<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20549

                                   FORM 10-K

               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

     For the 53 weeks ended January 31, 1998 Commission file number 1-777

                          J. C. PENNEY COMPANY, INC.
             -----------------------------------------------------
            (Exact name of registrant as specified in its charter)

             DELAWARE                                 13-5583779
     -------------------------                 ------------------------
     (State of incorporation)                  (I.R.S. Employer ID No.)

        6501 LEGACY DRIVE, PLANO, TEXAS                  75024-3698
        -------------------------------                  ----------
     (Address of principal executive offices)            (Zip Code)

Registrant's telephone number, including area code:    (972) 431-1000
--------------------------------------------------     --------------

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

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

Common Stock of 50c par value                  New York Stock Exchange
Preferred Stock Purchase Rights                New York Stock Exchange


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

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

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

     State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant: $19,890,899,116 as of March 16, 1998.

     Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 252,176,384 shares
of Common Stock of 50c par value, as of March 16, 1998.

                      DOCUMENTS INCORPORATED BY REFERENCE
                      -----------------------------------

<TABLE>
<CAPTION>
     Documents from which portions           Parts of the Form 10-K
     are incorporated by reference           into which incorporated
     -----------------------------           -----------------------
<S>                                          <C> 
1.   J. C. Penney Company, Inc.              Part I, Part II, and
     1997 Annual Report to Stockholders      Part IV
 
2.   J. C. Penney Company, Inc.              Part III
     1998 Proxy Statement

3.   J. C. Penney Funding Corporation        Part I and Part IV
     Form 10-K for fiscal year 1997
</TABLE> 
<PAGE>
 
                                    PART I
                                    ------

1.  BUSINESS.

  J. C. Penney Company, Inc. ("Company") was founded by James Cash Penney in
1902.  Incorporated in Delaware in 1924, the Company has grown to be a major
retailer.  The major portion of the Company's business consists of providing
merchandise and services to consumers through department stores that include
catalog departments.  The Company markets predominantly family apparel, jewelry,
shoes, accessories, and home furnishings.  In addition, the Company, through its
wholly-owned subsidiary, Eckerd Corporation ("Eckerd"), operates a chain of
approximately 2,780 drugstores located throughout the northeast, southeast, and
Sunbelt regions of the United States.  The Company also has several direct
marketing insurance subsidiaries, the principal of which is J. C. Penney Life
Insurance Company, which market life, health, accident and credit insurance as
well as a growing portfolio of non-insurance products.

  The business of marketing merchandise and services is highly competitive.
Although the Company is one of the largest department store and drugstore
retailers in the United States, it has numerous competitors.  Many factors enter
into the competition for the consumer's patronage, including price, quality,
style, service, product mix, convenience, and credit availability.  The
Company's annual earnings depend to a significant extent on the results of
operations for the last quarter of its fiscal year.  Sales for that period
average approximately one-third of annual sales.

  Information about certain aspects of the business of the Company included
under the captions of "Investments and Fair Value of Financial Instruments"
(page 25), and "Segment Reporting" (page 30), which appear in the section of the
Company's 1997 Annual Report to Stockholders entitled "Notes to Consolidated
Financial Statements", "Five Year Financial Summary" (page 31), "Five Year
Operations Summary" (page 32), and "Supplemental Data (unaudited)" (pages 33 and
34), which appear in the Company's 1997 Annual Report to Stockholders on the
pages indicated in the parenthetical references, is incorporated herein by
reference and filed hereto as Exhibit 13 in response to Item 1 of Form 10-K.

  In addition, information about J. C. Penney Funding Corporation, a wholly
owned consolidated subsidiary of the Company, which appears in Item 1 of its
separate Annual Report on Form 10-K for the fiscal year ended January 31, 1998,
is incorporated herein by reference and filed hereto as Exhibit 99(a) in
response to Item 1 of Form 10-K.

                                      -1-
<PAGE>
 
  SUPPLIERS.  The Company purchases its merchandise from approximately 4,300
domestic and foreign suppliers, many of whom have done business with the Company
for many years.  In addition, Eckerd purchases merchandise and pharmaceuticals
from approximately 3,300 suppliers, substantially all of which are domestic.
The majority of Eckerd's suppliers have done business with Eckerd for many
years.  In addition to its Plano, Texas home office, the Company, through its
international purchasing subsidiary and as of January 31, 1998, maintained
buying offices in Guatemala, Hong Kong, India, Italy, Korea, Mexico, the
Philippines, Singapore, Taiwan and Thailand.

  EMPLOYMENT.  The Company and its consolidated subsidiaries employed
approximately 260,000 persons as of January 31, 1998.

  ENVIRONMENT.  Environmental protection requirements did not have a material
effect upon the Company's operations during fiscal 1997.  While management
believes it unlikely, it is possible that compliance with such requirements will
lengthen lead time in expansion plans and increase construction, and therefore
operating, costs due, in part, to the expense and time required to conduct
environmental and ecological studies.

2.  PROPERTIES.

  At January 31, 1998, the Company operated 3,981 retail stores, comprised of
1,203 JCPenney department stores and 2,778 drugstores, in all 50 states, Puerto
Rico, Mexico, and Chile, of which 282 JCPenney department stores and 16
drugstores were owned.  In addition, the Company owns ten store locations that
are leased to other tenants and not operated as units of the Company.  The
Company also operated six catalog fulfillment centers, of which four were owned,
and owned one store distribution center, three drugstore distribution centers,
the insurance company and Eckerd corporate offices, and the Company's home
office facility and approximately 244 acres of property in Plano, Texas,
adjacent to the facility.  Information relating to certain of the Company's
facilities included under the captions of "Five Year Financial Summary" and
"Five Year Operations Summary", which appear on pages 31 and 32, respectively,
of the Company's 1997 Annual Report to Stockholders, is incorporated herein by
reference and filed hereto as Exhibit 13 in response to Item 2 of Form 10-K.

