | —     |   |   |   | (27 | ) |   |   | (27 | ) |   |
| Comprehensive  income                                 |       |       |       |       |       |           |       |         |       |              |       |                   |       |   |   |   |   |   |   |   | 1,487 |   |   |
| Exercise of stock  options                            |       | 177,750    |       |       | 2          |           |       |         | 1,385      |              |       |                   | —     |   |   |   | — |   |   |   | 1,387 |   |   |
| Tax benefit from  exercise of stock options           |       | —     |       |       | —     |           |       |         | 404        |              |       |                   | —     |   |   |   | — |   |   |   | 404 |   |   |
| Stock granted  under employee stock purchase plan     |       | 66,657     |       |       | 1          |           |       |         | 785        |              |       |                   | —     |   |   |   | — |   |   |   | 786 |   |   |
| **Balance  at December 31, 2005**                |       | 20,354,196 |       |       | $          | 204            |       |         |       | $                 | 115,082    |                   |       |   | $ | 52,951 |   |   |   | $ | (116 | ) |   |   | $ | 168,121 |   |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

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**THE J. JILL GROUP, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(inthousands)**

| ** **                                                                         | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                         | ** ** | **December 31,**             | ** ** | **December 25,** | ** ** | **December 27,** | ** ** |
| ** **                                                                         | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                         | ** ** | **(53 weeks)**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows provided by operating activities:                                       |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                         |       |                              | $          | 1,514 |   |   |   | $ | 8,706 |   |   |   | $ | 7,025 |   |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                     |       |                              | 22,755     |   |   |   | 18,663 |   |   |   | 16,131 |   |   |
| Deferred income taxes                                                              |       |                              | (2,555     | ) |   |   | 1,396 |   |   |   | 1,298 |   |   |
| Gain on trust assets                                                               |       |                              | (477       | ) |   |   | (388 | ) |   |   | (374 | ) |   |
| Loss on disposal of  property and equipment                                        |       |                              | 567        |   |   |   | 388 |   |   |   | — |   |   |
| Changes in assets and liabilities:                                                 |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Decrease in accounts  receivable, net                                              |       |                              | 3,984      |   |   |   | 55 |   |   |   | 2,683 |   |   |
| Decrease (increase) in  inventory                                                  |       |                              | 1,650      |   |   |   | (8,081 | ) |   |   | 5,867 |   |   |
| (Increase) decrease in  prepaid catalog expenses                                   |       |                              | (412       | ) |   |   | 212 |   |   |   | (24 | ) |   |
| Decrease (increase) in  other assets                                               |       |                              | 878        |   |   |   | (1,220 | ) |   |   | (578 | ) |   |
| (Decrease) increase in  accounts payable                                           |       |                              | (10,417    | ) |   |   | 2,340 |   |   |   | 2,318 |   |   |
| Increase in accrued  expenses                                                      |       |                              | 4,563      |   |   |   | 5,863 |   |   |   | 3,367 |   |   |
| (Decrease) increase in  accrued customer returns                                   |       |                              | (936       | ) |   |   | 205 |   |   |   | (39 | ) |   |
| Increase in deferred  credits from landlords and other                             |       |                              | 10,836     |   |   |   | 7,322 |   |   |   | 13,065 |   |   |
| Net cash provided by  operating activities                                         |       |                              | 31,950     |   |   |   | 35,461 |   |   |   | 50,739 |   |   |
| Cash flows used in investing activities:                                           |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Additions to property  and equipment                                               |       |                              | (36,020    | ) |   |   | (28,784 | ) |   |   | (34,265 | ) |   |
| Purchases of marketable  securities                                                |       |                              | (31,875    | ) |   |   | (34,246 | ) |   |   | — |   |   |
| Sales of marketable  securities                                                    |       |                              | 8,701      |   |   |   | — |   |   |   | — |   |   |
| Maturities of marketable  securities                                               |       |                              | 32,436     |   |   |   | — |   |   |   | — |   |   |
| Investment in trust  assets                                                        |       |                              | (1,356     | ) |   |   | (1,099 | ) |   |   | (898 | ) |   |
| Increase in cash held in  escrow                                                   |       |                              | (470       | ) |   |   | (89 | ) |   |   | (245 | ) |   |
| Net cash used in  investing activities                                             |       |                              | (28,584    | ) |   |   | (64,218 | ) |   |   | (35,408 | ) |   |
| Cash flows provided by (used in) financing  activities:                            |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Payments of debt  borrowings                                                       |       |                              | (1,805     | ) |   |   | (1,706 | ) |   |   | (1,648 | ) |   |
| Proceeds from stock  transactions                                                  |       |                              | 2,173      |   |   |   | 3,142 |   |   |   | 870 |   |   |
| Net cash provided by  (used in) financing activities                               |       |                              | 368        |   |   |   | 1,436 |   |   |   | (778 | ) |   |
| Net increase (decrease)  in cash and cash equivalents                              |       |                              | 3,734      |   |   |   | (27,321 | ) |   |   | 14,553 |   |   |
| Cash and cash equivalents at:                                                      |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Beginning of period                                                                |       |                              | 31,966     |   |   |   | 59,287 |   |   |   | 44,734 |   |   |
| End of period                                                                      |       |                              | $          | 35,700 |   |   |   | $ | 31,966 |   |   |   | $ | 59,287 |   |   |
| **Supplemental information:**                                                      |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Non-cash investing activities:                                                     |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Property and equipment  costs accrued, not paid                                    |       |                              | $          | 1,873 |   |   |   | $ | 917 |   |   |   | $ | 1,033 |   |   |
| Cash paid for interest                                                             |       |                              | $          | 806 |   |   |   | $ | 905 |   |   |   | $ | 1,065 |   |   |
| Cash paid for income taxes                                                         |       |                              | $          | 216 |   |   |   | $ | 4,959 |   |   |   | $ | 6,836 |   |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**A.   Nature of business:**

The J.Jill Group, Inc. (together with its wholly owned consolidatedsubsidiaries, the “Company” or “J. Jill”), is a multi-channel specialtyretailer of women’s apparel, including accessories and footwear, that marketsits products through its retail stores, catalogs and website *jjill.com*.

**B.   Summaryof significant accounting policies:**

***Principles of consolidation***

The consolidated financialstatements include the accounts of The J. Jill Group, Inc. and its whollyowned consolidated subsidiaries. Intercompany balances and transactions havebeen eliminated. Beginning as of the close of business on December 25,2004, the Company realigned its organizational structure in response to variousoperational changes in its business. This realignment resulted in, among otherthings, the Company’s retail/direct subsidiary, The Birch Pond Group, Inc.,a wholly owned subsidiary, being converted into J. Jill, LLC.

***Translation adjustments***

The financial statementsof the Company’s foreign operations have been translated into U.S. dollars. Allbalance sheet accounts have been translated using the exchange rate in effectat the applicable balance sheet date. Income statement amounts have beentranslated using average exchange rates in effect during the applicable fiscalyear. The gains and losses resulting from the changes in exchange rates areinsignificant for all periods presented.

***Fiscal***year

The Company’s fiscal yearends on the last Saturday in December. The 12 months ended December 31,2005 (“fiscal 2005”) was a 53-week fiscal year. In a 53-week fiscalyear, three of the quarters are 13-week periods, and one is a 14-weekperiod. The fourth quarter of fiscal 2005 was a 14-week period. The 12months ended December 25, 2004 (“fiscal 2004”) and December 27, 2003(“fiscal 2003”) were 52-week fiscal years.

***Cash and cash equivalents***

Cash and cash equivalentsconsist of cash on deposit in banks and may also include cash invested in moneymarket mutual funds, overnight repurchase agreements, debt securities and U.S.Treasury and federal agency securities. The Company considers all highly liquidinstruments, including certificates of deposit with remaining maturity at timeof purchase of three months or less, to be cash equivalents.

***Cash held in escrow***

Cash held in escrowprimarily consists of amounts Birch Pond Realty Corporation, a wholly ownedsubsidiary of The J. Jill Group, Inc., is required to keep in escrowassociated with the outstanding loan on the Company’s operations, fulfillmentand distribution center in Tilton, New Hampshire (the “Tilton facility”). Theseamounts will be used to pay for real estate taxes, insurance and certainrepairs and replacements related to the Tilton facility.

36

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Continued)

***Marketable securities***

The Company’s marketable securities consist primarilyof investments in municipal debt securities. The Company intends to maintain aliquid portfolio and accordingly, all marketable securities are classified asavailable-for-sale and reported at their fair value. Unrealized gains andlosses are included in accumulated other comprehensive income, a separatecomponent of stockholders’ equity. Unrealized gains and losses are added to ordeducted from net income, respectively, in arriving at comprehensive income(loss) for financial reporting purposes. There were no realized gains or losseson marketable securities during fiscal 2005 or fiscal 2004. The Company did nothave any investments in marketable securities in fiscal 2003. The Company’smarketable securities are exposed to interest rate and credit risks. See “Risksand uncertainties.”

Asummary of the contractual maturities of available-for-sale securities follows(in thousands):

| ** **                       | ** ** | **Fair Market Value** | ** ** |
|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **December 31,**           | ** ** | **December 25,** | ** ** |
| ** **                       | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| Due within one  year             |       |                            | $          | 16,674 |   |   |   | $ | 18,259 |   |   |
| Due between one  and three years |       |                            | 7,554      |   |   |   | 13,803 |   |   |
| Due after 10  years (1)          |       |                            | —     |   |   |   | 2,000 |   |   |
| Total                            |       |                            | $          | 24,228 |   |   |   | $ | 34,062 |   |   |

 

(1)          Marketable securitieswithin this category contained put provisions that allowed the security to beput every 35 days.

***Accounts receivable and allowance for doubtfulaccounts***

Asummary of the Company’s accounts receivable follows (in thousands):

| ** **                | ** ** | **December 31,** | ** ** | **December 25,** | ** ** |
|---------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Deferred billing          |       |                  | $          | 4,810                 |       |   |   | $ | 8,785 |   |   |
| Landlord  allowances      |       |                  | 6,416      |                  |       |   | 5,802 |   |   |
| Other                     |       |                  | 3,679      |                  |       |   | 4,398 |   |   |
| Total accounts receivable |       |                  | 14,905     |                  |       |   | 18,985 |   |   |
| Less: allowances          |       |                  | (310       | )                     |       |   | (406 | ) |   |
| Accounts  receivable, net |       |                  | $          | 14,595                |       |   |   | $ | 18,579 |   |   |

 

The Company’s trade accounts receivable relateprimarily to credit card sales to individuals and are recorded at the invoicedamount. These receivables do not bear interest. The allowance for doubtfulaccounts relates primarily to credit card bad debt associated with the Company’sdeferred billing program, list rental receivables and checks received from customers.The allowance for doubtful accounts is the Company’s best estimate of probableuncollectible amounts or losses in its existing accounts receivable. TheCompany determines the allowance for doubtful accounts based on the historicalwrite-off experience by type of receivable and other factors. Delinquentamounts are reviewed individually and account balances are charged off againstthe allowance when the Company determines that it is probable that thereceivable will not be recovered. Write-offs, net of recoveries, wereapproximately $163,000, $246,000 and 

37

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Continued)

$409,000 in fiscal 2005,fiscal 2004 and fiscal 2003, respectively. The Company does not have any offbalance sheet exposure related to its accounts receivable.

The Company’s deferredbilling program provides its customers with the option of deferring payment fortheir purchases. The deferral period is generally 60 to 90 days. For deferredbilling offered on the Company’s private label credit card, the Companytypically receives cash from the sale within four business days from the dateof purchase. For deferred billing offered on major credit cards, the Companyreceives cash after the deferral period expires, net of any returns oradjustments processed during the deferral period. The Company does not bear thecredit risk associated with its private label credit card. The Company isexposed to credit risk during the deferral period for its deferred billingprograms that relate to major credit cards.

***Inventory***

Inventory, consisting ofmerchandise for sale, is stated at the lower of cost, as determined by theweighted average cost method, or market, based on estimated net realizablevalue.

***Property and equipment***

Property and equipment are stated at cost. Depreciationexpense is computed using the straight-line method over the estimated usefullives of the assets, which are 30 years for buildings and one to seven yearsfor computers, computer software, equipment, furniture and fixtures. Improvementsto leased premises are amortized on a straight-line basis over the shorter oftheir estimated useful life or the lease term. Depreciation periods related toimprovements made to leased property do not exceed the lease term. Maintenanceand repairs are charged to expense as incurred. Upon retirement or sale, the costof the assets disposed of and the related accumulated depreciation are removedfrom the accounts and any resulting gain or loss is credited or charged toincome.

The Company capitalizescertain costs related to the development or purchase of internal-use softwareand amortizes these costs over the estimated useful life of the software. TheCompany expenses costs related to the preliminary project stage and thepost-implementation/operation stage of internal-use software developmentprojects including research and planning costs.

***Long-lived assets***

The Company periodicallyconsiders whether there has been a permanent impairment in the value of itslong-lived assets, primarily property and equipment. The Company evaluatesvarious factors after a start-up phase, including current and projected futureoperating results and the undiscounted cash flows for the underperforminglong-lived assets. The Company then compares the carrying amount of the assetto the estimated future undiscounted cash flows expected to result from use ofthe asset. To the extent that the estimated future undiscounted cash flows areless than the carrying amount of the asset, the asset is permanently writtendown to its estimated fair market value and an impairment loss is recognized. Thevalue of impaired long-lived assets may be subject to further write-downs basedon subsequent changes in these factors. At December 31, 2005, the Companydetermined, based on its evaluations, that certain long-lived assets wereimpaired. The Company recorded a charge to reduce the carrying value of theseassets. The charge is included in cost of products and merchandising and isimmaterial to the Company’s consolidated financial statements. At December 25,2004, the Company determined, based on its evaluations, that the carrying valueof its long-lived assets was appropriate.

38

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Continued)

***Fair value of financial instruments***

The Company periodicallyassesses the fair value of its financial instruments. The fair values of cashand cash equivalents, accounts receivable and accounts payable at December 31,2005 and December 25, 2004 approximate their carrying values. The fairvalue of the Company’s long-term debt, including current maturities, at December 31,2005 and December 25, 2004 was approximately $10,622,000 and $13,198,000,respectively. The Company’s marketable securities are reported at fair value.

***Deferred credits from landlords***

Deferred credits fromlandlords consists of step rent and allowances from landlords primarily relatedto the Company’s retail store leases. Step rent represents the differencebetween actual operating lease payments due and straight-line rent expense,which is recorded by the Company over the term of the lease, including thebuild-out period. This amount is recorded as a deferred credit in the earlyyears of the lease, when cash payments are generally lower than straight-linerent expense, and reduced in the later years of the lease when payments beginto exceed the straight-line expense. Landlord allowances are generallycomprised of amounts promised to the Company by landlords in the form of cashor rent abatements. These allowances are part of the negotiated terms of thelease. In situations where cash is to be received, the Company records areceivable for the full amount of the allowance when certain performancecriteria articulated in the lease are met, typically when the store opens, anda liability is concurrently established. This deferred credit from landlords isamortized into income (through lower rent expense) over the term (including thepre-opening build-out period) of the applicable lease and the receivable isreduced as amounts are received from the landlord. The liability forunamortized landlord allowances, including current portion, was $48,908,000****and $39,507,000 at December 31, 2005and December 25, 2004, respectively.

***Accounting for stock-based compensation***

The Company discloses stock-based compensationinformation in accordance with Financial Accounting Standard Board (“FASB”)issued Statement No. 148 (“SFAS 148”), *“Accountingfor Stock-Based Compensation—Transition and Disclosure—an amendment of FASBStatement No. 123”* and FASB issued Statement No. 123(“SFAS 123”), *“Accounting for Stock-BasedCompensation.”*   The Companyhas elected to continue to account for its stock-based plans under AccountingPrinciples Board Opinion No. 25, *“Accountingfor Stock Issued to Employees,”*as well as to provide disclosure ofstock-based compensation as outlined in SFAS 123, as amended by SFAS 148. Nocompensation expense has been recognized related to the Company’s stock-basedplans.

39

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**THE J. JILL GROUP, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In December 2004, the FASB issued StatementNo. 123R (“SFAS 123R”), *“Share-BasedPayment*,*”*a revisionof SFAS 123. As a result, the pro forma disclosures previously permitted underSFAS 123 will no longer be an alternative to financial statement recognition.The Company is required to adopt SFAS 123R in the first quarter of 2006. See“Recent accounting standards.” In April 2005, the Securities and ExchangeCommission (“SEC”) announced the adoption of a new rule that amended thecompliance date for SFAS 123R. The SEC’s rule requires companies toimplement SFAS 123R by the beginning of the first fiscal year beginning afterJune 15, 2005. Accordingly, the Company intends to adopt SFAS 123R in thefirst quarter of 2006. The Company is currently evaluating the provisions ofSFAS 123R. The adoption of this standard is expected to have a material effecton the Company’s consolidated financial statements; however, based on theCompany’s current projections, the Company expects the compensation expense tobe recognized in 2006 as a result of the adoption of SFAS 123R to besignificantly less than the pro forma amounts historically disclosed in thenotes to its consolidated financial statements. Many of the stock options thatwill be outstanding as of the first quarter of 2006 will be fully vested atthat time and accordingly, will not result in compensation expense goingforward.

At December 31, 2005, the Company had threestock-based plans: the Amended and Restated 2001 Incentive and Non-StatutoryStock Option Plan (the “2001 Stock Option Plan”), the Amended and Restated 1993Incentive and Nonqualified Stock Option Plan (the “1993 Stock Option Plan”)together (the “stock option plans”) and the Second Amended and Restated 1998Employee Stock Purchase Plan (the “Employee Stock Purchase Plan”).

TheCompany uses the Black-Scholes option pricing model to estimate the fair valueat the date of grant of stock options granted under the stock option plans andstock purchase rights associated with the Employee Stock Purchase Plan. Asummary of the assumptions used for stock option grants and stock purchaseright grants follows:
|                                    | ** ** | **Twelve Months Ended** | ** **             |
|------------------------------------|------------|-----------------------------------|------------------------|
| ** **                         | ** ** | **December 31,**             | ** **             | **December 25,** | ** ** | **December 27,** | ** ** |
| ** **                         | ** ** | **2005**                          | ** **             | **2004** | ** ** | **2003** | ** ** |
| **Stock option plans:**            |       |                              |                   |   |   |   |   |   |   |   |   |   |   |
| Dividend yield                     |       |                              | 0.0                    | % |   |   | 0.0 | % |   |   | 0.0 | % |   |
| Expected volatility                |       |                              | 51.4                   | % |   |   | 61.5 | % |   |   | 75.0 | % |   |
| Risk free interest rate            |       |                              | 3.8                    | % |   |   | 3.0 | % |   |   | 2.1 | % |   |
| Expected lives                     |       |                              | 2.7 years    | (1) |   |   | 3.3 years |   |   |   | 3.9 years |   |   |
| **Employee  Stock Purchase Plan:** |       |                              |                   |   |   |   |   |   |   |   |   |   |   |
| Dividend yield                     |       |                              | 0.0                    | % |   |   | 0.0 | % |   |   | 0.0 | % |   |
| Expected volatility                |       |                              | 49.0                   | % |   |   | 50.0 | % |   |   | 75.0 | % |   |
| Risk free interest rate            |       |                              | 2.8                    | % |   |   | 1.0 | % |   |   | 1.3 | % |   |
| Expected lives                     |       |                              | 1.0 year               |   |   |   | 1.0 year |   |   |   | 1.0 year |   |   |

 

(1)          Certain stock optiongrants during fiscal 2005 were vested in full at the time of grant, whichdecreases the assumption with respect to the expected life of those grants.

