The following items were the subject of a Form 12b-25
                           and are included herein:  Items 6, 7, 8, 14(a)(1) and
                           14(a)(2), and Exhibits 23 and 27


                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

    For the fiscal year ended January 31, 1998 Commission file number 0-15934

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

               Washington                                91-0698077
    (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation of organization)

      1530 Fifth Ave., Seattle, WA                          98101
  (Address of principal executive offices)                (Zip Code)

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

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

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

                    Common stock - par value $0.01 per share

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

Applicable only to Registrants involved in bankruptcy proceedings during the
preceding five years: Indicate by check mark whether the Registrant has filed
all documents and reports required to be filed by Section 12, 13, or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. YES [X]  NO [ ]

As of April 14, 1998 544,323 shares of Common Stock of the Registrant were
outstanding, and the aggregate market value of the share (based upon the closing
price of the shares traded on April 14, 1998) of Jay Jacobs, Inc., held by
non-affiliates was $3,402,018. For the purposes of such calculation, all
outstanding shares of Common Stock have been considered held by non-affiliates,
other than the zero (0) shares beneficially owned by directors and executive
officers of the Registrant.

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 [ ]

                                     Page 1
<PAGE>
                                     PART 1

                                ITEM 1. BUSINESS


General
-------

Jay Jacobs, Inc. ("Jay Jacobs" or the "Company") operates a chain of specialty
apparel stores offering fashion conscious young women and men contemporary
clothing at reasonable prices. The Company targets the 18 to 34 age group and
features fashionable merchandise for all lifestyles of its target customer at
competitive prices. The majority of the product offered to men and women in Jay
Jacobs stores is merchandise developed by the Company and sold under its own
label. At January 31, 1998 the Company operated a chain of 108 Jay Jacobs stores
in 19 states. These stores are concentrated in the Northwest, Midwest and
Southwest and are located in regional, enclosed shopping malls.

The Company was founded in 1941 in Seattle, Washington and grew to a 288 store
operation by 1992. By early 1994, the Company had become overextended and, in
May 1994, it filed a voluntary petition under Chapter 11 of the Bankruptcy code.
New management was brought in and commenced a restructuring of operations that
involved the closing of over 100 stores by January 1997. In June 1997, the
Bankruptcy Court approved a final decree and the case was closed. The Company
then focused its efforts on raising operating capital and paying its debt to its
unsecured creditors. In December 1997, the Company raised a total of $7,100,000
through the sale of two series of preferred stock to institutional investors
permitting the payment in full of the unsecured creditors (following a
modification of the original decree to permit partial payment in stock) and
providing additional operating capital.

DESCRIPTION OF BUSINESS

The principal aspects of the Company's business are summarized below.

Retail Merchandising
--------------------

Jay Jacobs' merchandising strategy is targeted at the 18 to 34 age group. The
Company offers both men's and women's clothing, and features fashionable
merchandise for all lifestyles of its target customer. The majority of the
product offered to men and women in Jay Jacobs stores is merchandise sold under
the private labels of Jay Jacobs, D.D. Sloane, Private Edition, and American
Sportswear Exchange. Management believes that focusing on private label designs
provides unique positioning for the Company's merchandise. The Company also
understands that its customer wants quality as well as value. Through the use of
in-store displays and promotional signage, the Company and its trained store
personnel show customers how the merchandise works together to create a variety
of outfits and looks. Value is demonstrated in regular promotions emphasizing
multiple purchases. The target age group has a built-in need for apparel as they
make the transition from school to career. Management believes that the Company
is well positioned to meet these needs. Finally, this market segment will be
growing over the next ten years. This growth will be primarily in the 18 to 25
year age group, which represents the "Baby Echo Boom" generation coming of age
(i.e. children of the Baby Boom Generation).

                                     Page 2
<PAGE>
Retail Store Locations
----------------------

The Company's stores are located, principally, in major enclosed regional
shopping malls. In addition to lease terms, site selection is influenced by mall
location, store location within the mall, the demographics of the area
surrounding the mall, and expected mall traffic.

The following table shows the number of stores by type and by state operated by
the Company as of January 31, 1998:

<TABLE>
<CAPTION>
                                   STORE TYPE

                         Women's        Women's         Men's
       State             & Men's         Only           Only        Total
     <S>                    <C>            <C>           <C>         <C>
     Alaska                 7              3             2           12
     California             4              7             3           14
     Colorado               5              2             1            8
     Florida                0              1             0            1
     Georgia                1              1             0            2
     Idaho                  2              2             0            4
     Illinois               3              1             1            5
     Indiana                5              0             0            5
     Louisiana              3              0             0            3
     Montana                2              2             1            5
     Nevada                 1              1             1            3
     New Mexico             1              0             0            1
     Oklahoma               1              0             0            1
     Oregon                 5              3             0            8
     Texas                  5              2             0            7
     Utah                   1              0             0            1
     Washington             14             7             1           22
     Wisconsin              1              3             0            4
     Wyoming                1              1             0            2
                     --------------- ------------- ------------ ------------
     Total                 62             36            10          108
</TABLE>


Store Expansion and Relocation
------------------------------

The Company's strategy is to capitalize on the combination store format where
both men's and women's merchandise is displayed within the same store. The
combination store format, which ranges in size between 4,000 and 6,000 square
feet, achieves greater productivity than women's only and men's only store.