3.  LEGAL PROCEEDINGS.

  On February 4, 1998, Eckerd Corporation was served with a civil complaint
which was filed jointly in federal court in Tampa, Florida by the Florida
Attorney General, the U.S. Department of Justice, and the U.S. Attorney's Office
for the Middle District of Florida.  The complaint relates to a practice, which
is not limited to Eckerd, known in the drugstore industry as "partial filling"
of

                                      -2-
<PAGE>
 
prescriptions and how they are billed in those relatively limited situations
when a customer fails to pick up the balance of a partially filled prescription.
The complaint seeks triple the amount of monetary damages and penalties up to
$10,000 for each bill for a partially-filled prescription.  A Motion to Dismiss
and to Strike has been filed by Eckerd and is pending.  Additionally, Eckerd and
a current and a former employee have been served with subpoenas issued by a
federal grand jury in the Middle District of Florida, at the direction of the
U.S. Attorney's Office, requesting records and documents pertaining to the
partial fill litigation and related matters.  Eckerd has also received a Civil
Investigative Demand from the Tennessee Attorney General requesting records and
documents pertaining to the partial filling of prescriptions in that state.
Eckerd is cooperating in each of these investigations.

  On April 22, 1998, a purported class action lawsuit entitled Board of
Trustees of the Carpenters & Millwrights of Houston & Vicinity Welfare Trust
Fund v. Eckerd Corporation (Civil Action No. 598CV149) was filed in the U.S.
District Court for the Eastern District of Texas, Texarkana Division.  The
complaint, which seeks certification of a nationwide class comprised of all non-
governmental entities that have allegedly paid Eckerd for pharmaceuticals and/or
prescription medications which were not provided to the entities' insureds and
their family members, alleges certain violations of the Racketeering Influenced
and Corrupt Organizations Act in connection with the partial filling of
prescriptions.  The complaint seeks triple the amount of monetary damages, as
well as punitive damages, attorneys' fees, and other equitable relief.

  Eckerd denies the aforementioned allegations and intends to pursue the
defense of these actions vigorously.  Although it is too early to predict the
outcome of any of the aforementioned lawsuits or investigations, the complaints
focus on a very small percentage of the prescriptions filled by Eckerd and
management is of the opinion that the aforementioned matters should not have a
material adverse effect on the Company's consolidated financial position or
results of operations.

4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

  No matter was submitted to a vote of stockholders during the fourth quarter
of fiscal 1997.

                                      -3-
<PAGE>
 
                     EXECUTIVE OFFICERS OF THE REGISTRANT.
                     ------------------------------------ 

The following is a list, as of March 2, 1998, of the names and ages of the
executive officers of the Company and of the offices and other positions held by
each such person with the Company.  The terms of all executive officers will
expire on May 15, 1998.  There is no family relationship between any of the
named persons.

<TABLE>
<CAPTION>
                                        OFFICES AND OTHER POSITIONS
          NAME                            HELD WITH THE COMPANY                        AGE
   ------------------                   ----------------------------                   ---
<S>                                     <C>                                            <C>
James E. Oesterreicher................  Chairman of the Board and
                                           Chief Executive Officer; Director           56
W. Barger Tygart......................  Vice Chairman of the Board; Director           62
John T. Cody, Jr......................  President and Chief Operating Officer,
                                           JCPenney Stores, Merchandising,
                                           Marketing, and Catalog                      58
Gary L. Davis.........................  Senior Vice President, Director
                                           of Human Resources and
                                           Administration                              55
Gale Duff-Bloom.......................  President, Marketing and Company
                                           Communications                              58
David V. Evans........................  Senior Vice President, Chief
                                           Information Officer                         53
John E. Fesperman.....................  President and Chief Operating Officer,
                                           JCPenney Insurance, Credit, and
                                           Facilities Services                         52
Thomas D. Hutchens....................  President and Chief Operating
                                           Officer, International                      57
Charles R. Lotter.....................  Executive Vice President, Secretary
                                           and General Counsel                         60
William E. McCarthy...................  Formerly President, Catalog,
                                           Distribution, and Purchasing                56
Donald A. McKay.......................  Executive Vice President and
                                           Chief Financial Officer                     52
Francis A. Newman.....................     Chairman of the Board,
                                        President and Chief Executive
                                           Officer, Eckerd Corporation                 49
Ted L. Spurlock.......................  Formerly Senior Vice President,
                                           Director of Financial Services
                                           and Government Relations                    59
</TABLE>

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

  Mr. Oesterreicher was elected Chairman of the Board effective January 1997 and
has served as Chief Executive Officer since 1995.  He served as Vice Chairman of
the Board from 1995 to 1997.  From 1992 to 1995, he served as President of
JCPenney Stores and Catalog.

                                      -4-
<PAGE>
 
  Mr. Tygart, who will retire from the Company in 1998, was elected Vice
Chairman of the Board, effective November 1, 1997.  From 1995 to 1997 he served
as President and Chief Operating Officer and a director of the Company.  He was
elected a Senior Executive Vice President and was named Director of
Merchandising, Quality Assurance and Distribution in 1992.  In 1993, he was
appointed Director of Merchandising and Support Operations, and served in that
capacity until 1995.  He has also served as a director of Eckerd Corporation
since February 1997.

  Mr. Cody was elected President and Chief Operating Officer, JCPenney Stores,
Merchandising, Marketing, and Catalog, effective November 1, 1997.  From 1995 to
May 1997, he served as President of JCPenney Stores, and from May 1997 to
November 1997, he served as President of Merchandising.  He was elected an
Executive Vice President in 1992 and served as Director of JCPenney Stores from
1992 to 1995.