40

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**THE J. JILL GROUP, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

A reconciliation of netincome, as reported in the consolidated statements of operations, to pro formanet income including compensation expense, net of tax, for the Company’sstock-based plans as calculated in accordance with the provisions of SFAS 123,as amended by SFAS 148, as well as a comparison of as reported and pro formabasic and diluted earnings per share (“EPS”) follows (in thousands, except pershare data):

| ** **                                           | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **December 31,**             | ** ** | **December 25,** | ** ** | **December 27,** | ** ** |
| ** **                                           | ** ** | **2005 (1)**                 | ** ** | **2004 (2)** | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(53 weeks)**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income (loss):**                               |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| As reported                                          |       |                              | $          | 1,514 |   |   |   | $ | 8,706 |   |   |   | $ | 7,025 |   |   |
| Compensation expense, net of related tax benefit (3) |       |                              | (3,316     | ) |   |   | (6,500 | ) |   |   | (5,117 | ) |   |
| Pro forma (4)                                        |       |                              | $          | (1,802 | ) |   |   | $ | 2,206 |   |   |   | $ | 1,908 |   |   |
| **Earnings  (loss) per share:**                      |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| *Basic*                                              |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| As reported                                          |       |                              | $          | 0.07 |   |   |   | $ | 0.43 |   |   |   | $ | 0.36 |   |   |
| Pro forma (4)                                        |       |                              | (0.09      | ) |   |   | 0.11 |   |   |   | 0.10 |   |   |
| *Diluted*                                            |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| As reported                                          |       |                              | 0.07       |   |   |   | 0.42 |   |   |   | 0.35 |   |   |
| Pro forma (4)                                        |       |                              | $          | (0.09 | ) |   |   | $ | 0.11 |   |   |   | $ | 0.10 |   |   |

 

(1)          In June 2005, theCompany granted 200,000 stock options to certain members of management thatwere vested in full at the time of grant. These grants were given in lieu ofannual salary increases.

(2)          In December 2004,the Company granted 270,000 stock options to certain members of management inexchange for their entering into agreements regarding the protection of theCompany’s property. These agreements include provisions relating to theprotection of confidential information and intellectual property and covenantsnot to compete with the Company or solicit the Company’s employees. Theseoptions were vested in full at the time of grant.

(3)          Compensation expense isnet of a related tax benefit of $1,323,000, $3,825,000 and $2,775,000 forfiscal 2005, fiscal 2004 and fiscal 2003, respectively.

(4)          All pro formadisclosures include the effects of all options granted after June 24,1995.

The effects on pro forma net income (loss) and proforma EPS of the estimated stock-based compensation expense, net of tax,calculated using the fair value of stock options and stock purchase rights inaccordance with the Black-Scholes option pricing model for fiscal 2005, fiscal2004 and fiscal 2003 are not necessarily representative of the effects on theCompany’s results of operations in the future. In addition, the compensationexpense estimates utilize an option pricing model developed for traded optionswith relatively short lives. The Company’s stock option grants typically have acontractual life of up to ten years and are not transferable. Therefore, theactual fair value of a stock option grant may be different from the Company’sestimates. The Company believes that its estimates incorporate all relevantinformation and represent a reasonable approximation in light of thedifficulties involved in valuing non-traded stock options.

41

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**THE J. JILL GROUP, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Asummary of the weighted average fair value of stock option grants and theaverage fair value of stock purchase right grants follows:

| ** **                                 | ** ** | **Twelve Months Ended** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|
| ** **                                 | ** ** | **December 31,**             | ** ** | **December 25,** | ** ** | **December 27,** | ** ** |
| ** **                                 | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Fair value of  stock option grants         |       |                              | $          | 5.04 |   |   |   | $ | 7.89 |   |   |   | $ | 8.38 |   |   |
| Fair value of stock  purchase right grants |       |                              | $          | 4.21 |   |   |   | $ | 4.22 |   |   |   | $ | 5.66 |   |   |

 

***Revenue recognition***

The Company recognizessales and the related cost of products at the time the products are received bycustomers. The Company’s customers may return purchased items for an exchangeor refund. The Company provides a returns allowance based on projectedmerchandise returns, taking into consideration historical experience and otherfactors. The returns allowance is recorded as a reduction to net sales for theestimated retail value of the projected merchandise returns and as a reductionto cost of products for the corresponding cost amount. From time to time, theCompany offers marketing promotions that may involve multiple purchases by thecustomer whereby, as a result of their first purchase, the customer receives acoupon for a specified discount on their next purchase. In these cases, revenueis deferred at the time of the first purchase for the estimated discount amountand recognized when the second purchase is made or the promotional period ends.Shipping and processing fees charged to the customer are recognized at the timethe products are received by the customer and are included in net sales. Thecost of shipping and processing customer orders is recognized at the time theproducts are received by the customer and is included in cost of products andmerchandising. Sales taxes are excluded from net sales.

***Pre-opening costs***

Pre-opening costs for theCompany’s new stores include costs incurred prior to store opening includingpayroll and training costs and rent expense. Pre-opening costs mainlyassociated with payroll and training are expensed as incurred and included inselling, general and administrative expenses. These costs totaled $2,029,000,$1,458,000 and $1,546,000 during fiscal 2005, fiscal 2004 and fiscal 2003,respectively. Pre-opening rent expense is included in cost of products andmerchandising and totaled $752,000, $493,000 and $692,000 during fiscal 2005,fiscal 2004 and fiscal 2003, respectively.

***Selling expenses***

Selling expenses consistprimarily of the costs to produce, print and distribute catalogs (“catalogcosts”), retail store selling and administrative costs (primarily salaries andbenefits) and other marketing department costs. Costs associated with theCompany’s website are also included in selling expenses. Catalog costs in thedirect segment are considered direct response advertising and as such arecapitalized as incurred and amortized over the expected sales life of eachcatalog, which is generally a period not exceeding six months.****Creative and production costs associatedwith the Company’s website are also considered direct response advertising andas such are capitalized as incurred and amortized over the applicable sellingseason, which is generally a period not exceeding six months.****Catalog costs in the retail segment areconsidered advertising and as such are expensed as incurred.  Advertising expense, excluding catalog costsfor the direct segment and in-store visual presentation and signage costs,totaled $8,833,000, $5,976,000 and $1,726,000 during fiscal 2005, fiscal 2004and fiscal 2003, respectively.

42

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**THE J. JILL GROUP, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Advertising arrangements***

The Company periodicallyenters into arrangements with certain national magazine publishers whereby theCompany includes magazine subscription cards in its catalog mailings inexchange for advertising credits or discounts on advertising. The arrangementsvary by publisher. The advertising credits recorded by the Company related tothese arrangements were $2,336,000, $849,000 and $500,000 during fiscal 2005,fiscal 2004 and fiscal 2003, respectively, and are included as a reduction toselling expenses. The other arrangements provide discounts on advertisingresulting in lower advertising costs. At December 31, 2005 and December 25,2004, the net accrued credits receivable related to these arrangements was$534,000 and $21,000, respectively.

***Use of estimates***

The preparation offinancial statements in conformity with generally accepted accountingprinciples (“GAAP”) requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the applicable balance sheetand the reported amounts of revenues and expenses during the applicablereporting period. The Company’s significant estimates include those associatedwith cumulative write-downs associated with inventory markdowns, reserves forexpected customer returns, catalog costs, valuation allowances related todeferred tax assets and write-downs associated with long-lived assetimpairments. Actual results could differ from estimates made by management.

***Risks and uncertainties***

The Company has evaluated its operations to determinewhether any risks and uncertainties exist that could severely impact itsoperations in the near term. The potential near term risks that the Companyidentified include, but are not limited to, the following: the Company’sability to produce a merchandise assortment that has broad customer appeal; theCompany’s ability to successfully grow its retail business while, at the sametime, stabilizing and improving its direct segment’s performance; the Company’sability to build brand awareness and the effectiveness of its brand developmentand marketing programs; the Company’s ability to respond to changes in customerdemands and fashion trends in a timely manner; the customary risks associatedwith purchasing inventory abroad including any event causing a disruption inmanufacturing or imports from the countries from which the Company currentlysources goods, or the imposition of additional import restrictions(particularly with respect to China); the Company’s reliance on itsrelationship with two foreign buying agents; changes in competition in thewomen’s apparel industry;  the potentialfor fixed asset impairments resulting from underperforming long-lived assets;the ability of the Company to have sufficient liquidity to meet its future operatinglease and other cash flow obligations; and changes in, or the failure to complywith, federal and state tax and other government regulations.

The Company’s financial instruments, which potentiallysubject the Company to interest rate and credit risks, consist principally ofcash and marketable securities investments. The Company maintains cash, cashequivalents and marketable securities with various financial institutions. Changesin interest rates may affect the Company’s operating results. The Companycurrently invests in highly liquid, interest bearing instruments, primarilymunicipal debt securities. The Company’s investments include securities with aminimum credit rating of A1 by Moody’s and A+ by Standard and Poor and noindividual investment in the portfolio, except investments in U.S. Treasury andfederal agency securities, is greater than 10% of the total portfolio, sopotential losses on individual securities is minimized. The Company’sinvestment policy limits interest rate risk by requiring the investmentportfolio to be structured such that 

43

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**THE J. JILL GROUP, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

securities mature to meetcash requirements for ongoing operations, thereby avoiding the need to sellsecurities on the open market prior to maturity. In addition, operating fundsare invested primarily in shorter-term securities, money market mutual funds,or similar investment pools.

The Company sells both domestically produced andimported merchandise. The Company places significant reliance on itsrelationship with two foreign buying agents. The Company believes that thisconcentration risk is mitigated by the fact that these buying agents purchasethe Company’s inventory directly from a variety of foreign vendors. Duringfiscal 2005 and fiscal 2004, the Company did not purchase more than 10% of itsinventory directly from any one vendor. However, it did purchase approximately80% and 73% of its imported inventory through these two buying agents duringfiscal 2005 and fiscal 2004, respectively. Although the Company could purchasethis inventory through alternative buying agents or directly from vendors, lossof these buying agents could disrupt the Company’s operations.

Approximately 86% and 78%of the merchandise received in fiscal 2005 and fiscal 2004, respectively, waspurchased directly from foreign sources, primarily located in China. Inaddition, goods purchased from domestic vendors are often sourced abroad bysuch vendors. The Company believes that its combined foreign purchases,including direct purchases and indirect purchases through domestic vendors,totaled roughly 97% and 92% of its total purchases during fiscal 2005 andfiscal 2004, respectively.

***Statement of operations classifications***

Cost of products andmerchandising consists primarily of product costs (e.g., product development,sourcing, merchandising, inventory control and inventory acquisition costs andinventory markdowns) and operating costs (e.g., occupancy and depreciationcosts for the Company’s retail stores, order processing costs and distributionfacility costs). Selling, general and administrative expenses consist primarilyof retail store selling costs, costs to produce, print and distribute catalogs,and website and corporate administrative costs.

***Reclassifications***

Certain amounts in the prior year financial statementsand related notes have been reclassified to conform to the fiscal 2005presentation.

44

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Recent accounting standards***

In October 2005, the FASB issued Staff Position No. FAS13-1 (“FSP FAS 13-1), “*Accountingfor Rental Costs Incurred during a Construction Period,”*a positionon FASB issued Statement No. 13, “*Accountingfor Leases*.”  FSP FAS 13-1clarifies that rental costs associated with a ground or building operatinglease that are incurred during a construction period shall be recognized asrental expense and these rental costs should be included in income fromcontinuing operations during the construction period. FSP FAS 13-1 iseffective for the first reporting period beginning after December 15,2005. The application of this position is not expected to have a materialimpact on the Company’s consolidated financial statements.

In May 2005, the FASB issued Statement No. 154(“SFAS 154”), “*Accounting Changes and ErrorCorrections*,” a replacement of APB Opinion No. 20, “*Accounting Changes,*” and FASB issuedStatement No. 3, “*Reporting AccountingChanges in Interim Financial Statements.”*  SFAS 154 requires retrospective applicationto prior period financial statements of changes in accounting principle, unlessit is impracticable to determine either the period-specific effects or thecumulative effect of the change.  Thisstatement requires that retrospective application of a change in accountingprinciple be limited to the direct effects of a change. SFAS 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005.

In March 2005, the FASB issued Interpretation No. 47(“FIN 47”), *“Accounting for ConditionalAsset Retirement Obligations,”* an interpretation of FASB issuedStatement No. 143, *“Accounting forAsset Retirement Obligations.” *FIN47 states that a conditional asset retirement obligation is a legal obligationto perform an asset retirement activity in which the timing or method ofsettlement are conditional on a future event that may or may not be within thecontrol of the entity. FIN 47 is effective no later than the end of fiscal yearsending after December 15, 2005. Retrospective application for interimfinancial information is permitted but is not required. The adoption of thisinterpretation did not have a material impact on the Company’s consolidatedfinancial statements.

In November 2004, theFASB issued Statement No. 151 (“SFAS 151”), “*Inventory Costs*.” SFAS 151 amends the guidance in AccountingResearch Bulletin No. 43, “*InventoryPricing*,” to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material (spoilage). SFAS151 requires that those items be recognized as current-period charges and thatthe allocation of fixed production overhead to the cost of converting work inprocess to finished goods be based on the normal capacity of the productionfacilities. This statement is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. The adoption of this statementis not expected to have a material impact on the Company’s consolidatedfinancial statements.

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**C.   Property and equipment:**

Asummary of property and equipment follows (in thousands):

| ** **                                      | ** ** | **December 31,** | ** ** | **December 25,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Land and building                               |       |                  | $          | 29,447                |       |   |   | $ | 29,358 |   |   |
| Equipment                                       |       |                  | 41,792     |                  |       |   | 35,740 |   |   |
| Furniture,  fixtures and leasehold improvements |       |                  | 163,926    |                  |       |   | 136,112 |   |   |
| Construction in  progress                       |       |                  | 4,076      |                  |       |   | 2,286 |   |   |
| Total property and equipment                    |       |                  | 239,241    |                  |       |   | 203,496 |   |   |
| Less accumulated  depreciation and amortization |       |                  | (91,141    | )                     |       |   | (69,524 | ) |   |
| Property and  equipment, net                    |       |                  | $          | 148,100               |       |   |   | $ | 133,972 |   |   |

 

Constructionin progress is primarily comprised of furniture, fixtures and equipment relatedto unopened retail stores and costs incurred related to the implementation ofcertain systems. The net book value of capitalized software included inproperty and equipment totaled $3,746,000 and $1,197,000 at December 31,2005 and December 25, 2004, respectively. The Company incurreddepreciation expense of $854,000, $773,000 and $801,000 related to capitalizedsoftware during fiscal 2005, fiscal 2004 and fiscal 2003, respectively.

**D.   Accrued expenses:**

Asummary of the significant components of accrued expenses follows (inthousands):

| ** **              | ** ** | **December 31,** | ** ** | **December 25,** | ** ** |
|-------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Gift certificates       |       |                  | $          | 7,053                 |       |   |   | $ | 6,108 |   |   |
| Deferred  compensation  |       |                  | 5,060      |                  |       |   | 3,845 |   |   |
| Employee-related        |       |                  | 4,729      |                  |       |   | 3,302 |   |   |
| Taxes                   |       |                  | 4,030      |                  |       |   | 2,905 |   |   |
| Other (1)               |       |                  | 11,297     |                  |       |   | 10,998 |   |   |
| Total accrued  expenses |       |                  | $          | 32,169                |       |   |   | $ | 27,158 |   |   |

 

(1)          Otherconsists primarily of amounts accrued for professional fees, insurance andcustomer refunds in process, which are individually less than 5% of currentliabilities.

**E.   Debt:**

The Company’s credit facilities at December 31,2005 consisted of (i) a $70,000,000 revolving credit facility (the “RevolvingCredit Facility”); (ii) a real estate loan (the “Tilton Facility Loan”);and (iii) an equipment loan (the “Equipment Loan”).

46

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Asummary of outstanding long-term debt follows (in thousands):

| ** **                            | ** ** | **December 31,** | ** ** | **December 25,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Tilton Facility  Loan                 |       |                  | $          | 9,825                 |       |   |   | $ | 10,224 |   |   |
| Equipment Loan                        |       |                  | 606        |                  |       |   | 2,012 |   |   |
| Total long-term debt                  |       |                  | 10,431     |                  |       |   | 12,236 |   |   |
| Less current  maturities              |       |                  | (1,036     | )                     |       |   | (1,805 | ) |   |
| Long-term debt,  less current portion |       |                  | $          | 9,395                 |       |   |   | $ | 10,431 |   |   |

 

At December 31,2005, the aggregate principal amounts of long-term debt maturing in the nextfour fiscal years were as follows (in thousands):

| Fiscal 2006 |   | $     | 1,036  |   |
|-------------|--------|-------|--------|--------|
| Fiscal 2007 |   | 463   |   |
| Fiscal 2008 |   | 496   |   |
| Fiscal 2009 |   | 8,436 |   |
| Total       |   | $     | 10,431 |   |

 

On December 30, 2005, the Company amended theRevolving Credit Facility primarily to increase the total amount available to$70,000,000, extend its termination date to June 1, 2007, modify certainlending conditions and covenants and add a change of control as an event ofdefault. The amount available under the Revolving Credit Facility is reduced byoutstanding borrowings and outstanding letters of credit. Outstanding borrowingsmay not exceed $20,000,000. Letters of credit are primarily used to procureinventory from foreign vendors. The Revolving Credit Facility is collateralizedby substantially all of the personal property, both tangible and intangible, ofthe Company. Outstanding borrowings bear interest at an annual rate equal tothe prime lending rate announced by one of the participating banks or the LIBORlending rate plus 1.75% per annum. At December 31, 2005, the RevolvingCredit Facility bore interest at 7.25% per annum. There were no outstandingborrowings on the Revolving Credit Facility at December 31, 2005 or December 25,2004. Outstanding letters of credit totaled $33,816,000 and $40,647,000 at December 31,2005 and December 25, 2004, respectively. Availability under the RevolvingCredit Facility at December 31, 2005 and December 25, 2004 was$36,184,000 and $19,353,000, respectively, subject in each case to theborrowing cap. Outstanding letters of credit do not bear interest. The Companyis required to pay a commitment fee of 1⁄4 of 1% per annum on the unused portionof the Revolving Credit Facility.

The Tilton Facility Loan is collateralized by amortgage lien on the Tilton facility. The Tilton facility is owned by BirchPond Realty Corporation, a wholly owned subsidiary of The J. Jill Group, Inc.,and leased to The J. Jill Group, Inc. Payments of principal and intereston the Tilton Facility Loan, a 10-year loan, are due monthly, based on a20-year amortization, with a balloon payment of the remaining balancepayable on April 1, 2009. The interest rate on the Tilton Facility Loan isfixed at 7.30% per annum.

The Equipment Loan is collateralized by substantiallyall of the Company’s materials handling equipment. The maturity date of theEquipment Loan is May 1, 2006 and payments of principal and interest aredue monthly. The interest rate on the Equipment Loan is fixed at 5.00% perannum.

47

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The Company’s credit facilities contain variouslending conditions and covenants including restrictions on permitted liens. Inthe case of the Revolving Credit Facility, these conditions and covenantsinclude certain financial coverage calculations and ratios, including (i) indebtednessand outstanding letter of credit balance to tangible net worth; (ii) hardcurrent assets to current liabilities; (iii) debt service coverage; (iv) indebtedness,outstanding letter of credit balance and net present value of operating leasesto tangible net worth; and (v) minimum annual net profit or net loss. Aspart of the amendment dated December 30, 2005, the minimum annual netprofit covenant was amended to permit a net loss after tax benefit of up to$2,000,000 for the fiscal year ending December 31, 2005. Thereafter, thecovenant requires a minimum annual net profit after tax of one dollar. Additionally,the amendment modified certain other lending conditions and covenants includingthe covenant relating to the ratio of indebtedness, outstanding letter ofcredit balance and net present value of operating leases to tangible net worth.These modifications are effective for the calculation for the year ended December 31,2005. The manner of making these calculations and computing these ratios isdefined by the provisions of the Fifth Amended and Restated Loan Agreement, asamended, which is part of the Revolving Credit Facility. The Company was incompliance with the covenants associated with its credit facilities as of andfor the fiscal years ended December 31, 2005, December 25, 2004 and December 27,2003.

Theweighted average interest rate for amounts outstanding under the Company’scredit facilities during fiscal 2005, fiscal 2004 and fiscal 2003 was 7.04%,6.83% and 7.01% per annum, respectively.

**F.   Stockholders’ equity:**

***Common stock***

The Company has 30,000,000shares of common stock, $0.01 par value per share, authorized.

***Special preferred stock***

The Company has 1,000,000shares of special preferred stock, $0.01 par value per share, authorized. TheCompany’s Board of Directors has discretion to determine the rights andpreferences of the special preferred stock. No special preferred stock wasoutstanding at December 31, 2005 or December 25, 2004.