  Mr. Davis, who was elected Executive Vice President, Chief Human Resources and
Administration Officer, effective April 1, 1998, has served as Senior Vice
President, Director of Human Resources and Administration since 1997.  From 1996
to 1997, he served as Senior Vice President and Director of Personnel and
Administration.  He was elected President of the Northwestern Region in 1992 and
served in that capacity until 1996.

  Ms. Duff-Bloom was elected President of Marketing and Company Communications
in February 1996.  She was elected Senior Executive Vice President and served as
Director of Personnel and Company Communications from January 1995 to February
1996.  She was elected an Executive Vice President in 1993 and served as
Director of Administration from 1993 to 1995.  She served as Senior Vice
President and Associate Director of Merchandising from 1990 to 1993.

  Mr. Evans was elected Senior Vice President, Chief Information Officer,
effective November 1, 1997. Prior to that, he served as Senior Vice President,
Director of Information Systems and from 1995 to 1997 he served as Senior Vice
President, Director of Planning and Information Systems.  He was elected a Vice
President in 1987 and served as Director of Information Systems from 1987 to
1995.

  Mr. Fesperman was elected President and Chief Operating Officer, JCPenney
Insurance, Credit, and Facilities Services effective December 1, 1997.  Prior to
that, he served as Senior Vice President, Director of Planning, Facilities, and
International Development and from 1996 to 1997 he served as Senior Vice
President and Director of Support Services and Subsidiary Operations.  He was
elected a Vice President in 1993 and served as Director of Insurance from 1991
to 1996.

                                      -5-
<PAGE>
 
  Mr. Hutchens was elected President and Chief Operating Officer, International,
effective November 1, 1997.  From 1995 to May 1997, he served as President of
Merchandising Worldwide, and from May 1997 to November 1997, he served as
President of JCPenney Stores.  He was elected an Executive Vice President in
1992 and served as Director of Merchandising from 1992 to 1995.

  Mr. Lotter was elected an Executive Vice President in 1993.  He was elected
Senior Vice President, General Counsel and Secretary in 1987.  He has also
served as a director of Eckerd Corporation since December 1996.

  Mr. McCarthy, who will retire from the Company in 1998, served as President of
Catalog, Distribution, and Purchasing from 1995 to 1998.  He was elected
President, Catalog Division in 1992, and served in that capacity until 1995.
 
  Mr. McKay was elected an Executive Vice President in 1997.  He was elected
Senior Vice President and Chief Financial Officer in 1996.  From 1994 to 1996,
he served as Vice President and Controller.  He was elected Vice President and
Treasurer in 1985 and served in that capacity until 1994.  He has also served as
a director of Eckerd Corporation since December 1996.

  Mr. Newman was elected Chairman of the Board of Eckerd Corporation in May
1997.  He has served as Chief Executive Officer of Eckerd Corporation since
February 1996.  He is also President and a director of Eckerd Corporation,
positions he has held since July 1993.  Prior to joining Eckerd, Mr. Newman
served as President, Chief Executive Officer and a director of F&M Distributors,
Inc. ("F&M"), a drugstore chain, since 1986.  F&M filed bankruptcy under Chapter
11 of the United States Bankruptcy Code in December 1994.  Prior to joining F&M,
he was the Executive Vice President of Household Merchandising, Inc., a retail
firm, from 1984 to 1986 and the Senior Vice President of Merchandising for F. W.
Woolworth, a retail firm, from 1980 to 1984.

  Mr. Spurlock, who will retire from the Company in 1998, was elected a Senior
Vice President in 1992.  He served as Director of Financial Services and
Government Relations from 1995 to 1997 and Director of Financial Services and
Company Communications from 1992 to 1995.

                                    PART II
                                    -------

5.  MARKET FOR REGISTRANT'S COMMON EQUITY
    AND RELATED STOCKHOLDER MATTERS.

  The Company's Common Stock is traded principally on the New York Stock
Exchange, as well as on other exchanges in the United States.  In addition, the
Company has issued approximately 1.2 million shares of Series B ESOP Convertible
Preferred Stock pursuant to a leveraged

                                      -6-
<PAGE>
 
employee stock ownership plan.  Additional information relating to the Common
Stock and Preferred Stock of the Company included under the captions
"Consolidated Statements of Stockholders' Equity" (page 19), "Capital Stock"
(page 26), and "Quarterly Data (Unaudited)" (page 31), which appear in the
Company's 1997 Annual Report to Stockholders on the pages indicated in the
parenthetical references, is incorporated herein by reference and filed hereto
as Exhibit 13 in response to Item 5 of Form 10-K.

6.  SELECTED FINANCIAL DATA.

  Information for the fiscal years 1993-1997 included in the "Five Year
Financial Summary" on page 31 of the Company's 1997 Annual Report to
Stockholders is incorporated herein by reference and filed hereto as Exhibit 13
in response to Item 6 of Form 10-K.

7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

  The discussion and analysis included under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations", which
appears in the Company's 1997 Annual Report to Stockholders on pages 13 through
17 thereof, is incorporated herein by reference and filed hereto as Exhibit 13
in response to Item 7 of Form 10-K.

7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

  Not Applicable

8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

  The Consolidated Balance Sheets of the Company and subsidiaries as of January
31, 1998 and January 25, 1997, and the related Consolidated Statements of
Income, Stockholders' Equity and Cash Flows for each of the years in the three-
year period ended January 31, 1998, appearing on pages 18 through 21 of the
Company's 1997 Annual Report to Stockholders, together with the Independent
Auditors' Report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing on page 22 of the Company's 1997 Annual Report to
Stockholders, the Notes to Consolidated Financial Statements on pages 23 through
30, and the quarterly financial highlights ("Quarterly Data
(unaudited)")appearing on page 31 thereof, are incorporated herein by reference
and filed hereto as Exhibit 13 in response to Item 8 of Form 10-K.

9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
    ON ACCOUNTING AND FINANCIAL DISCLOSURE.