48

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Earnings per share***

Areconciliation of the numerators and denominators of the basic and diluted EPScomputations follows (in thousands, except per share data):

| ** **                                                                            | ** ** | **Twelve Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                            | ** ** | **December 31,**             | ** ** | **December 25,** | ** ** | **December 27,** | ** ** |
| ** **                                                                            | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                            | ** ** | **(53 weeks)**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Numerator:**                                                                        |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                            |       |                              | $          | 1,514 |   |   |   | $ | 8,706 |   |   |   | $ | 7,025 |   |   |
| **Denominator  (shares):**                                                            |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Basic weighted average shares outstanding                                             |       |                              | 20,241     |   |   |   | 20,019 |   |   |   | 19,585 |   |   |
| Assumed issuance of shares under stock option plans and  Employee Stock Purchase Plan |       |                              | 295        |   |   |   | 527 |   |   |   | 475 |   |   |
| Diluted weighted average shares outstanding                                           |       |                              | 20,536     |   |   |   | 20,546 |   |   |   | 20,060 |   |   |
| **Earnings  per share:**                                                              |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| *Basic*                                                                               |       |                              | $          | 0.07 |   |   |   | $ | 0.43 |   |   |   | $ | 0.36 |   |   |
| *Diluted*                                                                             |       |                              | $          | 0.07 |   |   |   | $ | 0.42 |   |   |   | $ | 0.35 |   |   |

 

Of theoptions outstanding at the end of fiscal 2005, fiscal 2004 and fiscal 2003,options to purchase 1,872,350, 1,558,000 and****1,886,000shares of common stock, respectively, were excluded from the computation ofdiluted EPS on the basis that such options were antidilutive.

**G.   Stock-based plans:**

***Stock option plans***

The Company’s option plans authorize (i) thegrant of options to purchase common stock intended to qualify as incentivestock options as defined in Section 422 of the Internal Revenue Code of1986, as amended, and (ii) the grant of options that do not so qualify. AtDecember 31, 2005, the 1993 Stock Option Plan and the 2001 Stock OptionPlan authorized the issuance of options to purchase up to 3,600,000 and3,250,000 shares of common stock, respectively. The Compensation Committee ofthe Board of Directors administers the option plans and, within certain limits,has discretion to determine the terms and conditions of options granted underthe option plans. The 2001 Stock Option Plan provides for the automatic grantof options to purchase a specified number of shares to directors who are notemployees (“Non-employee Directors”). Options granted to Non-employee Directorsare typically vested in full at the time of grant. The maximum term of optionsgranted under the option plans are ten years. Options granted to employeestypically vest over a period of three years. No additional options may begranted under the 1993 Stock Option Plan. The 2001 Stock Option Plan had 40,009shares available for issuance as of December 31, 2005.

49

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Asummary of the number of shares of common stock for which outstanding optionswere exercisable under each of the option plans follows:

| ** **              | ** ** | **1993 Stock Option Plan** | ** ** | **2001 Stock Option Plan** | ** ** |
|-------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **              | ** ** | **Number**                                | ** ** | **Wtd. Avg.**                        | ** ** | **Number** | ** ** | **Wtd. Avg.** | ** ** |
| ** **              | ** ** | **Exercisable**                           | ** ** | **Exercise Price**                   | ** ** | **Exercisable** | ** ** | **Exercise Price** | ** ** |
| December 31,  2005 |       |                                      | 348,211    |                                      |       |   | $ | 8.81 |   |   | 2,651,358 |   |   | $ | 16.94 |   |   |
| December 25,  2004 |       |                                      | 498,890    |                                      |       |   | $ | 9.03 |   |   | 1,979,292 |   |   | $ | 16.62 |   |   |
| December 27, 2003  |       |                                      | 807,403    |                                      |       |   | $ | 7.91 |   |   | 1,004,775 |   |   | $ | 14.72 |   |   |

 

Asummary of the activity related to the shares of common stock covered byoutstanding options under each of the option plans follows:

| ** **                         | ** ** | **1993 Stock Option Plan** | ** ** | **2001 Stock Option Plan** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | ** **                                | ** ** | **Exercise**                              | ** ** | **Wtd. Avg.** | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Wtd. Avg.** | ** ** |
| ** **                         | ** ** | **Number**                                | ** ** | **Price**                                 | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Price** | ** ** | **Exercise** | ** ** |
| ** **                         | ** ** | **of Shares**                        | ** ** | **Per Share**                        | ** ** | **Price** | ** ** | **of Shares** | ** ** | **Per Share** | ** ** | **Price** | ** ** |
| Balance at  December 28, 2002 |       | 920,946                                   |       | $                                         | 1.39-14.23 |   |   | $ | 7.41 |   |   | 2,163,550 |   | $ | 7.15-24.16 |   |   | $ | 16.82 |   |   |
| Granted                            |       | 18,775                                    |       | 12.75-15.34                               |       |   | 15.14 |   |   | 436,725 |   | 12.12-16.68 |   |   | 15.08 |   |   |
| Exercised                          |       | (91,401                                   | )          | 1.39-7.15                                 |       |   | 2.32 |   |   | (40,500 | ) | 7.15 |   |   | 7.15 |   |   |
| Canceled                           |       | (2,000                                    | )          | 7.15-15.26                                |       |   | 11.21 |   |   | (181,000 | ) | 7.15-22.30 |   |   | 18.39 |   |   |
| Balance at  December 27, 2003 |       | 846,320                                   |       | 2.71-15.34                                |       |   | 8.12 |   |   | 2,378,775 |   | 7.15-24.16 |   |   | 16.55 |   |   |
| Granted                            |       | —                                    |       | —                                    |       |   | — |   |   | 737,000 |   | 13.45-24.36 |   |   | 17.49 |   |   |
| Exercised                          |       | (327,908                                  | )          | 2.71-14.23                                |       |   | 6.40 |   |   | (87,316 | ) | 7.15-15.26 |   |   | 7.46 |   |   |
| Canceled                           |       | (2,000                                    | )          | 12.75-15.34                               |       |   | 14.05 |   |   | (45,334 | ) | 7.15-15.51 |   |   | 12.60 |   |   |
| Balance at  December 25, 2004 |       | 516,412                                   |       | 2.71-15.34                                |       |   | 9.19 |   |   | 2,983,125 |   | 7.15-24.36 |   |   | 17.11 |   |   |
| Granted                            |       | —                                    |       | —                                    |       |   | — |   |   | 330,500 |   | 12.39-16.71 |   |   | 14.22 |   |   |
| Exercised                          |       | (116,250                                  | )          | 7.63-13.08                                |       |   | 8.15 |   |   | (61,500 | ) | 7.15 |   |   | 7.15 |   |   |
| Canceled                           |       | (47,275                                   | )          | 13.89-15.34                               |       |   | 13.95 |   |   | (237,225 | ) | 12.12-24.36 |   |   | 19.50 |   |   |
| Balance at  December 31, 2005 |       | 352,887                                   |       | $                                         | 2.71-15.34 |   |   | $ | 8.90 |   |   | 3,014,900 |   | $ | 7.15-24.36 |   |   | $ | 16.80 |   |   |

 

Asummary of information about the shares of common stock covered by outstandingand exercisable options under the option plans at December 31, 2005follows:

|                      | ** ** | **Outstanding**    | ** ** | **Exercisable**           | ** ** |
|----------------------|------------|--------------------|------------|---------------------------|------------|
| **Range**            | ** ** | ** **         | ** ** | **Wtd. Avg.**        | ** ** | **Wtd. Avg.** | ** ** | ** ** | ** ** | **Wtd. Avg.** | ** ** |
| **of Exercise** | ** ** | **Number**         | ** ** | **Remaining**             | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Prices**           | ** ** | **of Shares** | ** ** | **Contractual Life** | ** ** | **Price** | ** ** | **of Shares** | ** ** | **Price** | ** ** |
| $2.71-4.00           |       | 38,000             |       |                      | 1.3 years  |   |   |   | $ | 3.50 |   |   | 38,000 |   |   | $ | 3.50 |   |   |
| 7.15-9.32            |       | 538,948            |       |                      | 4.4 years  |   |   |   | 7.34 |   |   | 538,948 |   |   | 7.34 |   |   |
| 10.75-14.73          |       | 918,489            |       |                      | 7.0 years  |   |   |   | 13.72 |   |   | 824,818 |   |   | 13.83 |   |   |
| 15.26-19.48          |       | 821,850            |       |                      | 8.2 years  |   |   |   | 16.37 |   |   | 584,642 |   |   | 16.54 |   |   |
| $20.27-24.36         |       | 1,050,500          |       |                      | 6.7 years  |   |   |   | 22.53 |   |   | 1,013,161 |   |   | 22.53 |   |   |
|                 |       | 3,367,787          |       |                      | 6.7 years  |   |   |   | $ | 15.98 |   |   | 2,999,569 |   |   | $ | 16.00 |   |   |

 

**Alloutstanding options under the option plans will be cancelled as of theeffective time of the proposed merger with The Talbots, Inc. (“Talbots”).See “Note N.”**

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

***Stock purchase plan***

Under the Company’s Employee Stock Purchase Plan,eligible employees may be granted the opportunity to purchase common stock ofthe Company at 85% of market value on the first or last business day of thecalendar year, whichever is lower. In connection with the proposed merger withTalbots, the offering termination date for the current offering period underthe Employee Stock Purchase Plan was changed to, and the Employee StockPurchase Plan will terminate on, the end date of the Company’s pay periodduring which the proxy statement for the special meeting of stockholdersrelating to the merger is mailed. See “Note N.” See the consolidated statement of changes in stockholders’ equity foractivity under the Employee Stock Purchase Plan. At December 31, 2005, theEmployee Stock Purchase Plan authorized the issuance of options to purchase upto 600,000 shares of the Company’s common stock to eligible employees, of which243,996 shares were available for issuance.

**H.   Benefitplans:**

The Company offers asavings plan (the “401(k) Plan”) to its employees, which permitsparticipants to make contributions by salary reduction pursuant to Section 401(k) ofthe Internal Revenue Code. At the discretion of the Board of Directors, theCompany may also make contributions for the benefit of all eligible employeesunder the 401(k) Plan. Employee eligibility is based on minimum age andemployment requirements. Employees are not able to invest in Company stock inthe 401(k) Plan. The Company contributed $727,000, $598,000 and $530,000to the 401(k) Plan for fiscal 2005, fiscal 2004 and fiscal 2003,respectively.

**I.   Deferred compensation:**

Effective January 1,2002, the Company established an unfunded deferred compensation plan (the “2002DCP”) to provide benefits for management and members of the Board of Directors.Effective January 1, 2005, the Company established a second deferredcompensation plan (the “2005 DCP”) that incorporated the requirements ondeferred compensation imposed by new Internal Revenue Code Section 409A.The 2002 DCP and the 2005 DCP together are referred to hereafter as the “Plans.”  The Plans provide for (i) electivedeferrals of salary, incentive compensation and board member fees on a pre-taxbasis within limits specified by the Plans (“compensation deferrals”), (ii) discretionarycontributions by the Company (“discretionary contributions”), which may be madesubject to vesting requirements, and (iii) certain other contributions bythe Company to be made in connection with the Company’s annual discretionarymatch for its 401(k) Plan, if any (“other contributions”). Participants inthe Plans are required to designate how they would like their compensationdeferrals, discretionary contributions and other contributions to be measuredbased on the various measurement options provided by the Plans. Accrueddeferred compensation payable at December 31, 2005 and December 25,2004 was $5,060,000 and $3,845,000, respectively, and is included in accruedexpenses. The deferred compensation payable includes only vested balances. Allunvested discretionary contributions under the Plan will vest in full as of theeffective time of the proposed merger with Talbots. See “Note N.”

Separately, the Company,at its discretion, transferred $1,356,000 and $1,099,000 during fiscal 2005 andfiscal 2004, respectively, to a trust. The trust assets at December 31,2005 and December 25, 2004 were $6,444,000 and $4,741,000, respectively,net of investment gains and losses and various fees and expenses. The trustassets are invested in corporate owned life insurance in a manner that isdesigned to approximate the measurement designations of the participants in thePlans, for both vested and unvested balances. Investments are exposed tovarious risks, such as interest rate, market and credit risks. Due to the levelof 

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

riskassociated with certain investments, it is at least reasonably possible thatchanges in the values of these investments will occur in the near term and thatsuch changes will also impact participant deferred compensation balances basedon the measurement designations made by the participants in the Plans. Changesin value of the trust assets are intended to mirror changes in the value of theparticipants’ deferred compensation accounts. The trust assets are included inother non-current assets.

**J.   Income taxes:**

The Company recognizes its deferred tax assets andliabilities based on the temporary differences between the financial statementbasis and tax basis of its assets and liabilities using tax rates enacted to bein effect in the years in which the differences are expected to reverse. TheCompany’s net deferred tax assets are fully recognized to the extent that theCompany believes that it is more likely than not that such net deferred taxassets will be realized. To the extent that the Company believes that its netdeferred tax assets will not be realized, the Company provides a valuationallowance against those assets.

Asummary of the significant components of deferred tax assets and liabilitiesfollows (in thousands):

| ** **                                          | ** ** | **December 31,  2005** | ** ** | **December 25,  2004** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Deferred tax assets:**                            |       |                        |       |                        |       |   |   |   |   |
| Current:                                            |       |                        |       |                        |       |   |   |   |   |
| Net operating losses                                |       |                        | $          | 335                         |       |   |   | $ | 554 |   |   |
| Inventory                                           |       |                        | 4,328      |                        |       |   | 3,896 |   |   |
| Reserve for customer  returns                       |       |                        | 2,615      |                        |       |   | 2,988 |   |   |
| Deferred compensation                               |       |                        | 2,018      |                        |       |   | 1,533 |   |   |
| Other                                               |       |                        | 2,342      |                        |       |   | 1,964 |   |   |
| Total current deferred  tax assets                  |       |                        | 11,638     |                        |       |   | 10,935 |   |   |
| Non-current:                                        |       |                        |       |                        |       |   |   |   |   |
| Net operating losses                                |       |                        | 260        |                        |       |   | 451 |   |   |
| Deferred credits from  landlords                    |       |                        | —     |                        |       |   | 20 |   |   |
| Other                                               |       |                        | 50         |                        |       |   | — |   |   |
| Total non-current  deferred tax assets              |       |                        | 310        |                        |       |   | 471 |   |   |
| Total deferred tax  assets                          |       |                        | 11,948     |                        |       |   | 11,406 |   |   |
| **Deferred  tax liabilities:**                      |       |                        |       |                        |       |   |   |   |   |
| Current:                                            |       |                        |       |                        |       |   |   |   |   |
| Prepaid catalogs                                    |       |                        | 1,326      |                        |       |   | 1,174 |   |   |
| Non-current:                                        |       |                        |       |                        |       |   |   |   |   |
| Property and equipment                              |       |                        | 3,121      |                        |       |   | 7,162 |   |   |
| Deferred credits from  landlords                    |       |                        | 1,692      |                        |       |   | — |   |   |
| Total non-current  deferred tax liabilities         |       |                        | 4,813      |                        |       |   | 7,162 |   |   |
| Total deferred tax  liabilities                     |       |                        | 6,139      |                        |       |   | 8,336 |   |   |
| Net deferred tax assets  before valuation allowance |       |                        | 5,809      |                        |       |   | 3,070 |   |   |
| Less: Valuation  allowance                          |       |                        | (260       | )                           |       |   | (150 | ) |   |
| Net deferred tax assets                             |       |                        | $          | 5,549                       |       |   |   | $ | 2,920 |   |   |

 

Section 382 of the Internal Revenue Code of 1986,as amended, restricts a corporation’s ability to use its federal net operatingloss (“NOL”) carryforwards following certain “ownership changes.”  The Company determined that such an ownershipchange occurred as a result of its initial public offering (“IPO”), andaccordingly, the amount of the Company’s pre-IPO federal NOL carryforwardsavailable for 

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

use in any particulartaxable year is limited to $1,486,000 annually. The Company utilized $1,486,000****in federal NOL carryforwards during fiscal2005. At December 31, 2005, the Company had available federal NOLcarryforwards of approximately $958,000, which expire in 2006. Therealizability of the Company’s federal NOL carryforwards could be affected bythe proposed merger with Talbots. See “Note N.” At December 31, 2005 and December 25,2004, the Company placed a valuation allowance of $260,000 and $150,000,respectively, against a portion of its deferred tax assets related to state NOLcarryforwards as a result of its determination that it was more likely than notthat the tax benefit of these state NOL carryforwards would not be realized.

Asummary of the components of the provision for income taxes follows (inthousands):

| ** **                  | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------|------------|-----------------------------------|------------|
| ** **                  | ** ** | **December 31,  2005**       | ** ** | **December 25,  2004** | ** ** | **December 27,  2003** | ** ** |
| ** **                  | ** ** | **(53 weeks)**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current:**                |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Federal                     |       |                              | $          | 2,553 |   |   |   | $ | 4,026 |   |   |   | $ | 2,058 |   |   |
| State                       |       |                              | 1,106      |   |   |   | 874 |   |   |   | 1,517 |   |   |
| **Deferred:**               |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Federal                     |       |                              | (2,327     | ) |   |   | 601 |   |   |   | 1,922 |   |   |
| State                       |       |                              | (117       | ) |   |   | 795 |   |   |   | (624 | ) |   |
| Provision for income  taxes |       |                              | $          | 1,215 |   |   |   | $ | 6,296 |   |   |   | $ | 4,873 |   |   |

 

Areconciliation of the difference in income taxes at the U.S. federal statutoryrate and the income tax provision as reported follows (in thousands):

| ** **                                                     | ** ** | **Twelve Months Ended** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                     | ** ** | **December 31,  2005**       | ** ** | **December 25,  2004** | ** ** | **December 27,  2003** | ** ** |
| ** **                                                     | ** ** | **(53 weeks)**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision for  income taxes at the U.S. federal statutory rate |       |                              | $          | 955 |   |   |   | $ | 5,251 |   |   |   | $ | 4,164 |   |   |
| State taxes, net  of federal tax benefits                      |       |                              | 545        |   |   |   | 952 |   |   |   | 818 |   |   |
| Valuation  allowance on state NOL carryforwards                |       |                              | 110        |   |   |   | 150 |   |   |   | (119 | ) |   |
| Tax-exempt  interest                                           |       |                              | (312       | ) |   |   | (76 | ) |   |   | — |   |   |
| Other (1)                                                      |       |                              | (83        | ) |   |   | 19 |   |   |   | 10 |   |   |
| Provision for  income taxes at effective rate                  |       |                              | $          | 1,215 |   |   |   | $ | 6,296 |   |   |   | $ | 4,873 |   |   |

 

(1)          Otherconsists primarily of amounts related to deferred compensation, meals andentertainment, non-deductible compensation and changes in estimates for taxcontingencies.

**K.   Commitments and contingencies:**

***Lease commitments***

The Company leases certain of its facilities under non-cancelableoperating leases having initial or remaining terms of more than one year. Manyof the Company’s leases contain scheduled increases in annual rent payments andthe majority of the Company’s leases also require the Company to paymaintenance, insurance and real estate taxes. Additionally, certain of theCompany’s leases include 

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

provisions for the paymentof additional rent based on a percentage of sales over an established minimum. Suchamounts were less than $50,000 in all periods presented. Rent expense,excluding maintenance, insurance and real estate taxes, totaled $26,047,000,$22,733,000 and $19,660,000 during fiscal 2005, fiscal 2004 and fiscal 2003,respectively.

At December 31,2005, the future minimum lease payments, excluding maintenance, insurance andreal estate taxes, for operating leases having a remaining term in excess ofone year at such date were as follows (in thousands):

| Fiscal 2006 |   | $      | 31,266  |   |
|-------------|--------|--------|---------|--------|
| Fiscal 2007 |   | 34,859 |    |
| Fiscal 2008 |   | 35,387 |    |
| Fiscal 2009 |   | 35,707 |    |
| Fiscal 2010 |   | 32,331 |    |
| Thereafter  |   | 82,336 |    |
| Total       |   | $      | 251,886 |   |

 

In addition to the commitments represented in theabove table, the Company enters into a number of cancelable and non-cancelablecommitments during the year. Typically, these commitments are for less then ayear in duration and are principally focused on the construction of new retailstores and the procurement of inventory. The Company typically commits toconstruction costs one to six months in advance of a new retail store openingand actual construction typically begins two to three months before the storeopens. Preliminary commitments with the Company’s private labelmerchandise vendors typically are made five to seven months in advance ofplanned receipt date. Initial merchandise commitments for branded merchandisetypically are made four to six months before planned receipt date.