                                      -7-
<PAGE>
 
  The Company has had no change in, or disagreements with, its independent
certified public accountants on accounting or auditing matters or on financial
statement disclosure.

                                   PART III*
                                   -------- 

10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.*

11. EXECUTIVE COMPENSATION.*

12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT.*

13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.*

-----------------
  * Pursuant to General Instruction G to Form 10-K, the information called for
by Items 10, with respect to directors of the Company (to the extent not set
forth in Part I hereof), 11, 12, and 13 is incorporated by reference to the
Company's 1998 Proxy Statement, which involves the election of directors, the
final copy of which the Company filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, on April 9, 1998.

                                    PART IV
                                    -------


14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
    REPORTS ON FORM 8-K.

  (a)(1) All Financial Statements.  See Item 8 of this Annual Report on Form 10-
K for financial statements incorporated by reference to the Company's 1997
Annual Report to Stockholders.

  (a)(2) Financial Statement Schedules.  The following schedule is attached on
Page F-1.

  II. Valuation and Qualifying Accounts and Reserves

  See Independent Auditors' Report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing on page 12 of this Annual Report on Form
10-K.

  All other schedules have been omitted as they are inapplicable or not required
under the rules, or the information has been submitted in the consolidated
financial statements and related material to the

                                      -8-
<PAGE>
 
Company's 1997 Annual Report to Stockholders incorporated herein by reference
and filed hereto as Exhibit 13.

  Separate financial statements are filed for J. C. Penney Funding Corporation,
a wholly owned consolidated subsidiary, in its separate Annual Report on Form
10-K for the 53 weeks ended January 31, 1998, which financial statements,
together with the Independent Auditors' Report of KPMG Peat Marwick LLP thereon,
are incorporated herein by reference and filed hereto as Exhibit 99(b).

  (a)(3) Exhibits.  See separate Exhibit Index on pages G-1  through G-11.

  (b)    Current Reports on Form 8-K.  None.

  (c)    Each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form is filed as part of the separate
Exhibit Index on pages G-1 through G-11 and specifically identified as such
beginning on page G-6.

                                      -9-
<PAGE>
 
                                   SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                                        J. C. PENNEY COMPANY, INC.
                                        --------------------------
                                              (Registrant)



                                        By /s/ C. R. LOTTER
                                          -----------------------------
                                              C. R. Lotter
                                              Executive Vice President,
                                              Secretary and General Counsel


Dated:  April 30, 1998

                                      -10-
<PAGE>
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE> 
<CAPTION> 
   SIGNATURES                     TITLE                                DATE
   ----------                     -----                                ----
<S>                       <C>                                      <C>  
J. E. Oesterreicher*      Chairman of the Board and                April 30, 1998
----------------------      Chief Executive Officer (principal
                            executive officer); Director
J. E. Oesterreicher         
 
W. B. Tygart*             Vice Chairman of the Board;              April 30, 1998
----------------------      Director 
W. B. Tygart                
 
D. A. McKay*              Executive Vice President and             April 30, 1998           
----------------------      Chief Financial Officer                                         
                            (principal financial officer)                             
D. A. McKay                 
                                                                                            
W. J. Alcorn*             Vice President and Controller            April 30, 1998           
----------------------      (principal accounting officer)                                  
W. J. Alcorn                
                                                                                            
M. A. Burns*              Director                                 April 30, 1998           
----------------------                                                                      
M. A. Burns                                                                                 
                                                                                            
V. E. Jordan, Jr.*        Director                                 April 30, 1998           
----------------------                                                                      
V. E. Jordan, Jr.                                                                           
                                                                                            
George Nigh*              Director                                 April 30, 1998           
----------------------                                                                      
George Nigh                                                                                 
                                                                                            
J. C. Pfeiffer*           Director                                 April 30, 1998           
----------------------                                                                      
J. C. Pfeiffer                                                                              
                                                                                            
A. W. Richards*           Director                                 April 30, 1998           
----------------------                                                                      
A. W. Richards                                                                              
                                                                                            
F. Sanchez-Loaeza*        Director                                 April 30, 1998           
----------------------                                                                      
F. Sanchez-Loaeza                                                                           
                                                                                            
C. S. Sanford, Jr.*       Director                                 April 30, 1998           
----------------------                                                                      
C. S. Sanford, Jr.                                                                          
                                                                                            
R. G. Turner*             Director                                 April 30, 1998           
----------------------                                                                      
R. G. Turner                                                                                
                                                                                            
J. D. Williams*           Director                                 April 30, 1998            
----------------------
J. D. Williams
</TABLE>

*By /s/ C. R. Lotter
   --------------------------
    C. R. Lotter
    Attorney-in-fact

                                      -11-
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
                         ----------------------------


The Board of Directors of
J. C. Penney Company, Inc.:

Under date of February 26, 1998, we reported on the consolidated balance sheets
of J. C. Penney Company, Inc. and subsidiaries as of January 31, 1998 and
January 25, 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended January 31, 1998, as contained in the 1997 Annual Report to
Stockholders.  These consolidated financial statements and our report thereon
are incorporated by reference in the Company's Annual Report on Form 10-K for
the 1997 fiscal year.  In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule listed in Item 14(a)(2) of the Annual Report on
Form 10-K.  This financial statement schedule is the responsibility of the
Company's management.  Our responsibility is to express an opinion on this
financial statement schedule based on our audits.

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


                                          /S/ KPMG Peat Marwick LLP
 

Dallas, Texas
February 26, 1998

                                      -12-
<PAGE>

                                                                     SCHEDULE II
                           J. C. PENNEY COMPANY, INC.
                                AND SUBSIDIARIES

          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                              (Amounts in millions)

<TABLE> 
<CAPTION> 
----------------------------------------------------------------------------------------------
                                                                     
                                                       53 Weeks            52 Weeks Ended  
                                                        Ended        -------------------------  
                                                      January 31,    January 25,   January 27,
DESCRIPTION                                             1998           1997          1996
----------------------------------------------------------------------------------------------
<S>                                                   <C>            <C>           <C> 
Reserves deducted from assets
-----------------------------

Allowance for doubtful accounts (1)
     Balance at beginning of period                     $  77        $  63           $  55
     Additions charged to costs and                                                        
       expenses                                           249          196             163
     Deductions of write-offs, less                                                        
       recoveries                                        (221)        (182)           (155)
                                                        -----        -----           -----
                                                                                           
     Balance at end of period                           $ 105        $  77           $  63
                                                        =====        =====           ===== 
</TABLE> 

     (1) Excludes amounts related to the Company's retained interest in JCP 
Master Credit Card Trust.

<TABLE> 
<S>                                                   <C>            <C>           <C>  
Allowance for loan losses -
     JCPenney National Bank
     Balance at beginning of period                     $  51        $  47           $  44
     Additions charged to costs and                                                       
        expenses                                            8           83              45
     Deductions of write-offs, less                                                       
        recoveries                                        (11)         (79)            (42)
     Reduction in reserves related                                                        
        to the sale of the bank                                                           
        receivables portfolio                             (48)          --              --
                                                        -----        -----           -----
                                                                                          
     Balance at end of period                           $  --        $  51           $  47
                                                        =====        =====           =====
                                                                                          
                                                                                          
                                                                                          
Other reserves                                                                            
     Valuation reserve - retained interest                                                
        in JCP Master Credit Card Trust                    40           28              21
     Other receivables                                      7           --              --
                                                        -----        -----           -----
                                                                                          
     Balance at end of period                           $  47        $  28           $  21
                                                        =====        =====           ===== 
</TABLE> 

                                      F-1
<PAGE>
 
                                 EXHIBIT INDEX
                                 -------------
                                        
               Exhibit
               -------


3.   (i)    ARTICLES OF INCORPORATION  Restated Certificate of Incorporation of
            the Company(incorporated by reference to Exhibit (3)(i) to Company's
            Quarterly Report on Form 10-Q for the thirteen week period ended
            April 27, 1996*).


     (ii)   BYLAWS Bylaws of Company, as amended to January 11, 1995
            (incorporated by reference to Exhibit 3(ii)(a) to Company's Annual
            Report on Form 10-K for the 52 week period ended January 28, 1995*).

4.   INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES

        (a)   Indenture, dated as of October 1, 1982, between the Company and
              U.S. Bank Trust National Association (formerly First Trust of
              California, National Association) (as Successor Trustee to Bank of
              America National Trust and Savings Association) (incorporated by
              reference to Exhibit 4(a) to Company's Annual Report on Form 10-K
              for the 52 week period ended January 29, 1994*).

        (b)   First Supplemental Indenture, dated as of March 15, 1983, between
              the Company and U.S. Bank Trust National Association (formerly
              First Trust of California, National Association) (as Successor
              Trustee to Bank of America National Trust and Savings
              Association)(incorporated by reference to Exhibit 4(b) to
              Company's Annual Report on Form 10-K for the 52 week period ended
              January 29, 1994*).

        (c)   Second Supplemental Indenture, dated as of May 1, 1984, between
              the Company and U.S. Bank Trust National Association (formerly
              First Trust of California, National Association)(as Successor
              Trustee to Bank of America National Trust and Savings
              Association)(incorporated by reference to Exhibit 4(c) to
              Company's Annual Report on Form 10-K for the 52 week period ended
              January 29, 1994*).

                                      G-1
<PAGE>
 
        (d)   Third Supplemental Indenture, dated as of March 7, 1986, between
              the Company and U.S. Bank Trust National Association (formerly
              First Trust of California, National Association) (as Successor
              Trustee to Bank of America National Trust and Savings
              Association)(incorporated by reference to Exhibit 4(d) to
              Company's Registration Statement on Form S-3, SEC File No.33-
              3882).

        (e)   Fourth Supplemental Indenture, dated as of June 7, 1991, between
              the Company and U.S. Bank Trust National Association (formerly
              First Trust of California, National Association) (as Successor
              Trustee to Bank of America National Trust and Savings
              Association)(incorporated by reference to Exhibit 4(e) to
              Registrant's Registration Statement on Form S-3, SEC File No. 33-
              41186).

        (f)   Indenture, dated as of April 1, 1994, between the Company and U.S.
              Bank Trust National Association (formerly First Trust of
              California, National Association) (as Successor Trustee to Bank of
              America National Trust and Savings Association) (incorporated by
              reference to Exhibit 4(a) to Company's Registration Statement on
              Form S-3, SEC File No. 33-53275).

        (g)   Rights Agreement dated as of February 14, 1990 between Company and
              First Chicago Trust Company of New York, as Rights Agent
              (incorporated by reference to Exhibit 1 to Company's Current
              Report on Form 8-K, Date of Report - February 6, 1990*).

        (h)   Amendment to Rights Agreement, dated as of February 14, 1990,
              between Company and First Chicago Trust Company of New York, as
              Rights Agent, effective as of January 13, 1992, among Company,
              First Chicago Trust Company of New York, and Manufacturers Hanover
              Trust Company of New York (now ChaseMellon Shareholder Services,
              L.L.C.), as successor Rights Agent (incorporated by reference to
              Exhibit 4(b) to Company's Annual Report on Form 10-K for the 52
              week period ended January 25, 1992*).

        (i)   Letter to Company stockholders dated May 1, 1993 explaining
              adjustments to Rights and to underlying Series A Junior

                                      G-2
<PAGE>
 
              Participating Preferred Stock, including exercise price of such
              Rights, and the voting rights and participating dividend on such
              Preferred Stock as a result of the two-for-one stock split payable
              May 1, 1993 to stockholders of record on April 12, 1993
              (incorporated by reference to Exhibit 4(c) to Company's Annual
              Report on Form 10-K for the 53 week period ended January 30,
              1993*).
 