A majority of the Company’sretail store leases contain provisions that allow us to terminate the leaseearly if certain predetermined annual sales levels are not met. In a minorityof the retail store leases, the landlord is also granted this termination right.Generally, these provisions allow the lease to be terminated following thethird, fourth or fifth year of the lease. Should the lease be terminated underthese provisions, a majority of the leases obligate the Company to reimbursethe landlord for the unamortized portion of any landlord allowance previouslypaid to the Company.  See “Note B.”

***Legal proceedings and other contingencies***

In August 2003, a Complaint was served on TheBirch Pond Group, Inc. (a subsidiary of The J. Jill Group, Inc. whichwas later converted into, and is now known as, J. Jill, LLC) in a civil actionfiled in the California Superior Court, Riverside County, against The BirchPond Group, Inc. and certain fictitiously named and unknown defendants whoallegedly were operating J. Jill stores within the State of California. Thisaction, allegedly on behalf of a class of salaried and non-salaried storeworkers, alleged, among other things, violations of various provisions of theCalifornia Labor Code and related regulations regarding meal periods, restperiods and coerced patronage, and unfair competition. In April 2005, theparties executed a settlement agreement and the Court certified a class (forsettlement purposes only) and preliminarily approved the settlement agreement. InSeptember 2005, the Court approved the settlement agreement and entered anorder and final judgment. In November 2005, the Company made payments ofclaims to class members as well as attorney’s fees, costs and classrepresentative enhancements. In December 2005, the Company filed with theCourt and served on class counsel written certification of 

54

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

settlement administration.On February 10, 2006, class counsel filed with the Court and served theCompany with acknowledgement of full satisfaction of judgment.

From time to time, theCompany is party to various legal proceedings, primarily arising in theordinary course of business. Further, additional claims may be asserted in thefuture relative to events currently unknown to management.

**L.   Segment information:**

The Company currently has two reportable businesssegments, retail and direct. Each segment is separately managed and utilizesdistinct distribution, marketing and inventory management strategies. Theretail segment markets merchandise through retail stores. The direct segmentmarkets merchandise through the Company’s catalogs and website. Segmentreporting is intended to give financial statement users a view of the Company “throughthe eyes of management.”  The Company’sinternal management reporting is the basis for the information disclosed forits business segments. In accordance with GAAP, the Company’s internallydefined measure of segment profit or loss, segment contribution, is required tobe disclosed, but is not a GAAP measure. Information related to segmentcontribution should be read in conjunction with the reconciliation to “Operatingincome” as determined by GAAP.

At the beginning of 2005, the Company changed itssegment reporting as a result of changes in the way management views thebusiness. Inventory control costs, previously disclosed in other, have beenreclassified to the retail and direct segments. Additionally, certain orderfulfillment costs previously recorded in the direct segment have beenreclassified to inventory distribution costs and allocated to the retailsegment. Segment information for fiscal 2004 and fiscal 2003 has beenreclassified to conform to current period presentation.

The Company evaluates its segment profitability basedon the contribution of each segment. Segment contribution represents eachsegment’s net sales less direct costs related to the segment’s operations. Directcosts for the retail and direct segments include merchandise acquisition andinventory control costs and inventory markdowns. Direct costs also includeretail store selling, occupancy, depreciation, inventory distribution andadministrative costs for the retail segment and catalog costs, certain orderprocessing and fulfillment costs and internet selling costs for the direct segment.Segment contribution less other and general and administrative expenses isequal to operating income. Other represents unallocated shared-service costssuch as merchandising, product development, sourcing and distribution facilitycosts, as well as outlet store revenues and expenses. General andadministrative expenses include corporate executive management costs, supportservice costs (e.g., shared information systems, finance and human resources)and corporate headquarters occupancy costs.

Segment assets are those that are directly used in oridentified with segment operations, including inventory, fixed assets,primarily related to store construction, accounts receivable and otheroperating assets. Unallocated assets include corporate cash and cashequivalents, marketable securities, inventory segregated from segment inventoryprior to liquidation, the Company’s corporate headquarters and distributionfacility, corporate information systems, deferred tax amounts and othercorporate assets.

The accounting policies of the Company’s segments arethe same as those described in “Note B.” Inter-segment balances and transactions have been eliminated.

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The following table summarizes financial informationby segment and provides a reconciliation of segment contribution to operatingincome (in thousands):

| ** **                               | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|
| ** **                               | ** ** | **December 31,  2005**       | ** ** | **December 25,  2004** | ** ** | **December 27,  2003** | ** ** |
| ** **                               | ** ** | **(53 weeks)**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net sales:**                           |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Retail                                   |       |                              | $          | 282,751 |   |   |   | $ | 238,776 |   |   |   | $ | 176,762 |   |   |
| Direct                                   |       |                              | 159,978    |   |   |   | 191,074 |   |   |   | 194,993 |   |   |
| Other (1)                                |       |                              | 6,983      |   |   |   | 5,017 |   |   |   | 5,149 |   |   |
| Total net sales                          |       |                              | $          | 449,712 |   |   |   | $ | 434,867 |   |   |   | $ | 376,904 |   |   |
| **Reconciliation to operating  income:** |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Retail segment contribution              |       |                              | $          | 16,398 |   |   |   | $ | 19,736 |   |   |   | $ | 3,621 |   |   |
| Direct segment contribution              |       |                              | 36,915     |   |   |   | 44,059 |   |   |   | 45,267 |   |   |
| Other (2)                                |       |                              | (17,935    | ) |   |   | (16,040 | ) |   |   | (13,817 | ) |   |
| General and administrative expenses      |       |                              | (32,762    | ) |   |   | (32,419 | ) |   |   | (22,434 | ) |   |
| Operating income                         |       |                              | $          | 2,616 |   |   |   | $ | 15,336 |   |   |   | $ | 12,637 |   |   |
| **Depreciation and amortization:**       |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Retail                                   |       |                              | $          | 16,935 |   |   |   | $ | 14,065 |   |   |   | $ | 10,928 |   |   |
| Other (3)                                |       |                              | 5,820      |   |   |   | 4,598 |   |   |   | 5,203 |   |   |
| Total depreciation and amortization      |       |                              | $          | 22,755 |   |   |   | $ | 18,663 |   |   |   | $ | 16,131 |   |   |
| **Capital expenditures:**                |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Retail                                   |       |                              | $          | 29,221 |   |   |   | $ | 24,091 |   |   |   | $ | 31,330 |   |   |
| Other (3)                                |       |                              | 6,799      |   |   |   | 4,693 |   |   |   | 2,935 |   |   |
| Total capital  expenditures              |       |                              | $          | 36,020 |   |   |   | $ | 28,784 |   |   |   | $ | 34,265 |   |   |

 

(1)          Other represents outletstore net sales.

(2)          Other representsunallocated shared-service costs and outlet store revenues and expenses.

(3)          Other includes expensesor expenditures related to unallocated capital assets and outlet stores.

Thefollowing table summarizes identifiable assets by segment (in thousands):

| ** **                | ** ** | **Retail** | ** ** | **Direct** | ** ** | **Unallocated   Assets** | ** ** | **Total** | ** ** |
|---------------------------|------------|------------|------------|------------|------------|-------------------------------|------------|-----------|------------|
| **Identifiable  assets:** |       |       |       |       |       |                          |       |      |       |   |   |
| December 31, 2005    |       | $          | 144,080    |       | $          | 21,316                        |       |      | $          | 122,079 |   |   | $ | 287,475 |   |
| December 25,  2004   |       | $          | 132,539    |       | $          | 26,811                        |       |      | $          | 123,346 |   |   | $ | 282,696 |   |

 

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**THE J. JILL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**M.   Quarterlyfinancial data (unaudited):**

The followingtables contain selected quarterly consolidated financial data for fiscal 2005and fiscal 2004 that was prepared on the same basis as the audited consolidatedfinancial statements and includes all adjustments necessary to present fairly,in all material respects, the information set forth therein on a consistentbasis.

| ** **                      | ** ** | **Fiscal 2005 Quarter Ended** | ** ** |
|---------------------------------|------------|----------------------------------------------|------------|
| ** **                      | ** ** | **March 26,  2005**                     | ** ** | **June 25,  2005** | ** ** | **September 24,  2005** | ** ** | **December 31,  2005** | ** ** |
| ** **                      | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **(14 weeks)** | ** ** |
| Net sales                       |       |                                         | $          | 98,369 |   |   | $ | 117,417 |   |   | $ | 102,969 |   |   |   | $ | 130,957 |   |   |
| Gross margin                    |       |                                         | 28,727     |   |   | 41,830 |   |   | 31,814 |   |   |   | 49,370 |   |   |
| Net income (loss)               |       |                                         | $          | (2,708 | ) |   | $ | 3,870 |   |   | $ | (2,688 | ) |   |   | $ | 3,040 |   |   |
| **Earnings  (loss) per share:** |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Basic*                         |       |                                         | $          | (0.13 | ) |   | $ | 0.19 |   |   | $ | (0.13 | ) |   |   | $ | 0.15 |   |   |
| *Diluted*                       |       |                                         | $          | (0.13 | ) |   | $ | 0.19 |   |   | $ | (0.13 | ) |   |   | $ | 0.15 |   |   |

 

| ** **                     | ** ** | **Fiscal 2004 Quarter Ended** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **March 27,  2004**                     | ** ** | **June 26,  2004** | ** ** | **September 25,  2004** | ** ** | **December 25,  2004** | ** ** |
| Net sales                      |       |                                         | $          | 99,929 |   |   | $ | 120,561 |   |   | $ | 94,933 |   |   |   | $ | 119,444 |   |   |
| Gross margin                   |       |                                         | 35,082     |   |   | 47,148 |   |   | 30,103 |   |   |   | 44,124 |   |   |
| Net income (loss)              |       |                                         | $          | 2,237 |   |   | $ | 6,529 |   |   | $ | (2,660 | ) |   |   | $ | 2,600 |   |   |
| **Earnings (loss) per share:** |       |                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Basic*                        |       |                                         | $          | 0.11 |   |   | $ | 0.33 |   |   | $ | (0.13 | ) |   |   | $ | 0.13 |   |   |
| *Diluted*                      |       |                                         | $          | 0.11 |   |   | $ | 0.32 |   |   | $ | (0.13 | ) |   |   | $ | 0.13 |   |   |

 

The sum of the quarterlyEPS amounts may not equal the full year amount since the computations of theweighted average shares outstanding for each quarter and the full year are madeindependently.

**N.**   Subsequent Event:

On February 5, 2006, J. Jill entered into anAgreement and Plan of Merger (the “Merger Agreement”) with Talbots and JackMerger Sub, Inc., a wholly owned subsidiary of Talbots (“Merger Sub”). Pursuantto the Merger Agreement, Talbots will acquire J. Jill in a taxable all-cashtransaction whereby Merger Sub will merge with and into J. Jill (the “Merger”).J. Jill will continue as the corporation surviving the Merger and will become awholly owned subsidiary of Talbots. The Merger Agreement provides, uponconsummation of the Merger, for J. Jill’s stockholders to receive $24.05 incash, without interest, for each share of common stock of J. Jill. Optionsoutstanding under J. Jill’s stock option plans, whether or not exercisable orvested, will be cancelled as of the effective time of the Merger. Holders ofoptions will be entitled to receive a cash payment (less required taxwithholdings) equal to the excess, if any, of $24.05 over the exercise price ofeach such option, multiplied by the amount of shares covered by each suchoption. The Merger Agreement is subject to adoption by J. Jill’s stockholders,as well as the satisfaction or waiver of other conditions, including, amongothers, the expiration or termination of applicable waiting periods under theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The MergerAgreement contains certain termination rights and provides that, upon thetermination of the Merger Agreement under specified circumstances, J. Jill willbe required to pay Talbots a termination fee of $18,000,000.

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**THEJ. JILL GROUP, INC.SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS(in thousands)**

| ** **                             | ** ** | **Balance  Beginning  of Period** | ** ** | **Amounts  Charged to  Net Income** | ** ** | **Write-Offs  Against  Reserve** | ** ** | **Balance  End of**

**Period** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| **Accrued Customer Returns:**          |       |                                   |       |                                          |       |                             |       |                                 |       |   |   |   |   |   |   |
| Year ended December 31, 2005      |       |                                   | $          | 7,494                                         |       |                             |       | $                                    | 64,468     |   |   |   | $ | 65,404 |   |   | $ | 6,558 |   |
| Year ended December 25, 2004 (1)  |       |                                   | $          | 7,289                                         |       |                             |       | $                                    | 65,683     |   |   |   | $ | 65,478 |   |   | $ | 7,494 |   |
| Year ended  December 27, 2003 (1) |       |                                   | $          | 7,328                                         |       |                             |       | $                                    | 64,439     |   |   |   | $ | 64,478 |   |   | $ | 7,289 |   |

 

(1)          Certain fiscal 2004 andfiscal 2003 information has been reclassified to conform to fiscal 2005presentation.

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**Item 9.**                        Changesin and Disagreements with Accountants on Accounting and Consolidated Financial Disclosure

Not applicable.

**Item 9A.**                Controlsand Procedures

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

We carried out an evaluation,with the participation of our principal executive officer and principalfinancial officer, of the effectiveness of our disclosure controls andprocedures as of December 31, 2005. Based on this evaluation, ourprincipal executive officer and principal financial officer concluded that asof December 31, 2005 our disclosure controls and procedures, as defined inRule 13a-15(e), were effective to ensure that information requiredto be disclosed by us in the reports we file or submit under the Securities ExchangeAct of 1934, as amended, (the “Exchange Act”) are recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms.

**Management’sReport on Internal Control Over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as defined inExchange Act Rule 13a-15(f). Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we carried out an evaluation of the effectivenessof our internal control over financial reporting as of December 31, 2005based on the framework described by the Committee of Sponsoring Organizationsof the Treadway Commission in its report “*InternalControl—Integrated Framework”*(the “COSO framework”). Based on thisevaluation, our management concluded that our internal control over financialreporting was effective as of December 31, 2005.

PricewaterhouseCoopersLLP, the independent registered public accounting firm that audited ourfinancial statements included in this Annual Report on Form 10-K,has audited our management’s assessment of the effectiveness of our internalcontrol over financial reporting as of December 31, 2005 as stated intheir report which is included herein.

**Changesin Internal Control over Financial Reporting**

Our management carried outan evaluation, with the participation of the principal executive officer andthe principal financial officer, of changes in our internal control overfinancial reporting, as defined in Exchange Act Rule 13a-15(f). Based onthis evaluation, our management has determined that no change in our internalcontrol over financial reporting occurred during the fourth quarter of fiscal2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

**Item 9B.**               OtherInformation

None.

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**PART III**

**Item 10.**                 Directorsand Executive Officers of the Registrant

The following table sets forth certain informationconcerning each of our directors and executive officers:

| **Name**                  | ** ** | ** ** | ** ** | ** ** | **Age** | ** **                                                                            | ** ** | ** ** | **Position** | ** ** |
|---------------------------|------------|------------|------------|------------|---------|---------------------------------------------------------------------------------------|------------|------------|--------------|------------|
| Gordon R. Cooke           |       |       | 60         |       |    | President, Chief  Executive Officer, and Chairman of the Board of Directors; Director |
| Dennis J. Adomaitis       |       |       | 55         |       |    | Executive Vice  President/Retail Stores                                               |
| Olga L. Conley            |       |       | 47         |       |    | Executive Vice  President/Chief Financial Officer and Chief Administrative Officer    |
| Lisa T. Bayne             |       |       | 53         |       |    | Executive Vice  President/Chief Marketing Officer                                     |
| John Fiske                |       |       | 41         |       |    | Senior Vice  President/Human Resources                                                |
| Peter J. Clinch           |       |       | 47         |       |    | Senior Vice  President/Inventory Management                                           |
| William E. Engbers (1)    |       |       | 63         |       |    | Director                                                                              |
| Brett D. Heffes (1)(2)    |       |       | 38         |       |    | Director                                                                              |
| James G. Held (2)(3)      |       |       | 56         |       |    | Director                                                                              |
| Thomas J. Litle (2)       |       |       | 65         |       |    | Director                                                                              |
| Ruth M. Owades (3)        |       |       | 57         |       |    | Director                                                                              |
| Michael P. Sherman (1)(3) |       |       | 53         |       |    | Director                                                                              |
|                           |            |            |            |            |         |                                                                                       |            |            |              |            |  |  |

 

(1)          Member of the AuditCommittee.

(2)          Member of the Nominatingand Corporate Governance Committee.

(3)          Member of theCompensation Committee.

**GORDONR. COOKE** has been President and Chief Executive Officer and a director sincejoining us in December 1995 and Chairman of the Board of Directors since August 1997. Mr. Cooke’s current term as adirector will expire at our 2008 annual meeting of stockholders or specialmeeting in lieu thereof.

**DENNISJ. ADOMAITIS**has been Executive Vice President/RetailStores since October 2003. From June 2000 until October 2003, hewas President of The Birch Pond Group, Inc., a wholly owned subsidiary ofThe J. Jill Group, Inc. (the “Company”), and from March 1999 until June 2000,he served as President—J. Jill Retail.

**OLGAL. CONLEY**has been Executive VicePresident/Chief Financial Officer and Chief Administrative Officer since June 2005.Ms. Conley was Executive Vice President/Chief Financial Officer from October 2003to June 2005, President—Corporate Services and Chief Financial Officerfrom March 2001 to October 2003, and Senior Vice President—Financeand Chief Financial Officer from May 1998 to March 2001. She becameChief Financial Officer in August 1997 and was Treasurer from August 1993to June 2005. She also served as Vice President of Finance from June 1996to May 1998.

**LISAT. BAYNE**has been Executive VicePresident/Chief Marketing Officer since October 2005. From December 2003to August 2005, Ms. Bayne served as Senior Vice President, Brand forThe Gymboree Corporation, a specialty retailer of apparel and accessories forwomen and children. From December 2001 to November 2003, Ms. Baynewas Senior Vice President, Marketing at Smith & Hawken, Ltd., amarketer of outdoor living products. Prior to 2001, Ms. Bayne served asSenior Vice President, Creative Services and Brand Marketing at Eddie Bauer, aspecialty retailer of casual sportswear and accessories.

**JOHNFISKE**has been Senior VicePresident/Human Resources since March 2005. From August 2002 to November 2004,Mr. Fiske was Vice President, Human Resources at Abercrombie & 

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Fitch Co., a retailerof casual apparel and accessories for men, women and children, and from September 1999to June 2002, Mr. Fiske was Vice President, Human Resources andOrganizational Development at Kenneth Cole Productions, Inc., a retailerof footwear, handbags, apparel and accessories for men, women and children.

**PETERJ. CLINCH**has been Senior VicePresident/Inventory Management since June 2003 and before that served asVice President/Inventory Management from November 2001 to June 2003. FromMay 2001 to November 2001, Mr. Clinch was Senior Vice President,Inventory Management at Williams-Sonoma, Inc., a nationwide retailer ofproducts for the home.

**WILLIAME. ENGBERS**has been a director since July 1990. Heis a venture capital consultant and was Manager, and subsequently Director,Venture Capital of Allstate Insurance Company from June 1989 until January 1999.Mr. Engbers has been either a director or chairman of over 25 corporations.Mr. Engbers’ current term as a director will expire at our 2006 annualmeeting of stockholders or special meeting in lieu thereof.

**BRETTD. HEFFES**has been a director sinceApril 2000. Since November 2002, Mr. Heffes has been the ChiefFinancial Officer and Treasurer of Winmark Corporation, a franchisor of retailbrands and provider of equipment leasing services. From April 2002 until May 2002,Mr. Heffes was the Chief Financial Officer of Gearworks, Inc., adeveloper and marketer of wireless software. From July 2000 until March 2002,Mr. Heffes was Chief Financial Officer of Applied Epi, Inc. (now adivision of Veero Instruments, Inc.), a developer and manufacturer ofprocess equipment for compound semiconductor devices. Mr. Heffes’ currentterm as a director will expire at our 2007 annual meeting of stockholders orspecial meeting in lieu thereof.