        (j)   Explanation of adjustments to Rights and to underlying Series A
              Junior Participating Preferred Stock and changes to shares of
              Series B Convertible Preferred Stock held by Trustee of Company's
              Savings, Profit-Sharing and Stock Ownership Plan on behalf of Plan
              participants as a result of the two-for-one stock split payable
              May 1, 1993 to stockholders of record on April 12, 1993
              (incorporated by reference to Item 5 of Company's Current Report
              on Form 8-K dated March 10, 1993*).

        (k)   Amended and Restated 364-Day Revolving Credit Agreement dated as
              of December 3, 1996, among J. C. Penney Company, Inc., J. C.
              Penney Funding Corporation, the Lenders party thereto, Morgan
              Guaranty Trust Company of New York, as Agent for the Lenders, and
              Bank of America Illinois, Bankers Trust Company, The Chase
              Manhattan Bank, Citibank, N.A., Credit Suisse, and NationsBank of
              Texas, N.A., as Co-Agents for the Lenders (incorporated by
              reference to Exhibit 4(d) to J. C. Penney Funding Corporation's
              Annual Report on Form 10-K for the 52 weeks ended January 25,
              1997, SEC File No. 1-4947-1).

        (l)   Amended and Restated Five-Year Revolving Credit Agreement dated as
              of December 3, 1996, among J. C. Penney Company, Inc., J. C.
              Penney Funding Corporation, the Lenders party thereto, Morgan
              Guaranty Trust Company of New York, as Agent for the Lenders, and
              Bank of America Illinois, Bankers Trust Company, The Chase
              Manhattan Bank, Citibank, N.A., Credit Suisse, and NationsBank of
              Texas, N.A., as Co-Agents for the Lenders (incorporated by
              reference to Exhibit 4(e) to J. C. Penney Funding Corporation's
              Annual Report on Form 10-K for the 52 weeks ended January 25,
              1997, SEC File No. 1-4947-1).

                                      G-3
<PAGE>
 
        (m)   Amendment and Restatement Agreement to 364-Day Revolving Credit
              Agreement, dated as November 21, 1997, among J. C. Penney Company,
              Inc., J. C. Penney Funding Corporation, the Lenders party thereto,
              Morgan Guaranty Trust Company of New York, as Agent, and Bank of
              America National Trust and Savings Association, Bankers Trust
              Company, The Chase Manhattan Bank, Citibank, N.A., Credit Suisse
              First Boston and NationsBank of Texas, N.A., as Managing Agents
              (incorporated by reference to Exhibit 4(f) to J. C. Penney Funding
              Corporation's Annual Report on Form 10-K for the 53 weeks ended
              January 31, 1998, SEC File No. 1-4947-1).

        (n)   Amendment and Restatement Agreement to Five-Year Revolving Credit
              Agreement, dated as of November 21, 1997, among J. C. Penney
              Company, Inc., J. C. Penney Funding Corporation, the Lenders party
              thereto, Morgan Guaranty Trust Company of New York, as Agent, and
              Bank of America National Trust and Savings Association, Bankers
              Trust Company, The Chase Manhattan Bank, Citibank, N.A., Credit
              Suisse First Boston and NationsBank of Texas, N.A., as Managing
              Agents (incorporated by reference to Exhibit 4(g) to J. C. Penney
              Funding Corporation's Annual Report on Form 10-K for the 53 weeks
              ended January 31, 1998, SEC File No. 1-4947-1).

        (o)   Guaranty dated as of February 17, 1997, executed by J. C. Penney
              Company, Inc. (incorporated by reference to Exhibit 4(c) to J. C.
              Penney Funding Corporation's Annual Report on Form 10-K for the 52
              weeks ended January 25, 1997, SEC File No. 1-4947-1).

        (p)   Guaranty dated as of December 3, 1996, executed by J. C. Penney
              Company Inc. with respect to the Amended and Restated 364-Day and
              Five-Year Revolving Credit Agreements, each dated as of December
              3, 1996 (incorporated by reference to Exhibit 4(m) to J. C. Penney
              Funding Corporation's Annual Report on Form 10-K for the 52 weeks
              ended January 25, 1997, SEC File No. 1-4947-1).

    Other instruments evidencing long-term debt have not been filed as exhibits
    hereto because none of the debt authorized under any such instrument exceeds
    10 percent of the total assets of the Registrant and its consolidated
    subsidiaries.  The Registrant agrees to

                                      G-4
<PAGE>
 
    furnish a copy of any of its long-term debt instruments to the Securities
    and Exchange Commission upon request.

10. MATERIAL CONTRACTS

    (i) OTHER THAN COMPENSATORY PLANS OR
        ARRANGEMENTS
    
        (a)   Amended and Restated Receivables Agreement dated as of January 29,
              1980 between Company and J. C. Penney Funding Corporation
              (incorporated by reference to Exhibit 10(i)(a) to Company's Annual
              Report on Form 10-K for the 52 week period ended January 29,
              1994*).

        (b)   Amendment No. 1 to Amended and Restated Receivables Agreement
              dated as of January 25, 1983 between Company and J. C. Penney
              Funding Corporation (incorporated by reference to Exhibit 10(i)(b)
              to Company's Annual Report on Form 10-K for the 52 week period
              ended January 29, 1994*).

        (c)   Loan Agreement dated as of January 28, 1986 between Company and J.
              C. Penney Funding Corporation (incorporated by reference to
              Exhibit 4 to Company's Current Report on Form 8-K, Date of 
              Report -January 28, 1986*).