**JAMESG. HELD**has been a director sinceSeptember 2004. He has been Chairman of Shop at Home Network, LLC, atelevision retailing network, since November 2005 and President and ChiefExecutive Officer of JPBK Consulting Inc., a management consulting business,since its founding in January 2000. Mr. Held was Chairman of theBoard and Acting Chief Executive Officer of SmartBargains, Inc., an onlineretailer of discounted branded products from January 2005 to November 2005.From November 1995 to December 1999, Mr. Held served in avariety of positions with Home Shopping Network and its parent company HSN, Inc.,including President and Chief Executive Officer of Home Shopping Network from November 1995to December 1999, Chairman of Home Shopping Network from December 1998to December 1999 and Vice Chairman of HSN, Inc. from January 1997to February 1998. Mr. Held’s current term as a director will expireat our 2008 annual meeting of stockholders or special meeting in lieu thereof.

**THOMASJ. LITLE**has been a director since May 1997. Since1986, Mr. Litle has been Chairman of different Litle & Co.entities providing value added payment transaction services to direct marketersexcept for the period from September 1995 (when Litle & Co. wassold to First USA and its name was changed to Paymentech) through June 2001.From January 2001 to June 2001, Mr. Litle served as interim CEOof OrderTrust, Inc. Mr. Litle is a director of several privatelyowned companies. Mr. Litle’s current term as a director will expire at our2008 annual meeting of stockholders or special meeting in lieu thereof.

**RUTHM. OWADES**has been a director since May 1997.Ms. Owades is the founder of Calyx & Corolla, Inc., acatalog business that offers consumers fresh-cut flowers and plants. She servedCalyx & Corolla as Chairman from 1989 to March 2002 and asPresident and Chief Executive Officer from 1989 to 2000. Ms. Owades is adirector of Armstrong Holdings, a manufacturer of building products used inhomes and businesses. Ms. Owades’ current term as a director will expireat our 2007 annual meeting of stockholders or special meeting in lieu thereof.

**MICHAELP. SHERMAN**has been a director sinceDecember 2004. He is a consultant in the direct marketing industry.Mr. Sherman served as Vice Chairman of Crosstown Traders, Inc., adirect marketing company offering apparel, food and gifts until its sale in June 2005.Crosstown Traders was formed in 2002 

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to purchase the specialtyapparel and food catalog businesses of Federated Department Stores and itsFingerhut subsidiary. Prior to that, Mr. Sherman spent six years atFingerhut Companies, Inc., most recently serving as President. Mr. Sherman’scurrent term as a director will expire at our 2006 annual meeting ofstockholders or special meeting in lieu thereof.

Our executive officers areelected by our directors and hold office until the first directors’ meetingafter the next annual meeting of stockholders or special meeting in lieuthereof, and thereafter until their successors are chosen and qualified, unlessa shorter term is specified in the vote appointing them, or until they soonerdie, resign, are removed or become disqualified.

**Code of Ethics**

We have adopted a Code ofEthics that applies to our principal executive officer, principal financialofficer and principal accounting officer/controller. Our Board of Directors(the “Board”) has also adopted a Code of Business Conduct and Ethics asrequired by The NASDAQ Stock Market (“NASDAQ”) that applies to all of ouremployees, officers and directors. The Code of Ethics and the Code of BusinessConduct and Ethics are available on our website at: *www.jjill.com*.We are satisfying Securities and Exchange Commission (“SEC”) disclosurerequirements relating to amendments to and/or waivers of the Code of Ethics byposting such information on our website identified above.

**Audit Committee**

We have a separatelydesignated standing Audit Committee established in accordance with therequirements of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). The Audit Committee is currently composed of Mr. Engbers(Chairman), Mr. Heffes and Mr. Sherman. The Board has determined thateach member of the Audit Committee is independent under applicable NASDAQ rules andthe requirements of Section 10A(m)(3) and Rule 10A-3 underthe Exchange Act and an “audit committee financial expert” within the meaningof applicable SEC rules, and has the financial sophistication and otherattributes required under the applicable NASDAQ rules.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Section 16(a) of the Exchange Act requiresour officers and directors, and persons who beneficially own more than 10% of aregistered class of our equity securities, to file reports of ownership andchanges in ownership with the SEC. Officers, directors and greater-than-10%stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) formsthey file.

Based solely upon reviewof Forms 3 and 4 and amendments thereto furnished to us during the 12 monthsended December 31, 2005 (“fiscal 2005”) and Forms 5 and amendments theretofurnished to us with respect to fiscal 2005, or written representations that Form 5was not required, we believe that all Section 16(a) filingrequirements applicable to our officers, directors and greater-than-10%stockholders were fulfilled in a timely manner.

**Item 11.**                 ExecutiveCompensation

**Directors’ Compensation**

Each director who is not an employee of the Company orany of its subsidiaries (“a Non-Employee Director”) receives a $50,000 annual retainer. Directors whoare employees of the Company are not paid any separate fees for serving asdirectors. The Chairman of the Audit Committee receives an additional $10,000annual retainer. The Chairman of the Compensation Committee and the Chairman ofthe Nominating and Corporate Governance Committee each receive an additional$5,000 annual retainer. All retainers are paid on a quarterly basis.

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Under our Amended andRestated 2001 Incentive and Non-Statutory Stock Option Plan (the “2001 StockOption Plan”) each Non-Employee Director is automatically granted an option topurchase 15,000 shares of common stock upon first joining our Board. Suchoption is immediately vested in full unless otherwise determined by theCompensation Committee prior to grant. In addition, in connection with eachannual meeting of stockholders each Non-Employee Director who has served for atleast six months before the meeting and continues to serve at the meeting isautomatically granted an option to purchase 7,500 shares of common stock. Suchoption is immediately vested in full. All of the options automatically grantedto Non-Employee Directors under the 2001 Option Plan have exercise prices equalto the closing price of the common stock on the date of grant as reported byNASDAQ and expire on the tenth anniversary of the date of grant.

**ExecutiveCompensation**

The following table sets forth certain informationconcerning the compensation for services rendered in all capacities for fiscal2005, the 12 months ended December 25, 2004 (“fiscal 2004”) and the 12months ended December 27, 2003 (“fiscal 2003”) of our Chief ExecutiveOfficer, the four other most highly compensated executive officers serving atthe end of fiscal 2005 and Stephen L. Pearson, our former Executive VicePresident/Merchandising and Product Development, who would have been identifiedas one of the four other most highly compensated executive officers except thathe was not serving as an executive officer at the end of fiscal 2005.

**SummaryCompensation Table**

|                                                | ** ** | ** **  | ** ** | **Annual Compensation** | ** ** | **Long-Term  Compensation  Awards**   | ** ** | ** **            | ** ** |
|------------------------------------------------|------------|-------------|------------|------------------------------|------------|---------------------------------------|------------|-----------------------|------------|
|                                                | ** ** | ** **  | ** ** | ** **                   | ** ** | ** **                            | ** ** | **Other**             | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** **  | ** ** | ** **                   | ** ** | ** **                            | ** ** | **Annual**            | ** ** | **Securities** | ** ** | **All Other** | ** ** |
| ** **                                     | ** ** | ** **  | ** ** | ** **                   | ** ** | ** **                            | ** ** | **Compensation**      | ** ** | **Underlying** | ** ** | **Compensation** | ** ** |
| **Name and Principal Position** | ** ** | ** **  | ** ** | **Period**                   | ** ** | **Salary (1) (2) ($)** | ** ** | **Bonus (2)($)** | ** ** | **(2) (3) ($)** | ** ** | **Options (4) (#)** | ** ** | **(2) (5) ($)** | ** ** |
| Gordon R. Cooke                                |       | Fiscal 2005 |       |                         | $          | 710,000                               |       |                  |       | $ | 0 |   |   |   | $ | 294,207 |  (6) |   |   | 50,000 |   |   |   | $ | 51,576 |   |   |
| President, Chief Executive                     |       | Fiscal 2004 |       |                         | 680,000    |                                  |       |                  | 576,488    |   |   |   | 252,890 |  (7) |   |   | 100,000 |   |   |   | 51,276 |   |   |
| Officer and Chairman                           |       | Fiscal 2003 |       |                         | 650,000    |                                  |       |                  | 0          |   |   |   | 251,847 |  (8) |   |   | 50,000 |   |   |   | 58,902 |   |   |
| of the Board of Directors                      |       |        |       |                         |       |                                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dennis J.  Adomaitis                           |       | Fiscal 2005 |       |                         | 425,000    |                                  |       |                  | 0          |   |   |   | * |   |   |   | 20,000 |   |   |   | 7,258 |   |   |
| Executive Vice  President/                     |       | Fiscal 2004 |       |                         | 425,000    |                                  |       |                  | 242,628    |   |   |   | * |   |   |   | 50,000 |   |   |   | 7,722 |   |   |
| Retail Stores                                  |       | Fiscal 2003 |       |                         | 412,500    |                                  |       |                  | 0          |   |   |   | * |   |   |   | 25,000 |   |   |   | 6,658 |   |   |
| Olga L. Conley                                 |       | Fiscal 2005 |       |                         | 400,000    |                                  |       |                  | 0          |   |   |   | * |   |   |   | 15,000 |   |   |   | 3,123 |   |   |
| Executive Vice President/                      |       | Fiscal 2004 |       |                         | 355,000    |                                  |       |                  | 206,628    |   |   |   | * |   |   |   | 50,000 |   |   |   | 2,762 |   |   |
| Chief Administrative                           |       | Fiscal 2003 |       |                         | 317,500    |                                  |       |                  | 0          |   |   |   | * |   |   |   | 25,000 |   |   |   | 3,606 |   |   |
| Officer and Chief Financial                    |       |        |       |                         |       |                                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Officer                                        |       |        |       |                         |       |                                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| John Fiske                                     |       | Fiscal 2005 |       |                         | 222,115    |                                  |       |                  | 165,000    | (9) |   |   | 205,523 |  (10) |   |   | 30,000 |   |   |   | 190 |   |   |
| Senior Vice  President/                        |       | Fiscal 2004 |       |                         | n/a        |                                  |       |                  | n/a        |   |   |   | n/a |   |   |   | n/a |   |   |   | n/a |   |   |
| Human Resources                                |       | Fiscal 2003 |       |                         | n/a        |                                  |       |                  | n/a        |   |   |   | n/a |   |   |   | n/a |   |   |   | n/a |   |   |
| Peter J. Clinch                                |       | Fiscal 2005 |       |                         | 245,000    |                                  |       |                  | 0          |   |   |   | * |   |   |   | 10,000 |   |   |   | 54,513 |  (11) |   |
| Senior Vice President/                         |       | Fiscal 2004 |       |                         | 235,000    |                                  |       |                  | 67,500     |   |   |   | * |   |   |   | 25,000 |   |   |   | 49,950 |  (11) |   |
| Inventory Management                           |       | Fiscal 2003 |       |                         | 202,500    |                                  |       |                  | 0          |   |   |   | * |   |   |   | 10,000 |   |   |   | 40,913 |  (11) |   |
| Stephen L. Pearson                             |       | Fiscal 2005 |       |                         | 400,000    |                                  |       |                  | 0          |   |   |   | * |   |   |   | 15,000 |   |   |   | 6,467 |   |   |
| formerly Executive  Vice                       |       | Fiscal 2004 |       |                         | 375,000    |                                  |       |                  | 212,628    |   |   |   | * |   |   |   | 50,000 |   |   |   | 6,167 |   |   |
| President/  Merchandising                      |       | Fiscal 2003 |       |                         | 173,077    |                                  |       |                  | 140,000    |  (12) |   |   | 350,000 |  (13) |   |   | 50,000 |   |   |   | 567 |   |   |
| and Product  Development                       |       |        |       |                         |       |                                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                |            |             |            |                              |            |                                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(1)           Amounts reported for each period include amountsdeferred by the named individuals pursuant to our 401(k) plan and trustand our deferred compensation plans. Amounts shown do not include amountsexpended by us pursuant to plans (including group disability, life and health)that do not discriminate in scope, terms or operation in favor of officers anddirectors and are generally available to all salaried employees.

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(2)           Amounts reported for each period includeamounts that have been earned with respect to that period but may have beenpaid in a subsequent period.

(3)           In accordance with the rules of theSEC, perquisites and other benefits, securities and property that, in theaggregate, do not equal or exceed the lesser of either $50,000 or10 percent of the total annual salary and bonus reported for the namedexecutive officer for the period in question do not need to be reported, and insuch cases an asterisk appears in the table.

(4)           We did not grant any restricted stockawards or stock appreciation rights or make any long-term incentive planpayouts to any of the executive officers during any of the reported periods.  All options are for the purchase of shares ofcommon stock.

(5)           The amounts reported include the followingCompany matching contributions pursuant to our 401(k) plan and trust forfiscal 2005, fiscal 2004 and fiscal 2003, respectively, for the benefit of thenamed individuals: Mr. Cooke, $2,520, $2,460 and $2,400; Mr. Adomaitis,$2,520, $2,460 and $2,400; Ms. Conley, $2,520, $2,460 and $2,400; Mr. Fiske$190, $0 and $0; Mr. Clinch, $2,520, $2,460, and $2,215; and Mr. Pearson,$2,520, $0 and $0. The amounts reported include the following Company matchingcontributions pursuant to our deferred compensation plans for fiscal 2005,fiscal 2004 and fiscal 2003, respectively, for the benefit of the namedindividuals: Mr. Cooke, $1,680, $1,440 and $1,200; Mr. Adomaitis,$1,680, $1,440 and $1,200; Ms. Conley, $0, $0 and $0; Mr. Fiske, $0,$0 and $0; Mr. Clinch, $1,680, $1,440 and $1,385; and Mr. Pearson, $1,680, $3,900 and $0. Theamounts reported also include premiums paid for term life insurance policiesfor fiscal 2005, fiscal 2004 and fiscal 2003, respectively, for the benefit ofthe named individuals: Mr. Cooke, $47,376, $47,376 and $55,302; Mr. Adomaitis,$3,058, $3,822 and $3,058; Ms. Conley, $603, $302 and $1,206; Mr. Fiske,$0, $0 and $0; Mr. Clinch, $1,313, $1,050 and $1,313; and Mr. Pearson,$2,267, $2,267 and $567.

(6)           Includes the provision of a residence byus to Mr. Cooke, at an expense to us of $101,919, as well as the paymentof $125,617 by us to Mr. Cooke to offset the tax burden assumed by Mr. Cookein connection with his receipt of certain perquisites and other non-cashbenefits from us, including but not limited to the aforementioned residence.

(7)           Includes the provision of a residence by us to Mr. Cooke,at an expense to us of $102,784, as well as the payment of $107,335 by us to Mr. Cooketo offset the tax burden assumed by Mr. Cooke in connection with hisreceipt of certain perquisites and other non-cash benefits from us, includingbut not limited to the aforementioned residence.

(8)           Includes the provision of a residence byus to Mr. Cooke, at an expense to us of $101,559, as well as the paymentof $105,987 by us to Mr. Cooke to offset the tax burden assumed by Mr. Cookein connection with his receipt of certain perquisites and other non-cash benefitsfrom us, including but not limited to the aforementioned residence.

(9)           The amount reported is the amount paid to Mr. Fiskeas a bonus that was guaranteed to him in connection with his joining us infiscal 2005.

(10)     Includes reimbursement of moving expensespaid to Mr. Fiske, at an expense to us of $104,286, as well as the paymentof $74,745 by us to Mr. Fiske to offset the tax burden assumed by Mr. Fiskein connection with his receipt of certain perquisites and other non-cashbenefits from us, including but not limited to the aforementioned reimbursementof moving expenses. Also includes $26,492 in relocation expenses paid directlyto vendors.

(11)     Includes $49,000, $45,000 and $36,000 indiscretionary Company contributions made to our deferred compensation plans forthe benefit of Mr. Clinch for fiscal 2005, fiscal 2004 and fiscal 2003,respectively. Such contributions vest 20% per year over a five-year period,with vesting on any vesting date contingent upon Mr. Clinch being employedon such date. Pursuant to the terms of the deferred compensation plans, in theevent of a change in control (as defined in the plan), these contributions, tothe extent not otherwise vested, become vested in full.

(12)     The amount reported is the amount paid to Mr. Pearsonas a bonus that was guaranteed to him in connection with his joining us infiscal 2003.

(13)     Includes reimbursement of moving expensespaid to Mr. Pearson, at an expense to us of $212,450, as well as thepayment of $100,000 by us to Mr. Pearson to offset the tax burden assumedby Mr. Pearson in connection with his receipt of certain perquisites andother non-cash benefits from us, including but not limited to theaforementioned reimbursement of moving expenses. Also includes $37,550 inrelocation expenses paid directly to vendors.

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**Option Grants**

The following table setsforth certain information regarding stock options granted during fiscal 2005 byus to the individuals named in the Summary Compensation Table:

**Option Grants in Last Fiscal Year**

| ** **          | ** ** | **Individual Grants**      | ** ** | ** **                     | ** ** | **Potential Realizable Value** | ** ** |
|---------------------|------------|----------------------------|------------|--------------------------------|------------|------------------------------------------|------------|
| ** **          | ** ** | **Number of**         | ** ** | **Percent of Total** | ** ** | ** **                               | ** ** | ** ** | ** ** | **at Assumed Annual Rates of** | ** ** |
| ** **          | ** ** | **Shares Underlying** | ** ** | **Options Granted**       | ** ** | **Exercise**                             | ** ** | ** ** | ** ** | **Stock Price Appreciation for** | ** ** |
| ** **          | ** ** | **Options Granted**   | ** ** | **to Employees**          | ** ** | **Price per Share**            | ** ** | **Expiration** | ** ** | **Option Term (3)** | ** ** |
| **Name**            | ** ** | ** **                 | ** ** | **(#) (1)**               | ** ** | **in Fiscal 2005**             | ** ** | **($/Sh)** | ** ** | **Date (2)** | ** ** | **5% ($)** | ** ** | **10% ($)** | ** ** |
| Gordon R. Cooke     |       |                       | 50,000     |  (4)                      |       |                                     | 15.1       | % |   |   | $ | 14.73 |   |   | 6/20/2015 |   | $ | 463,181 |   | $ | 1,173,791 |   |
| Dennis J. Adomaitis |       |                       | 20,000     |  (4)                      |       |                                     | 6.1        |   |   |   | 14.73 |   |   | 6/20/2015 |   | 185,272 |   | 469,517 |   |
| Olga L. Conley      |       |                       | 15,000     |  (4)                      |       |                                     | 4.5        |   |   |   | 14.73 |   |   | 6/20/2015 |   | 138,954 |   | 352,137 |   |
| John Fiske          |       |                       | 20,000     |  (5)                      |       |                                     | 6.1        |   |   |   | 12.39 |   |   | 3/14/2015 |   | 155,840 |   | 394,929 |   |
|                |       |                       | 10,000     |  (4)                      |       |                                     | 3.0        |   |   |   | 14.73 |   |   | 6/20/2015 |   | 92,636 |   | 234,758 |   |
| Peter J. Clinch     |       |                       | 10,000     |  (4)                      |       |                                     | 3.0        |   |   |   | 14.73 |   |   | 6/20/2015 |   | 92,636 |   | 234,758 |   |
| Stephen L. Pearson  |       |                       | 15,000     |  (4)                      |       |                                     | 4.5        |   |   |   | 14.73 |   |   | 6/20/2015 |   | 138,954 |   | 352,137 |   |
|                     |            |                            |            |                                |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(1)           These options are exercisable during the holder’slifetime only by the holder, and by the holder only while the holder is ouremployee, and for certain limited periods of time thereafter in the event ofretirement, death or termination of employment other than for cause.

(2)           All options will be cancelled as of the effective timeof the proposed merger with The Talbots, Inc. See “Item 1. Business.”

(3)           Amounts represent hypothetical gains that could beachieved for the respective options if exercised at the end of the option term.These gains are based upon assumed rates of share price appreciation set by theSEC of five percent and ten percent compounded annually from the date therespective options were granted to their expiration date. The gains shown arenet of the option exercise price, but do not include deductions for taxes orother expenses associated with the exercise. Actual gains, if any, aredependent on the performance of the common stock and the date on which theoption is exercised. There can be no assurance that the amounts reflected willbe achieved. All options outstanding under J. Jill’s stock option plans,whether or not exercisable or vested, will be cancelled as of the effectivetime of the proposed merger with The Talbots, Inc. In connection with theproposed merger, holders of options will be entitled to receive a cash payment(less any required tax withholdings) equal to the excess, if any, of $24.05 overthe exercise price of each such option multiplied by the amount of sharescovered by each such option. See “Item 1. Business.”

(4)           These options were fully vested upon grant.

(5)           These options vest as to one-third of theshares which may be purchased thereunder on the first anniversary of the dateof grant, and as to an additional one-third of such shares on each of thesecond and third anniversaries of the date of grant, contingent upon the optionholder’s continued employment with us or one of our wholly owned subsidiarieson such vesting date. In addition, in the event of the death of the optionholder while an employee and before expiration of the option, the options vestin full. These options are also subject to accelerated vesting in the event thata “Qualified Sale” occurs and immediately prior to the closing of such “QualifiedSale” the holder is an employee. Immediately prior to such closing theseoptions will become exercisable as to an additional one-third of the sharessubject to the options. “Qualified Sale” means the sale of all or substantiallyall of our assets or issued and outstanding capital stock or a merger orconsolidation involving us in which our stockholders immediately before suchmerger or consolidation do not own capital stock or other equity interests ofthe surviving corporation or entity representing more than 50% in voting powerof the capital stock or other equity interests of such surviving corporation orentity outstanding immediately after such merger or consolidation.

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**OptionExercises and Fiscal Year-End Values**

The following table setsforth certain information concerning the number and value of stock optionsexercised by each of the individuals named in the Summary Compensation Tableduring fiscal 2005 and of unexercised stock options held by each of suchindividuals on December 31, 2005. All such options were for the purchaseof shares of common stock.

**Aggregated OptionExercises In Last Fiscal Year and Fiscal Year-End Option Values**

| ** **           | ** ** | ** **               | ** ** | ** **                    | ** ** | **Number of Securities Underlying** | ** ** | **Value of Unexercised**                | ** ** |
|----------------------|------------|--------------------------|------------|-------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **           | ** ** | ** **               | ** ** | ** **                    | ** ** | **Unexercised Options Held at**     | ** ** | **In-the-Money Options Held at**   | ** ** |
| ** **           | ** ** | **Shares Acquired** | ** ** | **Value**                     | ** ** | **December 31, 2005 (#) (1)**  | ** ** | **December 31, 2005 ($) (2)** | ** ** |
| **Name**             | ** ** | ** **               | ** ** | **on Exercise (#)** | ** ** | **Realized ($)**                              | ** ** | **Exercisable**                                   | ** ** | **Unexercisable** | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Gordon R. Cooke      |       |                     | 0          |                          |       |                                               | $          | 0                                                 |       |   | 1,234,833 |   |   | 50,001 |   |   | $ | 5,346,404 |   |   | $ | 156,503 |   |   |
| Dennis J.  Adomaitis |       |                     | 0          |                          |       |                                               | 0          |                                              |       | 433,083 |   |   | 25,001 |   |   | 1,798,395 |   |   | 78,253 |   |   |
| Olga L. Conley       |       |                     | 0          |                          |       |                                               | 0          |                                              |       | 298,029 |   |   | 25,001 |   |   | 1,159,454 |   |   | 78,253 |   |   |
| John Fiske           |       |                     | 0          |                          |       |                                               | 0          |                                              |       | 10,000 |   |   | 20,000 |   |   | 43,000 |   |   | 132,800 |   |   |
| Peter J. Clinch      |       |                     | 0          |                          |       |                                               | 0          |                                              |       | 49,999 |   |   | 10,001 |   |   | 206,013 |   |   | 36,037 |   |   |
| Stephen L. Pearson   |       |                     | 0          |                          |       |                                               | 0          |                                              |       | 81,665 |   |   | 33,335 |   |   | 300,492 |   |   | 136,507 |   |   |
|                      |            |                          |            |                               |            |                                                    |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(1)          All options outstandingunder J. Jill’s stock option plans, whether or not exercisable of vested, willbe cancelled as of the effective time of the proposed merger with The Talbots, Inc.See “Item 1. Business.”

(2)          Valueis based on the last sales price of the common stock before the end of fiscal2005 ($19.03 per share on December 30, 2005), as reported by NASDAQ, lessthe applicable option exercise price. In connection with the proposed merger,holders of options will be entitled to receive a cash payment (less anyrequired tax withholdings) equal to the excess, if any, of $24.05 over theexercise price of each such option, multiplied by the amount of shares coveredby each such option.  See “Item 1.Business.”

**CertainAgreements with Executive Officers**

***SeveranceAgreements***

Each of Gordon R. Cooke, Dennis J. Adomaitis, Olga L.Conley, Lisa T. Bayne, John Fiske and Peter J. Clinch is a party to aseverance agreement with us. Each severance agreement provides for a lump sumpayment of one year of base salary and continued group medical/dental insurancefor up to 12 months in the event of termination of the executive’s employmentby us without cause (as defined in the severance agreement) or by the executivewith good reason (as defined in the severance agreement), in exchange for theexecutive’s execution of a release of any claims against us. The severanceagreements supersede any prior agreements relating to severance payments.

Stephen L. Pearson, ourformer Executive Vice President/Merchandising and Product Development, enteredinto a letter agreement, dated December 7, 2005, related to thetermination of his employment with us. Pursuant to the agreement, Mr. Pearsonexecuted a release of any claims against us, and we made a lump-sum severancepayment to Mr. Pearson equal to his total annual salary of $400,000 andwill provide him miscellaneous other benefits, including continuation of groupmedical/dental insurance for a period of up to 18 months after his last day ofemployment with us. In addition, in the event a change in control (as definedin the agreement) occurs at any time on or before December 31, 2006, Mr. Pearsonwill be paid supplemental compensation in the lump-sum amount of $729,552subject to his continuing compliance with certain ongoing obligations under theagreement and his executing a second release of claims.

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***Change In Control Severance Agreements***

Each of Gordon R. Cooke,Dennis J. Adomaitis, Olga L. Conley, Lisa T. Bayne, John Fiske and Peter J.Clinch is a party to a change in control severance agreement with us. Eachchange in control severance agreement provides for the following benefits inthe event of termination of the executive’s employment by us without cause (asdefined in the change in control severance agreement) or by the executive withgood reason (as defined in the change in control severance agreement) followinga change in control (as defined in the change in control severance agreement),or prior to a change in control if terminated at the direction of a person whohas entered into a change in control transaction with us or if the executiveterminates his or her employment for good reason if the circumstance or eventwhich constitutes good reason occurs at the direction of a person who hasentered into a change of control transaction with the us, in exchange for theexecutive’s execution of a release of any claims against us:  (i) a lump sum payment of two times theexecutive’s annual base salary, (ii) a lump sum payment of a pro rataportion of the executive’s maximum bonus for any incomplete performance period,(iii) continued life, disability, accident and health insurance benefitsfor up to 24 months, (iv) accelerated vesting of stock options, (v) atax gross up payment with respect to any “parachute payments” under Section 280Gof the Internal Revenue Code, and (vi) in the case of Mr. Cooke and Ms. Conley,a lump sum payment of two times their maximum bonus for the year in whichtermination occurs, and in the case of Mr. Adomaitis and Ms. Bayne, alump sum payment equal to the bonus payments received by them with respect tothe two fiscal years immediately preceding the year in which termination occurs.These benefits supersede any post-termination payments that otherwise would bepayable to the executives, including those under the severance agreementsdescribed above. The change in control severance agreements also supersedeprior change in control severance agreements.

***Leadership Incentive Program***

Ourexecutive officers are participating in our Leadership Incentive Program (the “LIP”)for fiscal 2006. The LIP covers the period commencing on January 1, 2006and concluding on December 30, 2006 (the “Performance Period”). The LIPprovides for cash-based incentives to be paid at the conclusion of thePerformance Period based upon our achieving earnings per share (“EPS”) targetsset by the Compensation Committee of the Board. The following table describesincentive ranges and payment percentages for eligible executive officers bylevel:

| Title/Level                | ** ** | ** ** | ** ** | **Performance Incentive Ranges** | ** ** | **Incentive Payment as a  Percent of Base Salary** |
|----------------------------|------------|------------|------------|----------------------------------|------------|----------------------------------------------------|
| Chief Executive Officer    |       | Threshold  |       |                             | 50         | %                                                  |
|                       |       | Target     |       |                             | 100        |                                               |
|                       |       | Maximum    |       |                             | 200        |                                               |
| Executive Vice  Presidents |       | Threshold  |       |                             | 40         |                                               |
|                       |       | Target     |       |                             | 80         |                                               |
|                       |       | Maximum    |       |                             | 120        |                                               |
| Senior Vice Presidents     |       | Threshold  |       |                             | 30         |                                               |
| (Executive  Officers Only) |       | Target     |       |                             | 60         |                                               |
|                       |       | Maximum    |       |                             | 90         |                                               |

 

The amount of theincentive payment for any executive officer for any Performance Period may beincreased or decreased by up to ten percent of the payment amount determined bythe performance percentage in the table, but in no event may the payment amountexceed the maximum performance percentage in the table.

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***Guaranteed Bonus***

Lisa T. Bayne is a partyto an agreement with us executed in connection with her hiring in October 2005under which she is guaranteed bonus payments for the Spring 2006 and Fall 2006seasons, each in the amount of $150,000. If Ms. Bayne becomes entitled toreceive payments under her change in control severance agreement describedabove, those payments would supersede any remaining unpaid guaranteed bonuspayments under her October 2005 agreement except to the extent, if any,that the remaining unpaid guaranteed bonus payments under her October 2005agreement exceed the amount of the payment under her change in controlseverance agreement with respect to her bonus for incomplete performanceperiods.

***Agreements to Protect Corporate Property***

Each of our executiveofficers, including the persons named in the Summary Compensation Table, hassigned an Agreement to Protect Corporate Property. The Agreement includesprovisions relating to the protection of confidential information andintellectual property and covenants not to compete with us or solicit ouremployees.

**CompensationCommittee Interlocks and Insider Participation**

The Compensation Committeeof the Board is composed of independent, Non-Employee Directors. The Committeecurrently consists of Ruth M. Owades (Chairman), James G. Held and Michael P.Sherman, who joined the Committee in June 2005. Jonathan P. Ward, a formerdirector, served as a member of the Compensation Committee during 2005 until June 2005.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

At the close of business on March 10, 2006, therewere issued and outstanding 20,480,861 shares of our common stock. On March 10,2006, the closing price of our common stock as reported by NASDAQ was $23.77 pershare.

The following tables set forth the number of shares ofour common stock beneficially owned, directly or indirectly, by each personknown to us to own beneficially more than five percent of our outstandingcommon stock, by each director, by our Chief Executive Officer, by the fourother most highly compensated executive officers serving at the end of fiscal2005, by Stephen L. Pearson, our former Executive Vice President/Merchandisingand Product Development, who would have been identified as one of the fourother most highly compensated executive officers except that he was not servingas an executive officer at the end of fiscal 2005, and by our current executiveofficers and directors as a group, in each case based upon the beneficialownership of such persons reported to us as of March 10, 2006. Beneficialownership is determined in accordance with the rules of the SEC. Shares ofour common stock issuable by us pursuant to options that may be exercisedwithin 60 days after March 10, 2006, are deemed to be beneficially ownedand outstanding for purposes of calculating the number of shares and thepercentage beneficially owned by the applicable person. However, these sharesare not deemed to be beneficially owned and outstanding for purposes ofcomputing the percentage beneficially owned by any other person or entity. Eachperson has sole voting and investment power with respect to the shares listedand each person’s address is the address of our corporate offices, except whereotherwise noted. The inclusion of shares listed below as beneficially owneddoes not constitute an admission of beneficial ownership.

 

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**StockOwnership of Certain Beneficial Owners**

Thefollowing table sets forth, as of March 10, 2006, the beneficial ownershipof shares of our common stock by persons believed by our management tobeneficially own more than 5% of our outstanding common stock. Except withrespect to Gordon R. Cooke, our Chief Executive Officer, the information isbased on the most recent Schedule 13G filed with the SEC on behalf of suchpersons or other information made available to us.

| Name and Address  of Beneficial Owner | ** ** | ** ** | ** ** | **Amount of Shares  Beneficially Owned ** | ** ** | **Percentage of  Shares  Outstanding as  of  March 10, 2006 ** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| Kornitzer Capital Management  Inc. (1)                    |       | 1,752,243  |       |                                                          | 8.6        | %                                                                                                 |       |
| 5420 West 61st Place                                      |       |       |       |                                                          |       |                                                                                              |       |
| Shawnee Mission, KS 66205                                 |       |       |       |                                                          |       |                                                                                              |       |
| Gordon R. Cooke (2)                                       |       | 1,455,749  |       |                                                          | 6.7        | %                                                                                                 |       |
| Harvest Management, LLC (3)                               |       | 1,104,500  |       |                                                          | 5.4        | %                                                                                                 |       |
| James Morgan Rutman (3)                                   |       |       |       |                                                          |       |                                                                                              |       |
| Nathaniel Bohrer (3)                                      |       |       |       |                                                          |       |                                                                                              |       |
| Marjorie Gochberg Kellner (3)                             |       |       |       |                                                          |       |                                                                                              |       |
| 600 Madison  Avenue, 11th Floor                           |       |       |       |                                                          |       |                                                                                              |       |
| New York, NY  10022                                       |       |       |       |                                                          |       |                                                                                              |       |
| T. Rowe Price  Associates, Inc. (4)                  |       | 1,049,100  |       |                                                          | 5.1        | %                                                                                                 |       |
| 100 E. Pratt Street                                       |       |       |       |                                                          |       |                                                                                              |       |
| Baltimore, MD 21202                                       |       |       |       |                                                          |       |                                                                                              |       |

 

(1)          We have received a copyof a report on Schedule 13G/A, with a signature dated January 31, 2006,filed by Kornitzer Capital Management, Inc. (“Kornitzer”). The reportstates that Kornitzer is an investment adviser with respect to the shares ofcommon stock for the accounts of other persons who have the right to receive,and the power to direct the receipt of, dividends from, or the proceeds fromthe sale of, our common stock; and that Kornitzer has the shared voting anddispositive power as to all 1,752,243 shares.

(2)          See Stock Ownership ofManagement Table set forth below.

(3)          We have received a copyof a report on Schedule 13G, with signatures dated January 30, 2006, filedjointly by James Morgan Rutman, Nathaniel Bohrer and Marjorie Gochberg Kellner(collectively, the “Harvest Reporting Persons”), and Harvest Management L.L.C.(“Harvest Management”). The report states that the shares are beneficiallyowned by the following accounts under management by Harvest Management, whichit may be deemed to beneficially own: 172,869 shares beneficially owned byHarvest Capital, L.P.; 178,161 shares beneficially owned by Wabash HarvestPartners, L.P.; 355,616 shares beneficially owned by Harvest Offshore InvestorsLtd.; 21,989 shares beneficially owned by CL Harvest, LLC; 31,068 sharesbeneficially owned by Harvest AA Capital, L.P.; 50,259 shares beneficiallyowned by New Americans, L.L.C.; and 294,544 shares beneficially owned by TEHarvest Portfolio, Ltd; that the Harvest Reporting Persons are each principalsof Harvest Management and thus may be deemed to beneficially own the sharesbeneficially owned by Harvest Management; and that Harvest Management and theHarvest Reporting Persons have the shared voting and dispositive power as toall 1,104,500 shares.

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(4)          Wehave received a copy of a report on Schedule 13G/A, with a signature dated February 14,2006 filed by T. Rowe Price Associates, Inc. (“TRP”). The report statesthat TRP is an investment adviser registered under Section 203 of theInvestment Advisors Act of 1940; that TRP does not serve as custodian of theassets of any of its clients; that in each instance only the client or theclient’s custodian or trustee bank has the right to receive dividends paid withrespect to, and proceeds from the sale of, such securities; and that TRP hassole voting power as to 140,600 shares and sole dispositive power as to all1,049,100 shares.

**Stock Ownership of Management**

Thefollowing table sets forth, as of March 10, 2006, the beneficial ownershipof shares of our common stock by each director, by our Chief ExecutiveOfficer, by the four other most highly compensated executive officersserving at the end of fiscal 2005, by Stephen L. Pearson, our former ExecutiveVice President/Merchandising and Product Development, who would have beenidentified as one of the four other most highly compensated executive officersexcept that he was not serving as an executive officer at the end of fiscal2005 and by our current executive officers and directors as a group.

| **Name and Address of   Beneficial Owner**   | ** ** | ** ** | ** ** | **Shares   Owned** | ** ** | **Shares Subject to   Options (1)** | ** ** | **Total Shares  Beneficially Owned** | ** ** | **Percentage of   Shares Outstanding   as of March 10, 2006** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|-------------------------|------------|---------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| Gordon R. Cooke                                                       |       | 204,249    |       |                    | 1,251,500  |                                                    |       |                                           | 1,455,749  |                                                                                                  |       |   | 6.7 | % |   |
| Dennis J.  Adomaitis                                                  |       | 28,642     |       |                    | 441,416    |                                                    |       |                                           | 470,058    |                                                                                                  |       |   | 2.2 | % |   |
| Olga L. Conley                                                        |       | 64,659     |       |                    | 306,362    |                                                    |       |                                           | 371,021    |                                                                                                  |       |   | 1.8 | % |   |
| John Fiske                                                            |       | —     |       |                    | 16,666     |                                                    |       |                                           | 16,666     |                                                                                                  |       |   | * |   |   |
| Peter J. Clinch                                                       |       | 2,719      |       |                    | 53,332     |                                                    |       |                                           | 56,051     |                                                                                                  |       |   | * |   |   |
| Stephen L.  Pearson (2)                                               |       | 53,598     |       |                    | —     |                                                    |       |                                           | 53,598     |                                                                                                  |       |   | * |   |   |
| Thomas J. Litle  (3)                                                  |       | 3,375      |       |                    | 75,000     |                                                    |       |                                           | 78,375     |                                                                                                  |       |   | * |   |   |
| William E.  Engbers (4)                                               |       | 225        |       |                    | 63,750     |                                                    |       |                                           | 63,975     |                                                                                                  |       |   | * |   |   |
| Brett D. Heffes                                                       |       | —     |       |                    | 62,000     |                                                    |       |                                           | 62,000     |                                                                                                  |       |   | * |   |   |
| Ruth M. Owades                                                        |       | 3,750      |       |                    | 50,250     |                                                    |       |                                           | 54,000     |                                                                                                  |       |   | * |   |   |
| James G. Held                                                         |       | —     |       |                    | 37,500     |                                                    |       |                                           | 37,500     |                                                                                                  |       |   | * |   |   |
| Michael P.  Sherman                                                   |       | —     |       |                    | 30,000     |                                                    |       |                                           | 30,000     |                                                                                                  |       |   | * |   |   |
| All current executive  officers and directors as a group (12 persons) |       | 307,619    |       |                    | 2,387,776  |                                                    |       |                                           | 2,695,395  |                                                                                                  |       |   | 11.8 | % |   |

 

*                    Less than 1.0%of the outstanding shares.

(1)          Includes shares issuableupon the exercise of one or more outstanding stock options issuable within 60days following March 10, 2006.

(2)          Mr. Pearson ceased to be an executiveofficer in December 2005.

(3)          Includes 3,375 sharesheld by Mr. Litle’s wife.

(4)          Includes225 shares held by Mr. Engbers’ wife. Mr. Engbers disclaimsbeneficial ownership of the shares held by his wife.

**Equity Compensation Plans**

The following tableprovides information as of December 31, 2005 regarding securitiesauthorized for issuance under our equity compensation plans, includingindividual compensation arrangements. Our equity compensation plans include theAmended and Restated 1993 Incentive and Nonqualified Stock Option Plan (the “1993Stock Option Plan”), the 2001 Stock Option Plan, and the Second Amended and 

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Restated1998 Employee Stock Purchase Plan (the “Employee Stock Purchase Plan”). All ofthese equity compensation plans have been approved by our stockholders.