        (d)   Amendment No. 1 to Loan Agreement dated as of January 28, 1986
              between Company and J. C. Penney Funding Corporation (incorporated
              by reference to Exhibit 1 to Company's Current Report on Form 8-K,
              Date of Report -December 31, 1986*).

        (e)   Amendment No. 2 to Loan Agreement dated as of January 28, 1986
              between Company and J. C. Penney Funding Corporation (incorporated
              by reference to Exhibit 10(i)(e) to Company's Annual Report on
              Form 10-K for the 52 weeks ended January 25, 1997*).

        (f)   Personal Services Agreement dated as of February 12, 1997 between
              Company and W. R. Howell (incorporated by reference to Exhibit
              10(i)(f) to Company's Annual Report on Form 10-K for the 52 weeks
              ended January 25, 1997*).

                                      G-5

<PAGE>
 
    (ii) COMPENSATORY PLANS OR ARRANGEMENTS REQUIRED TO BE FILED AS EXHIBITS TO
         THIS REPORT PURSUANT TO ITEM 14 (C) OF THIS REPORT.

         (a)   J. C. Penney Company, Inc. 1989 Management Incentive Compensation
               Program as amended through March 27, 1990 (incorporated by
               reference to Exhibit 10(e) to Company's Annual Report on Form 10-
               K for the 52 week period ended January 27, 1990*).

         (b)   September 1995 Amendment to J. C. Penney Company, Inc. 1989
               Management Incentive Compensation Program, as amended
               (incorporated by reference to Exhibit 10(ii)(b)to Company's
               Annual Report on Form 10-K for the 52 weeks ended January 25,
               1997*).

         (c)   Supplemental Retirement Program for Management Profit-Sharing
               Associates of J. C. Penney Company, Inc., as amended through
               April 1, 1996 (incorporated by reference to Exhibit 10(ii)(c) to
               Company's Annual Report on Form 10-K for the 52 weeks ended
               January 25, 1997*).

         (d)   July 1997 Amendment to Supplemental Retirement Program for
               Management Profit-Sharing Associates of J. C. Penney Company,
               Inc. (incorporated by reference to Exhibit 10(b) to Company's
               Quarterly Report on Form 10-Q for the 13 and 39 week periods
               ended October 25, 1997*).

         (e)   December 1997 Amendment to Supplemental Retirement Program for
               Management Profit-Sharing Associates of J. C. Penney Company,
               Inc.

         (f)   J. C. Penney Company, Inc. Retirement Plan for Non-Associate
               Directors (incorporated by reference to Exhibit 10(b) to
               Company's Quarterly Report on Form 10-Q for the 13 week period
               ended April 26, 1997*).

         (g)   J. C. Penney Company, Inc. Directors' Equity Program Tandem
               Restricted Stock Award/Stock Option Plan (incorporated by
               reference to Exhibit 10(k) to Company's Annual Report on Form 10-
               K for the 52 week period ended January 28, 1989*).

                                      G-6
<PAGE>
 
         (h)   J. C. Penney Company, Inc. 1984 Equity Compensation Plan, as
               amended through January 31, 1989 (incorporated by reference to
               Exhibit 10(l) to Company's Annual Report on Form 10-K for the 52
               week period ended January 28, 1989*).

         (i)   February 1995 Amendment to J. C. Penney Company, Inc. 1984 Equity
               Compensation Plan, as amended (incorporated by reference to
               Exhibit 10(ii)(j) to Company's Annual Report on Form 10-K for the
               52 week period ended January 28, 1995*).

         (j)   J. C. Penney Company, Inc. 1989 Equity Compensation Plan
               (incorporated by reference to Exhibit A to Company's definitive
               Proxy Statement for its Annual Meeting of Stockholders held on
               May 19, 1989*).

         (k)   February 1995 Amendment to J. C. Penney Company, Inc. 1989 Equity
               Compensation Plan (incorporated by reference to Exhibit 10(ii)(k)
               to Company's Annual Report on Form 10-K for the 52 week period
               ended January 28, 1995*).

         (l)   February 1996 Amendment to J. C. Penney Company, Inc. 1989 Equity
               Compensation Plan, as amended (incorporated by reference to
               Exhibit 10(ii)(k) to Company's Annual Report on Form 10-K for the
               52 week period ended January 27, 1996*).

         (m)   J. C. Penney Company, Inc. 1993 Equity Compensation Plan
               (incorporated by reference to Exhibit A to Company's definitive
               Proxy Statement for its Annual Meeting of Stockholders held on
               May 21, 1993*).

         (n)   February 1995 Amendment to J. C. Penney Company, Inc. 1993 Equity
               Compensation Plan (incorporated by reference to Exhibit 10(ii)(l)
               to Company's Annual Report on Form 10-K for the 52 week period
               ended January 28, 1995*).

         (o)   November 1995 Amendment to J. C. Penney Company, Inc. 1993 Equity
               Compensation Plan, as amended (incorporated by reference to
               Exhibit 10(ii)(n) to Company's Annual Report on Form 10-K for the
               52 week period ended January 27, 1996*).

                                      G-7
<PAGE>
 
         (p)   J. C. Penney Company, Inc. 1993 Non-Associate Directors' Equity
               Plan (incorporated by reference to Exhibit B to Company's
               definitive Proxy Statement for its Annual Meeting of Stockholders
               held on May 21, 1993*) .

         (q)   February 1995 Amendment to J. C. Penney Company, Inc. 1993 Non-
               Associate Directors' Equity Plan (incorporated by reference to
               Exhibit 10(ii)(m) to Company's Annual Report on Form 10-K for the
               52 week period ended January 28, 1995*).

         (r)   J. C. Penney Company, Inc. Deferred Compensation Plan as amended
               through July 14, 1993 (incorporated by reference to Exhibit 10(a)
               to Company's Report on Form 10-Q for the 13 and 26 week periods
               ended July 31, 1993*).