**EquityCompensation Plan Information**

| ** **                                              | ** ** | **(a)**    | ** ** | **(b)**                                                                                                                                             | ** ** | **(c)**                                                                                                             | ** ** |
|---------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                  | ** ** | ** ** | ** ** | **Number of Shares  to be Issued Upon  Exercise of Outstanding  Options and Rights (#) (1)** | ** ** | **Weighted Average  Exercise Price of   Outstanding Options  and Rights ($/Sh)** | ** ** | **Number of Shares  Remaining Available for Future  Issuance Under Equity  Compensation Plans (excluding  Shares in Column (a)) (#)** | ** ** |
| Equity  Compensation Plans Approved by Stockholders     |       |       | 3,367,787  |                                                                                                                                                |       |                                                                                                                | $          | 15.98 |   |   |   | 284,005 |   |   |
| Equity  Compensation Plans Not Approved by Stockholders |       |       | —     |                                                                                                                                                |       |                                                                                                                | —     |   |   |   | — |   |   |
| TOTAL                                                   |       |       | 3,367,787  |                                                                                                                                                |       |                                                                                                                | $          | 15.98 |   |   |   | 284,005 |   |   |
|                                                         |            |            |            |                                                                                                                                                     |            |                                                                                                                     |            |  |  |  |  |  |  |  |  |  |

 

(1)          Includesoptions to purchase 352,887 shares of common stock under the 1993 Stock OptionPlan, and options to purchase 3,014,900 shares of common stock under the 2001Stock Option Plan. No rights under the Employee Stock Purchase Plan wereoutstanding as of the close of business on December 31, 2005.

**Item 13.**                 CertainRelationships and Related Transactions

Lauren Cooke, the daughterof our President and Chief Executive Officer, is employed by us as Manager ofPublic Relations. During fiscal 2005, Ms. Cooke received aggregatecompensation of $52,544 for her services. Ms. Cooke’s current annualsalary is $75,000. Ms. Cooke is also party to a retention bonus agreement,pursuant to which she will receive $7,500 if she remains actively employed byus until the earlier of July 1, 2006 or the termination of her employmentby us other than for cause (as defined in the retention bonus agreement).

**Item 14.**                 PrincipalAccounting Fees and Services

Theaggregate fees for professional services rendered by PricewaterhouseCoopers LLP(“PwC”), our independent registered public accounting firm, for the fiscalyears ended December 31, 2005 and December 25, 2004 were as follows:

| ** **              | ** ** | **Twelve Months Ended** | ** ** |
|-------------------------|------------|-----------------------------------|------------|
| ** **              | ** ** | **December 31,**             | ** ** | **December 24,** | ** ** |
| **Description**         | ** ** | ** **                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Audit Fees (1)          |       |                              | $          | 1,007,000 |   |   |   | $ | 1,071,000 |   |   |
| Audit-Related  Fees (2) |       |                              | 16,000     |   |   |   | 222,000 |   |   |
| Tax Fees (3)            |       |                              | 59,000     |   |   |   | 105,000 |   |   |
| All Other Fees (4)      |       |                              | 101,000    |   |   |   | — |   |   |
|                         |            |                                   |            |  |  |  |  |  |  |  |  |  |  |

 

(1)          Audit Fees are for theaudit of our annual financial statements and financial statement schedule, theexpression of opinions on management’s assessment of the effectiveness ofinternal control over financial reporting and on the effectiveness of internalcontrol over financial reporting, and the review of quarterly financialstatements.

(2)          Audit-Related Fees arefor accounting and reporting consultations, employee benefit plan audits andother advisory services.

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(3)          Tax Fees are for taxcompliance, tax planning and tax advice, with respect to ongoing mattersrelating to the realignment of our organizational structure.

(4)           AllOther Fees are for any services not included in the first three categoriesincluding consulting related to certain strategic considerations.

The Audit Committee hasdetermined that PwC’s provision of services to us not related to the audit ofour financial statements was at all relevant times compatible with that firm’sindependence.

**Pre-Approval Policies**

The Audit Committee’s policy is to pre-approve allaudit and permissible non-audit services provided by the independent auditor. Theseservices may include audit services, audit-related services, tax services andother services. Pre-approval is generally provided for up to one year and anypre-approval is detailed as to the particular service or category of servicesand is generally subject to a specific budget. The independent auditor andmanagement are required to periodically report to the Audit Committee regardingthe extent of services provided by the independent auditor in accordance withthis pre-approval, and the fees for the services performed to date. Specificservices that were not contemplated by the annual budget may also bepre-approved, on a case-by-case basis, by the Audit Committee acting as awhole, or by a designated single member of the Audit Committee provided suchservices are then approved, on at least a quarterly basis, by the AuditCommittee acting as a whole. None of the services provided by PwC for fiscal2005 was obtained in reliance on the waiver of the pre-approval requirementafforded in SEC regulations.

 

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**PART IV**

**Item 15.**                 Exhibitsand Consolidated Financial Statement Schedules

**(a)(1)            FinancialStatements**

Theindex to the consolidated financial statements follows:

| ** **                                                                                                                                                           | ** ** | **Page** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of  Independent Registered Public Accounting Firm                                                                                                             |       |     | 30         |   |   |
| Consolidated Balance Sheets at December 31,  2005 and December 25, 2004                                                                                    |       |     | 32         |   |   |
| Consolidated Statements of Operations for the 12  months ended December 31, 2005, December 25, 2004 and  December 27, 2003                            |       |     | 33         |   |   |
| Consolidated  Statements of Changes in Stockholders’ Equity for the 12 months  ended December 31, 2005, December 25, 2004 and December 27,  2003 |       |     | 34         |   |   |
| Consolidated Statements of Cash Flows for the 12  months ended December 31, 2005, December 25, 2004 and  December 27, 2003                            |       |     | 35         |   |   |
| Notes to  Consolidated Financial Statements                                                                                                                          |       |     | 36         |   |   |

 

**(a)(2)            Financial Statement Schedule**

Theindex to the Consolidated Financial Statement Schedule follows:

| ** **                                                                                | ** ** | **Page** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent  Registered Public Accounting Firm on Financial                     |       |     |       |
| Statement  Schedule (included in Report of Independent Registered Public Accounting Firm) |       | 30       |       |
| Schedule II—Valuation  and Qualifying Accounts                                       |       | 58       |       |

 

**(a)(3)            Exhibits**

Set forth below are the exhibits of The J. Jill Group, Inc.and its wholly owned subsidiaries (“the Company”). Exhibits 10.1 through 10.46include the Company’s compensatory plans or arrangements required to be filedas exhibits pursuant to Item 15(c) of Form 10-K.

|        | ** ** | **Plan of Acquisition,  Reorganization, Arrangement, Liquidation or Succession**                                                                                                                                                                                                                                                        |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1    |       | Agreement and  Plan of Merger by and among The J. Jill Group, The Talbots, Inc. and  Jack Merger Sub, Inc. dated as of February 5, 2006 (included as  Exhibit 2.1 to the Company’s Current Report on Form 8-K filed  February 7, 2006, File No. 0-22480, and incorporated herein  by reference) |
|   | ** ** | **Certificate of Incorporation  and By-Laws**                                                                                                                                                                                                                                                                                           |
| 3.1    |       | Restated  Certificate of Incorporation of the Company (included as Exhibit 4.2 to  the Company’s Quarterly Report on Form 10-Q for the quarter ended  September 25, 1993, File No. 0-22480, and incorporated herein  by reference)                                                                             |
| 3.2    |       | Certificate of  Amendment of Restated Certificate of Incorporation of the Company, dated  June 1, 1999 (included as Exhibit 3.2 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended June 26, 1999, File  No.  0-22480, and incorporated herein by reference)                            |

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| 3.3  |       | Certificate of  Amendment of Restated Certificate of Incorporation of the Company, dated  June 5, 2001 (included as Exhibit 3.3 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2001, File  No. 0-22480, and incorporated herein by reference)                                                                                                                         |
|------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.4  |       | By-Laws of the  Company, as amended (included as Exhibit 99.1 to the Company’s Current  Report on Form 8-K filed November 24, 1999, File No. 0-22480,  and incorporated herein by reference)                                                                                                                                                                                                               |
|      | ** ** | **Material  Contracts**                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1 |       | Amended and  Restated 2001 Incentive and Non-Statutory Stock Option Plan (included as  Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed January 28, 2005, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                                                          |
| 10.2 |       | Amended and  Restated 1993 Incentive and Nonqualified Stock Option Plan (included as  Exhibit 10.12 to the Company’s Annual Report on Form 10-K for  the fiscal year ended December 26, 1998, File No. 0-22480,  and incorporated herein by reference)                                                                                                                                                     |
| 10.3 |       | Form of  incentive stock option under 2001 Incentive and Non-Statutory Stock Option  Plan, fully vested (included as Exhibit 10.1 to the Company’s Quarterly  Report on Form 10-Q the quarter ended June 25, 2005, File  No. 0-22480, and incorporated herein by reference)                                                                                                                           |
| 10.4 |       | Form of  non-statutory stock option under the 2001 Incentive and Non-Statutory Stock  Option Plan, fully vested, for employees (included as Exhibit 10.2 to  the Company’s Quarterly Report on Form 10-Q for the quarter ended  June 25, 2005, File No. 0-22480, and incorporated herein by  reference)                                                                                               |
| 10.5 |       | Form of  non-statutory stock option under the 2001 Incentive and Non-Statutory Stock  Option Plan, fully vested, for directors (included as Exhibit 10.3 to  the Company’s Quarterly Report on Form 10-Q for the quarter ended  June 25, 2005, File No. 0-22480, and incorporated herein by  reference)                                                                                               |
| 10.6 |       | Form of  incentive stock option under the 2001 Incentive and Non-Statutory Stock  Option Plan, subject to vesting, for Chief Executive Officer (included as  Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q  for the quarter ended June 25, 2005, File No. 0-22480, and  incorporated herein by reference)                                                                               |
| 10.7 |       | Form of  non-statutory stock option under the 2001 Incentive and Non-Statutory Stock  Option Plan, subject to vesting, for Chief Executive Officer (included as  Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q  for the quarter ended June 25, 2005, File No. 0-22480, and  incorporated herein by reference)                                                                           |
| 10.8 |       | Form of  incentive stock option under the 2001 Incentive and Non-Statutory Stock  Option Plan, subject to vesting, for Operating Vice Presidents, Vice  Presidents, Senior Vice Presidents and Executive Vice Presidents (included as  Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for  the quarter ended June 25, 2005, File No. 0-22480, and  incorporated herein by reference)     |
| 10.9 |       | Form of  non-statutory stock option under the 2001 Incentive and Non-Statutory Stock  Option Plan, subject to vesting, for Operating Vice Presidents, Vice Presidents,  Senior Vice Presidents and Executive Vice Presidents (included as  Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q  for the quarter ended June 25, 2005, File No. 0-22480, and  incorporated herein by reference) |

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| 10.10 |   | Form of  incentive stock option under the 2001 Incentive and Non-Statutory Stock  Option Plan, subject to vesting, for employees below the rank of Operating  Vice President (included as Exhibit 10.8 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended June 25, 2005, File  No. 0-22480, and incorporated herein by reference)     |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.11 |   | Form of  non-statutory stock option under the 2001 Incentive and Non-Statutory Stock  Option Plan, subject to vesting, for employees below the rank of Operating  Vice President (included as Exhibit 10.9 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended June 25, 2005, File  No. 0-22480, and incorporated herein by reference) |
| 10.12 |   | Third Amended and  Restated 1998 Employee Stock Purchase Plan (included as Exhibit 10.1 to  the Company’s Current Report on Form 8-K filed February 8,  2006, File No. 0-22480, and incorporated herein by reference)                                                                                                                                         |
| 10.13 |   | The J. Jill  Group, Inc. 2006 Leadership Incentive Plan (included as  Exhibit 10.3 to the Company’s Current Report on Form 8-K  filed January 27, 2006, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                         |
| 10.14 |   | The J. Jill  Group, Inc. Amended and Restated 2005 Incentive Compensation Plan  (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed June 7, 2005, File No. 0-22480, and incorporated herein  by reference)                                                                                                                      |
| 10.15 |   | The J. Jill  Group, Inc. Fall Season Supplemental Executive Bonus Plan (included as  Exhibit 10.2 to the Company’s Current Report on Form 8-K  filed June 7, 2005, File No. 0-22480, and incorporated herein  by reference)                                                                                                                              |
| 10.16 |   | The J. Jill  Group, Inc. 2005 Incentive Compensation Plan (included as  Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed December 23, 2004, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                      |
| 10.17 |   | The J. Jill Group, Inc.  2005 Spring Season Supplemental Executive Bonus Plan (included as  Exhibit 10.2 to the Company’s Current Report on Form 8-K  filed December 23, 2004, File No. 0-22480, and incorporated  herein by reference)                                                                                                                  |
| 10.18 |   | 2004 Fall Season  Special Bonus Plan (included as Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed September 22, 2004, File No. 0-22480,  and incorporated herein by reference)                                                                                                                                                                |
| 10.19 |   | 2004 Incentive  Compensation Plan (included as Exhibit 10.5 to the Company’s Annual  Report on Form 10-K for the fiscal year ended December 27,  2003, File No. 0-22480, and incorporated herein by reference)                                                                                                                                                |
| 10.20 |   | Amended 2003  Incentive Compensation Plan (included as Exhibit 10.6 to the Company’s  Annual Report on Form 10-K for the fiscal year ended December 27,  2003, File No. 0-22480, and incorporated herein by reference)                                                                                                                                        |
| 10.21 |   | The J. Jill  Group, Inc. 2005 Deferred Compensation Plan (included as  Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed November 15, 2005, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                       |
| 10.22 |   | Deferred  Compensation Plan restated as of September 17, 2004 (included as  Exhibit 10.2 to the Company’s Current Report on Form 8-K  filed September 22, 2004, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                 |
| 10.23 |   | Trust Agreement  for The J. Jill Group, Inc. Deferred Compensation Plans restated as of  January 1, 2005 (included as Exhibit 10.2 to the Company’s Current  Report on Form 8-K filed November 15, 2004, File No. 0-22480,  and incorporated herein by reference)                                                                                   |

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| 10.24 |   | Letter Agreement,  dated April 24, 2005, between the Company and John J. Hayes (included as  Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed April 18, 2005, File No. 0-22480, and incorporated  herein by reference)                                              |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.25 |   | Letter Agreement,  dated January 19, 2006, between the Company and Stephen L. Pearson  (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed on January 24, 2006, File No. 0-22480, and incorporated  herein by reference)                                  |
| 10.26 |   | Employment Letter  Agreement, dated October 17, 2005, between the Company and Lisa Bayne  (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed on October 20, 2005, File No. 0-22480, and incorporated  herein by reference)                               |
| 10.27 |   | Agreement to  Protect Corporate Property, effective as of December 10, 2004, between  the Company and Dennis J. Adomaitis (included as Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed December 15, 2004,  File No. 0-22480, and incorporated herein by reference) |
| 10.28 |   | Agreement to  Protect Corporate Property, dated December 10, 2004, between the Company  and Peter J. Clinch                                                                                                                                                                                                 |
| 10.29 |   | Agreement to  Protect Corporate Property, effective as of December 10, 2004, between  the Company and Olga L. Conley (included as Exhibit 10.2 to the Company’s  Current Report on Form 8-K filed December 15, 2004, File  No. 0-22480, and incorporated herein by reference)      |
| 10.30 |   | Agreement to  Protect Corporate Property, effective as of December 10, 2004, between  the Company and Gordon R. Cooke (included as Exhibit 10.3 to the  Company’s Current Report on Form 8-K filed December 15, 2004,  File No. 0-22480, and incorporated herein by reference)     |
| 10.31 |   | Agreement to  Protect Corporate Property, effective as of December 10, 2004, between  the Company and John J. Hayes (included as Exhibit 10.4 to the Company’s  Current Report on Form 8-K filed December 15, 2004, File  No. 0-22480, and incorporated herein by reference)       |
| 10.32 |   | Agreement to  Protect Corporate Property, dated February 8, 2005, between the Company  and John Fiske                                                                                                                                                                                                       |
| 10.33 |   | Agreement to  Protect Corporate Property, effective as of December 10, 2004, between  the Company and Stephen L. Pearson (included as Exhibit 10.5 to the  Company’s Current Report on Form 8-K filed December 15, 2004,  File No. 0-22480, and incorporated herein by reference)  |
| 10.34 |   | Agreement to  Protect Corporate Property, dated October 17, 2005, between the Company  and Lisa Bayne (included as Exhibit 10.2 to the Company’s Current Report  on Form 8-K filed on October 20, 2005, File No. 0-22480,  and incorporated herein by reference)                   |
| 10.35 |   | Severance  Agreement, dated December 21, 2005, between the Company and Gordon R.  Cooke (included as Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed on December 23, 2005, File No. 0-22480,  and incorporated herein by reference)                                |
| 10.36 |   | Severance  Agreement, dated December 21, 2005, between the Company and Olga L. Conley  (included as Exhibit 10.2 to the Company’s Current Report on Form 8-K  dated December 23, 2005, File No. 0-22480, and incorporated  herein by reference)                                         |
| 10.37 |   | Severance  Agreement, dated December 21, 2005, between the Company and Dennis J.  Adomaitis (included as Exhibit 10.3 to the Company’s Current Report on  Form 8-K dated December 23, 2005, File No. 0-22480,  and incorporated herein by reference)                               |

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| 10.38 |   | Severance  Agreement, dated December 21, 2005, between the Company and Lisa T.  Bayne (included as Exhibit 10.4 to the Company’s Current Report on  Form 8-K filed on December 23, 2005, File No. 0-22480,  and incorporated herein by reference)                                                                                                                                                       |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.39 |   | Severance  Agreement, dated December 21, 2005, between the Company and Peter J.  Clinch (included as Exhibit 10.5 to the Company’s Current Report on  Form 8-K filed on December 23, 2005, File No. 0-22480,  and incorporated herein by reference)                                                                                                                                                     |
| 10.40 |   | Severance Agreement, dated December 21, 2005, between the Company  and John Fiske (included as Exhibit 10.6 to the Company’s Current Report  on Form 8-K filed on December 23, 2005, File No. 0-22480,  and incorporated herein by reference)                                                                                                                                                           |
| 10.41 |   | Amended and Restated  Change In Control Severance Agreement, dated January 27, 2006, between  the Company and Gordon R. Cooke (included as Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed on January 27,  2006, File No. 0-22480, and incorporated herein by reference)                                                                                                                |
| 10.42 |   | Amended and  Restated Change In Control Severance Agreement, dated January 27, 2006,  between the Company and Olga L. Conley (included as Exhibit 10.2 to the  Company’s Current Report on Form 8-K filed on January 27,  2006, File No. 0-22480, and incorporated herein by reference)                                                                                                                 |
| 10.43 |   | Change In Control  Severance Agreement, dated December 21, 2005 between the Company and  Dennis J. Adomaitis (included as Exhibit 10.9 to the Company’s Current  Report on Form 8-K filed on December 23, 2005, File  No. 0-22480, and incorporated herein by reference)                                                                                                                                |
| 10.44 |   | Change In Control  Severance Agreement, dated December 21, 2005 between the Company and  Lisa T. Bayne (included as Exhibit 10.10 to the Company’s Current Report  on Form 8-K filed on December 23, 2005, File No. 0-22480,  and incorporated herein by reference)                                                                                                                                     |
| 10.45 |   | Change In Control  Severance Agreement, dated December 21, 2005 between the Company and  Peter J. Clinch (included as Exhibit 10.11 to the Company’s Current  Report on Form 8-K filed on December 23, 2005, File  No. 0-22480, and incorporated herein by reference)                                                                                                                                   |
| 10.46 |   | Change In Control  Severance Agreement, dated December 21, 2005 between the Company and  John Fiske (included as Exhibit 10.12 to the Company’s Current Report on  Form 8-K filed on December 23, 2005, File No. 0-22480,  and incorporated herein by reference)                                                                                                                                        |
| 10.47 |   | Fifth Amended and  Restated Loan Agreement, dated June 29, 2001, between the Company and  Citizens Bank of Massachusetts, individually and as agent for the other  lenders party to such agreement, HSBC Bank USA and Bank of New Hampshire,  N.A. (included as Exhibit 99.1 to the Company’s Current Report on  Form 8-K filed July 17, 2001, File No. 0-22480,  and incorporated herein by reference) |
| 10.48 |   | Security  Agreement, dated June 29, 2001, between the Company and Citizens Bank of  Massachusetts, as agent for the lenders (included as Exhibit 99.2 to the  Company’s Current Report on Form 8-K filed July 17, 2001,  File No. 0-22480, and incorporated herein by reference)                                                                                                                        |
| 10.49 |   | Grant of Security  Interest in Trademarks, dated June 29, 2001, between the Company and  Citizens Bank of Massachusetts, as agent for the lenders (included as  Exhibit 99.16 to the Company’s Current Report on Form 8-K  filed July 17, 2001, File No. 0-22480, and incorporated herein  by reference)                                                                                                |