         (s)   J. C. Penney Company, Inc. Deferred Compensation Plan for
               Directors, as amended effective April 9, 1997 (incorporated by
               reference to Exhibit 10(a) to Company's Quarterly Report on Form
               10-Q for the 13 week period ended April 26, 1997*).

         (t)   J. C. Penney Company, Inc. 1995 Deferred Compensation Plan
               (incorporated by reference to Exhibit 10 to Company's
               Registration Statement on Form S-8, SEC File No. 33-56993).

         (u)   November 1995 amendment to J. C. Penney Company, Inc. 1995
               Deferred Compensation Plan (incorporated by reference to Exhibit
               10(ii)(u) to Company's Annual Report on Form 10-K for the 52 week
               period ended January 27, 1996*).

         (v)   April 1997 amendment to J. C. Penney Company, Inc. 1995 Deferred
               Compensation Plan (incorporated by reference to Exhibit 10(d) to
               Company's Quarterly Report on Form 10-Q for the 13 and 39 week
               periods ended October 25, 1997*).

         (w)   Directors' Charitable Award Program (incorporated by reference to
               Exhibit 10(r) to Company's Annual Report on Form 10-K for the 52
               week period ended January 27, 1990*).

                                      G-8
<PAGE>
 
         (x)   Form of Indemnification Trust Agreement between Company and
               Chemical Bank dated as of July 30, 1986, as amended (incorporated
               by reference to Exhibit 1 to Exhibit B to Company's definitive
               Proxy Statement for its Annual Meeting of Stockholders held on
               May 29, 1987*).

         (y)   Form of Indemnification Agreement between Company and individual
               Indemnitees (incorporated by reference to Exhibit B to Company's
               definitive Proxy Statement for its Annual Meeting of Stockholders
               held on May 29, 1987*).

         (z)   J. C. Penney Company, Inc. Benefit Restoration Plan (incorporated
               by reference to Exhibit 10(ii)(y) to Company's Annual Report on
               Form 10-K for the 52 week period ended January 27, 1996*).

         (aa)  February 1996 Amendment to J. C. Penney Company, Inc. Benefit
               Restoration Plan (incorporated by reference to Exhibit 10(ii)(z)
               to Company's Annual Report on Form 10-K for the 52 weeks ended
               January 25, 1997*).

         (ab)  July 1997 Amendment to J. C. Penney Company, Inc. Benefit
               Restoration Plan (incorporated by reference to Exhibit 10(c) to
               Company's Quarterly Report on Form 10-Q for the 13 and 39 week
               periods ended October 25, 1997*).

         (ac)  December 1997 Amendment to J. C. Penney Company, Inc. Benefit
               Restoration Plan.

         (ad)  Supplemental Term Life Insurance Plan for Management Profit-
               Sharing Associates of J. C. Penney Company, Inc. (incorporated by
               reference to Exhibit 10(ii)(aa) to Company's Annual Report on
               Form 10-K for the 52 weeks ended January 25, 1997*).

         (ae)  January 1995 Amendment to Supplemental Term Life Insurance Plan
               for Management Profit-Sharing Associates of J. C. Penney Company,
               Inc.(incorporated by reference to Exhibit 10(ii)(ab) to Company's
               Annual Report on Form 10-K for the 52 weeks ended January 25,
               1997*).

         (af)  November 1997 Amendment to Supplemental Term Life Insurance Plan
               for Management Profit-

                                      G-9
<PAGE>
 
               Sharing Associates of J. C. Penney Company, Inc.

         (ag)  Employment Agreement dated as of February 4, 1996 between Eckerd
               Corporation and Francis A. Newman (incorporated by reference to
               Exhibit 10.26 to Eckerd Corporation's Annual Report on Form 10-K
               for the fiscal year ended February 3, 1996, SEC File No. 1-4844).

         (ah)  Amendment No. 1, dated as of November 2, 1996, to the Employment
               Agreement dated as of February 4, 1996, by and between Eckerd
               Corporation and Francis A. Newman (incorporated by reference to
               Exhibit (c)(3) to Company's Schedule 14D-1 dated November 2,
               1996*).

         (ai)  J. C. Penney Company, Inc. 1997 Equity Compensation Plan
               (incorporated by reference to Exhibit A to Company's definitive
               proxy statement for its Annual Meeting of Stockholders held on
               May 16, 1997*).

         (aj)  J. C. Penney Company, Inc. 1998 EVA Performance Plan.

*  SEC file number 1-777

11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS

    Computation of Net Income Per Common Share.

12. STATEMENT RE: COMPUTATION OF RATIOS

    (a)     Computation of Ratios of Available Income to Combined Fixed Charges
            and Preferred Stock Dividend Requirement.
    (b)     Computation of Ratios of Available Income to Fixed Charges.

13. ANNUAL REPORT TO SECURITY HOLDERS

    Excerpt from Company's 1997 Annual Report to Stockholders.

                                     G-10
<PAGE>
 
21. SUBSIDIARIES OF THE REGISTRANT

    List of certain subsidiaries of the Company at March 2, 1998.

23. CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

24. POWER OF ATTORNEY

27. FINANCIAL DATA SCHEDULE

    (a)  Financial Data Schedule for the 53 week period ended January 31, 1998.
    (b)  Restated Financial Data Schedule for the 52 week period ended January
         25, 1997.
    (c)  Restated Financial Data Schedule for the 52 week period ended January
         27, 1996.

99. ADDITIONAL EXHIBITS

    (a)  Item 1 of J. C. Penney Funding Corporation Annual Report on Form 10-K
         for the 53 weeks ended January 31, 1998 (incorporated by reference to
         J. C. Penney Funding Corporation Annual Report on Form 10-K for the 53
         weeks ended January 31, 1998 filed concurrently herewith, SEC File No.
         1-4947-1).

    (b)  Excerpt from J. C. Penney Funding Corporation Annual Report.

                                     G-11