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| 10.50 |   | First Amendment  to Fifth Amended and Restated Loan Agreement, dated August 28, 2001,  between the Company and Citizens Bank of Massachusetts, individually and as  agent for the other lenders party to such agreement, HSBC Bank USA and Bank  of New Hampshire, N.A. (included as Exhibit 10.1 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended  September 29, 2001, File No. 0-22480, and incorporated herein  by reference)                                                             |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.51 |   | Second Amendment  to Fifth Amended and Restated Loan Agreement, dated July 25, 2002, by  and among the Company and Citizens Bank of Massachusetts, HSBC Bank USA and  Banknorth, N.A. f/k/a Peoples Heritage Bank, N.A., successor by merger to  Bank of New Hampshire, N.A. and Citizens Bank of Massachusetts as agent for  the lenders (included as Exhibit 10.1 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended June 29, 2002, File  No. 0-22480, and incorporated herein by reference) |
| 10.52 |   | Third Amendment  to Fifth Amended and Restated Loan Agreement, dated June 26, 2003, by  and among the Company and Citizens Bank of Massachusetts, HSBC Bank USA,  Banknorth, N.A. and Citizens Bank of Massachusetts as agent for the lenders  (included as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q  for the quarter ended June 28, 2003, File No. 0-22480, and  incorporated herein by reference)                                                                                            |
| 10.53 |   | Amended and  Restated Revolving Note, dated June 26, 2003, between the Company and  Citizens Bank of Massachusetts (included as Exhibit 10.6 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended  June 28, 2003, File No. 0-22480, and incorporated herein by  reference)                                                                                                                                                                                                                       |
| 10.54 |   | Amended and  Restated Revolving Note, dated June 26, 2003, between the Company and  HSBC Bank USA (included as Exhibit 10.7 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended June 28, 2003, File  No. 0-22480, and incorporated herein by reference)                                                                                                                                                                                                                                         |
| 10.55 |   | Amended and  Restated Revolving Note, dated June 26, 2003, between the Company and  Banknorth, N.A. (included as Exhibit 10.8 to the Company’s Quarterly  Report on Form 10-Q for the quarter ended June 28, 2003, File  No. 0-22480, and incorporated herein by reference)                                                                                                                                                                                                                                       |
| 10.56 |   | Fourth Amendment  to Fifth Amended and Restated Loan Agreement, dated September 30, 2004,  between the Company and Citizens Bank of Massachusetts, HSBC Bank USA,  Banknorth, N.A. and Citizens Bank of Massachusetts as agent for the lenders  (included as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed October 1, 2004, File No. 0-22480, and incorporated  herein by reference)                                                                                                            |
| 10.57 |   | First Amendment  to Amended and Restated Revolving Note, dated September 30, 2004,  between the Company and Citizens Bank of Massachusetts (included as  Exhibit 10.2 to the Company’s Current Report on Form 8-K  filed October 1, 2004, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                                                                                                |
| 10.58 |   | First Amendment  to Amended and Restated Revolving Note, dated September 30, 2004,  between the Company and HSBC Bank USA, National Association (included as  Exhibit 10.3 to the Company’s Current Report on Form 8-K  filed October 1, 2004, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                                                                                           |
| 10.59 |   | First Amendment  to Amended and Restated Revolving Note, dated September 30, 2004,  between the Company and Banknorth, N.A. (included as Exhibit 10.4 to the  Company’s Current Report on Form 8-K filed October 1, 2004,  File No. 0-22480, and incorporated herein by reference)                                                                                                                                                                                                                                |

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| 10.60 |   | Fifth Amendment  to Fifth Amended and Restated Loan Agreement, dated December 27, 2004,  by and among the Company and Citizens Bank of Massachusetts, HSBC Bank USA,  National Association and Banknorth, N.A. (included as Exhibit 10.1 to  the Company’s Current Report on Form 8-K filed December 28,  2004, File No. 0-22480, and incorporated herein by reference)                                                                                              |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.61 |   | Amendment to  Security Agreement, dated December 27, 2004, between the Company and  Citizens Bank of Massachusetts, as agent for the lenders (included as  Exhibit 10.2 to the Company’s Current Report on Form 8-K  filed December 28, 2004, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                                               |
| 10.62 |   | Security  Agreement, dated December 27, 2004, between J. Jill, LLC and Citizens  Bank of Massachusetts, as agent for the lenders (included as  Exhibit 10.3 to the Company’s Current Report on Form 8-K  filed December 28, 2004, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                                                           |
| 10.63 |   | Security  Agreement, dated December 27, 2004, between J.J. Company, Inc. and  Citizens Bank of Massachusetts, as agent for the lenders (included as  Exhibit 10.4 to the Company’s Current Report on Form 8-K  filed December 28, 2004, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                                                |
| 10.64 |   | Security  Agreement, dated December 27, 2004, between J. Jill, GP and Citizens  Bank of Massachusetts, as agent for the lenders (included as  Exhibit 10.5 to the Company’s Current Report on Form 8-K  filed December 28, 2004, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                                                            |
| 10.65 |   | Guaranty  (Unlimited), dated December 27, 2004, between J. Jill, LLC and Citizens  Bank of Massachusetts, as agent for the lenders (included as  Exhibit 10.6 to the Company’s Current Report on Form 8-K  filed December 28, 2004, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                                                         |
| 10.66 |   | Guaranty  (Unlimited), dated December 27, 2004, between J.J. Company, Inc.  and Citizens Bank of Massachusetts, as agent for the lenders (included as  Exhibit 10.7 to the Company’s Current Report on Form 8-K  filed December 28, 2004, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                                              |
| 10.67 |   | Guaranty  (Unlimited), dated December 27, 2004, between J. Jill, GP and Citizens  Bank of Massachusetts, as agent for the lenders (included as  Exhibit 10.8 to the Company’s Current Report on Form 8-K  filed December 28, 2004, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                                                          |
| 10.68 |   | Pledge Agreement,  dated December 27, 2004, between the Company and Citizens Bank of  Massachusetts, as agent for the lenders (included as Exhibit 10.9 to the  Company’s Current Report on Form 8-K filed December 28, 2004,  File No. 0-22480, and incorporated herein by reference)                                                                                                                                                                               |
| 10.69 |   | First Pledge and  Security Agreement, dated December 27, 2004, between J. Jill, GP and  Citizens Bank of Massachusetts, individually and as agent for the lenders (included as  Exhibit 10.10 to the Company’s Current Report on Form 8-K  filed December 28, 2004, File No. 0-22480 and incorporated  herein by reference)                                                                                                                                          |
| 10.70 |   | Sixth Amendment  to Fifth Amended and Restated Loan Agreement, dated June 17, 2005, by  and among the Company and Citizens Bank of Massachusetts, HSBC Bank USA,  National Association, and TD Banknorth, N.A., formerly known as Banknorth,  N.A. and Citizens Bank of Massachusetts as agent for the lenders (included as  Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed June 21, 2005, File No. 0-22480, and incorporated  herein by reference) |

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| 10.71 |   | Seventh Amendment  to Fifth Amended and Restated Loan Agreement, dated December 30, 2005,  by and among the Company and Citizens Bank of Massachusetts, HSBC Bank USA,  National Association, and TD Banknorth, N.A. (collectively, the “Lenders”),  and Citizens Bank of Massachusetts as agent for the Lenders (included as  Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed January 4, 2006, File No. 0-22480, and incorporated  herein by reference) |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.72 |   | Amended and  Restated Revolving Note, dated December 30, 2005, between the Company  and Citizens Bank of Massachusetts (included as Exhibit 10.2 to the  Company’s Current Report on Form 8-K filed January 4, 2006,  File No. 0-22480, and incorporated herein by reference)                                                                                                                                                                                                      |
| 10.73 |   | Amended and  Restated Revolving Note, dated December 30, 2005, between the Company  and HSBC Bank USA, National Association (included as Exhibit 10.3 to the  Company’s Current Report on Form 8-K filed January 4, 2006,  File No. 0-22480, and incorporated herein by reference)                                                                                                                                                                                                 |
| 10.74 |   | Amended and  Restated Revolving Note, dated December 30, 2005, between the Company  and TD Banknorth, N.A. (included as Exhibit 10.4 to the Company’s  Current Report on Form 8-K filed January 4, 2006, File  No. 0-22480, and incorporated herein by reference)                                                                                                                                                                                                                  |
| 10.75 |   | Master Security  Agreement, dated as of December 23, 1998, by and between the Company and  Citizens Leasing Corporation (included as Exhibit 10.59 to the Company’s  Annual Report on Form 10-K for the fiscal year ended  December 26, 1998, File No. 0-22480, and incorporated herein  by reference)                                                                                                                                                                             |
| 10.76 |   | Amendment  No. 1 to the Master Security Agreement, dated as of December 23,  1998, by and between the Company and Citizens Leasing Corporation (included  as Exhibit 10.60 to the Company’s Annual Report on Form 10-K  for the fiscal year ended December 26, 1998, File No. 0-22480,  and incorporated herein by reference)                                                                                                                                                 |
| 10.77 |   | Secured  Promissory Note No. 5, dated May 30, 2003, between the Company and  Citizens Leasing Corporation (included as Exhibit 10.1 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended June 28,  2003, File No. 0-22480, and incorporated herein by reference)                                                                                                                                                                                             |
| 10.78 |   | Assignment and  Assumption Agreement, dated December 26, 2004, between the Company, J.  Jill, LLC and Citizens Leasing Corporation (included as  Exhibit 10.11 to the Company’s Current Report on Form 8-K  filed December 28, 2004, File No. 0-22480, and incorporated  herein by reference)                                                                                                                                                                                      |
| 10.79 |   | Guaranty, dated  December 26, 2004, between the Company and Citizens Leasing Corporation  (included as Exhibit 10.12 to the Company’s Current Report on  Form 8-K filed December 28, 2004, File No. 0-22480,  and incorporated herein by reference)                                                                                                                                                                                                                                |
| 10.80 |   | Mortgage Note,  dated March 1, 1999, between Birch Pond Realty Corporation and John  Hancock Real Estate Finance, Inc. (included as Exhibit 10.63 to the  Company’s Annual Report on Form 10-K for the fiscal year ended  December 26, 1998, File No. 0-22480, and incorporated herein  by reference)                                                                                                                                                                         |
| 10.81 |   | Consent  Agreement, dated March 1, 1999, between the Company and Citizens Bank of  Massachusetts (included as Exhibit 10.71 to the Company’s Annual Report  on Form 10-K for the fiscal year ended December 26, 1998,  File No. 0-22480, and incorporated herein by reference)                                                                                                                                                                                                     |
| 10.82 |   | Lease, dated  March 1, 1999, between the Company and Birch Pond Realty Corporation  (included as Exhibit 10.10 to the Company’s Annual Report on  Form 10-K for the fiscal year ended December 26, 1998, File  No. 0-22480, and incorporated herein by reference)                                                                                                                                                                                                                  |

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| 10.83 |   | Assignment of  Leases and Rents, dated March 1, 1999, between Birch Pond Realty  Corporation and John Hancock Real Estate Finance, Inc. (included as  Exhibit 10.64 to the Company’s Annual Report on Form 10-K for  the fiscal year ended December 26, 1998, File No. 0-22480,  and incorporated herein by reference)                                                   |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.84 |   | Mortgage,  Assignment of Leases and Rents and Security Agreement, dated March 1,  1999, between Birch Pond Realty Corporation and John Hancock Real Estate  Finance, Inc. (included as Exhibit 10.65 to the Company’s Annual  Report on Form 10-K for the fiscal year ended December 26,  1998, File No. 0-22480, and incorporated herein by reference)                  |
| 10.85 |   | Assignment of  Agreements, Permits and Contracts, dated March 1, 1999, between Birch  Pond Realty Corporation and John Hancock Real Estate Finance, Inc.  (included as Exhibit 10.66 to the Company’s Annual Report on  Form 10-K for the fiscal year ended December 26, 1998, File  No. 0-22480, and incorporated herein by reference)                                  |
| 10.86 |   | Indemnification  Agreement, dated March 1, 1999, between the Company, Birch Pond Realty  Corporation and John Hancock Real Estate Finance, Inc. (included as  Exhibit 10.67 to the Company’s Annual Report on Form 10-K for  the fiscal year ended December 26, 1998, File No. 0-22480,  and incorporated herein by reference)                                           |
| 10.87 |   | Guaranty  Agreement, dated March 1, 1999, between the Company and John Hancock  Real Estate Finance, Inc. (included as Exhibit 10.68 to the  Company’s Annual Report on Form 10-K for the fiscal year ended  December 26, 1998, File No. 0-22480, and incorporated herein  by reference)                                                                                 |
| 10.88 |   | Replacement  Reserve Agreement, dated March 1, 1999, by and between Birch Pond Realty  Corporation and John Hancock Real Estate Finance, Inc. (included as  Exhibit 10.69 to the Company’s Annual Report on Form 10-K for  the fiscal year ended December 26, 1998, File No. 0-22480,  and incorporated herein by reference)                                             |
| 10.89 |   | Tenant  Improvement and Leasing Commissions Agreement, dated March 1, 1999,  between Birch Pond Realty Corporation and John Hancock Real Estate  Finance, Inc. (included as Exhibit 10.70 to the Company’s Annual  Report on Form 10-K for the fiscal year ended December 26,  1998, File No. 0-22480, and incorporated herein by reference)                             |
| 10.90 |   | Subordination of  Mortgage, dated June 28, 1999, between Birch Pond Realty Corporation and  John Hancock Real Estate Finance, Inc. (included as Exhibit 10.2 to  the Company’s Quarterly Report on Form 10-Q for the quarter ended  June 26, 1999, File No. 0-22480, and incorporated herein by  reference)                                                              |
| 10.91 |   | First  Modification of Mortgage, Assignment of Leases and Rents and Security  Agreement, dated June 28, 1999, between Birch Pond Realty Corporation  and John Hancock Real Estate Finance, Inc. (included as  Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q  for the quarter ended June 26, 1999, File No. 0-22480, and  incorporated herein by reference) |
| 10.92 |   | Partial Release,  dated June 28, 1999, between Birch Pond Realty Corporation and John  Hancock Real Estate Finance, Inc. (included as Exhibit 10.4 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended  June 26, 1999, File No. 0-22480, and incorporated herein by  reference)                                                                        |
| 10.93 |   | Reaffirmation of  Guaranty and Indemnity Agreements, dated June 28, 1999, between the  Company and Birch Pond Realty Corporation in favor of John Hancock Real  Estate Finance, Inc. (included as Exhibit 10.5 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended June 26,  1999, File No. 0-22480, and incorporated herein by reference)             |

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| 10.94  |       | Lease Agreement,  dated September 18, 1998, between the Company and National Fire  Protection Association (included as Exhibit 10.1 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended  September 26, 1998, File No. 0-22480, and incorporated herein  by reference)                   |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.95  |       | First Amendment  to Lease Agreement, dated June 10, 1999, between the Company and  National Fire Protection Association (included as Exhibit 10.1 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended  June 26, 1999, File No. 0-22480, and incorporated herein by  reference)          |
| 10.96  |       | Second Amendment  to Lease Agreement, dated October 29, 1999, between the Company and  National Fire Protection Association (included as Exhibit 10.8 to the  Company’s Annual Report on Form 10-K for the fiscal year ended  December 25, 1999, File No. 0-22480, and incorporated herein  by reference) |
| 10.97  |       | Agreement of  Sublease between the Company and Lumbermens Mutual Casualty Company, dated  August 28, 2003 (included as Exhibit 10.1 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended September 27,  2003, File No. 0-22480, and incorporated herein by reference)                    |
|        |       | **List of  Subsidiaries of the Registrant**                                                                                                                                                                                                                                                                                             |
| 21.1   |       | List of  Subsidiaries of the Registrant at December 31, 2005                                                                                                                                                                                                                                                                       |
|   | ** ** | **Consent  of Experts**                                                                                                                                                                                                                                                                                                                 |
| 23.1   |       | Consent of  PricewaterhouseCoopers LLP dated March 15, 2006                                                                                                                                                                                                                                                                        |
|   | ** ** | **Certifications**                                                                                                                                                                                                                                                                                                                      |
| 31.1   |       | Certification of  Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) or  Rule 15d-14(a)                                                                                                                                                                                                           |
| 31.2   |       | Certification of  Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) or  Rule 15d-14(a)                                                                                                                                                                                                           |
| 32.1   |       | Certification by  Chief Executive Officer and Chief Financial Officer of Periodic Report  Pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                                       |

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 of 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

|                             |   | THE J. JILL GROUP, INC. |
|-----------------------------|--------|-------------------------|
| Dated: March 15,  2006 |   |                    |   |   |
|                        |   | By:                     |   | /s/ GORDON R. COOKE |
|                        |   |                    |   | Gordon R. Cooke |
|                        |   |                    |   | President, Chief Executive Officer, |
|                        |   |                    |   | Chairman of the Board of Directors and |
| * *                    |   |                    |   | Director*(Principal Executive  Officer)* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

|                        | **Signature** | ** **                                                                        | ** ** |                | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|------------------------|---------------|-----------------------------------------------------------------------------------|------------|----------------|-----------|------------|------------|--|----------|------------|
| /s/ GORDON R. COOKE    |          | President, Chief  Executive Officer,                                              |       |           |
| Gordon R. Cooke        |          | Chairman of the Board of  Directors and  Director *(Principal Executive Officer)* |       | March 15, 2006 |
| /s/ OLGA L. CONLEY     |          | Executive Vice  President/Chief Financial                                         |       |           |
| Olga L. Conley         |          | Officer and Chief  Administrative Officer*(Principal Financial Officer)*          |       | March 15, 2006 |
| /s/ LINDA L. TRUDEL    |          | Senior Vice  President/Corporate Controller                                       |       |           |
| Linda L. Trudel        |          | and Treasurer *(Principal Accounting Officer)*                                    |       | March 15, 2006 |
| /s/ WILLIAM E. ENGBERS |          |                                                                              |       |           |
| William E. Engbers     |          | Director                                                                          |       | March 15, 2006 |
| /s/ BRETT D. HEFFES    |          |                                                                              |       |           |
| Brett D. Heffes        |          | Director                                                                          |       | March 15, 2006 |
| /s/ JAMES G. HELD      |          |                                                                              |       |           |
| James G. Held          |          | Director                                                                          |       | March 15, 2006 |
| /s/ THOMAS J. LITLE    |          |                                                                              |       |           |
| Thomas J. Litle        |          | Director                                                                          |       | March 15, 2006 |
| /s/ RUTH M. OWADES     |          |                                                                              |       |           |
| Ruth M. Owades         |          | Director                                                                          |       | March 15, 2006 |
| /s/ MICHAEL P. SHERMAN |          |                                                                              |       |           |
| Michael P. Sherman     |          | Director                                                                          |       | March 15, 2006 |

 

 

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**THEJ. JILL GROUP, INC.**FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2005EXHIBIT INDEX

|            | ** ** | **Material Contracts**                                                                                                            |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|
| 10.28      | ** ** | Agreement to Protect  Corporate Property, dated December 10, 2004, between the Company and  Peter J. Clinch                  |
| 10.32      | ** ** | Agreement to Protect  Corporate Property, dated February 8, 2005, between the Company and John  Fiske                        |
|       |       | **List of Subsidiaries of the  Registrant**                                                                                       |
| 21.1       |       | List of Subsidiaries of  the Registrant at December 31, 2005                                                                 |
|       | ** ** | **Consent of Experts**                                                                                                            |
| 23.1       |       | Consent of PricewaterhouseCoopers  LLP dated March 15, 2006                                                                  |
| ** ** |       | **Certifications**                                                                                                                |
| 31.1       | ** ** | Certification of  Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) or  Rule 15d-14(a)     |
| 31.2       | ** ** | Certification of  Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) or  Rule 15d-14(a)     |
| 32.1       | ** ** | Certification by Chief  Executive Officer and Chief Financial Officer of Periodic Report Pursuant to  18 U.S.C. Section 1350 |

 

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