The Company plans to reformat a portion of its women's only and men's only
stores into the combination store formats by relocating those stores to more
productive locations within the mall in which the store is currently located.
This process will be completed over the next five years as store leases expire.
During the fiscal year ended January 31, 1998, the Company relocated and
reformatted 15 stores in existing malls into the combination store formats.

                                     Page 3
<PAGE>
During the fiscal year ended January 31, 1998, the Company opened 3 stores in
the combination format and closed 18 stores, each of which was at the end of its
lease term. The Company did not incur any material expense as a result of the
store closings. As of January 31, 1998, the Company operated 108 stores.

The Company new-store opening strategy is to open combination format stores in
regional enclosed malls. During the fiscal year ending January 31, 1999, the
Company plans to open at least 20 combination stores.

Merchandise Inventory, Replenishment and Distribution
-----------------------------------------------------

Merchandise planning, purchasing and marketing is directed from the Company's
headquarters in Seattle, Washington and is overseen by the Company's General
Merchandise Managers and their team of 24 associates.

The Company utilizes a computerized point-of-sale merchandise system that
provides detailed information on sales and inventory levels, on a daily basis,
to the merchandise staff. The system provides detailed information on inventory
by department, merchandise classification, style, color and size to the staff
via computer terminal or printed reports. Information regarding fast selling and
slow-moving merchandise is monitored closely in order to identify consumer
buying trends, allowing the Company to quickly and appropriately respond when
making purchasing and pricing decisions. Emphasis is placed on ensuring that
each merchandise category achieves the planned turnover level. The Company
generally uses price changes to clear this merchandise. Price changes may occur
when inventory exceeds customer demand for reasons of style, seasonal
adaptation, changes in customer preference, lack of consumer acceptance of
fashion items, competition, or if it is determined that the inventory in stock
will not sell at its currently ticketed price.

The specialty retail business fluctuates according to changes in the economy and
customer preferences, dictated by fashion and season. These fluctuations
especially affect the inventory owned by apparel retailers, since merchandise
usually must be ordered well in advance of its selling season. While the Company
endeavors to test many merchandise items before ordering large quantities, it is
still vulnerable to changing fashion trends and fluctuations in customer
demands.

The Company is currently researching alternatives and costs for upgrading both
the software and hardware components of its computer inventory tracking and
financial systems in order to increase reporting flexibility, enhance
management's decision making capability, and comply with year 2000 requirements.

Purchasing
----------

The Company works with established sources of fashion apparel and seeks
suppliers and manufacturers that will assist the Company in its merchandise
strategy. The Company works closely with its suppliers to design merchandise
that meets the needs of its target customers. Substantially all of the Company's
merchandise is sold under its own label.

                                     Page 4
<PAGE>
The Company believes that it has good relationships with its vendors. The
Company purchases merchandise from both domestic and foreign suppliers either
directly from a factory or through a domestic agent. The Company's domestic
vendors include suppliers who produce merchandise that meets the Company's
specifications. During the fiscal year ended January 31, 1998, approximately 90%
of the Company merchandise was produced with domestic contractors and 10%
manufactured with foreign resources either directly or through domestic agents.

During the fiscal year ended January 31, 1998, merchandise was purchased from
over 200 suppliers. No single vendor accounted for more than 10% of the
Company's purchases.

Retail Advertising
------------------

The Company's advertising expenditures during the fiscal year ended January 31,
1998 were approximately 0.2% of net sales. Like many specialty retailers, the
Company relies heavily on its locations in malls and on in-store graphics and
displays to attract customers to its stores. In addition, the Company maintains
a list of preferred customers and periodically advises them of special offers
and advance notice of sale events. The company also advertises in the form of
mall tabloids that are distributed by mall landlords to customers during peak
selling periods.

Retail Store Operations
-----------------------

The Company's focus is on attentive, personalized customer service. Sales
associates are selected for their knowledge and interest in fashion, as well as
for friendliness and eagerness to satisfy the customer. Sales associates are
compensated with an hourly wage based on experience and past performance and
with sales contests and performance awards for meeting established goals.

The management of a retail store is overseen by a District Manager, a Regional
Manager, and ultimately, the Vice President of Store Operations. Each of these
individuals makes regular visits to the stores to ensure adherence to corporate
policies and merchandising strategies and to oversee store operations. A
District Manager typically oversees eight to eleven stores, each of which is
staffed by a Store Manager and one or more Assistant Store Managers. These
managers are eligible to receive incentive compensation based on the performance
of the store or stores under their supervision. Accounting functions for all
stores are centralized at corporate headquarters.

Distribution
------------

The Company leases a 60,000 square foot facility in a warehousing complex near
Seattle for use as its Distribution Center. The facility is equipped with
sophisticated systems that allow for the efficient receiving and processing of
merchandise. The Company estimates that the Distribution Center has the capacity
to process merchandise for approximately 300 stores and has the potential to
process approximately 500 stores with the installation of additional equipment
within the existing space.

All merchandise is shipped directly from the vendors to the Distribution Center
where it is received, inspected, and priced before being shipped by common
carrier to stores. Emphasis 

                                     Page 5
<PAGE>
is placed on having goods in and out of the Distribution Center quickly to
ensure frequent shipments to the Company's stores. The Company has increased,
and intends to continue to increase, the percentage of receipts that are
pre-ticketed during the upcoming fiscal year, to bring about greater efficiency
in its Distribution Center.

Competition
-----------

The retail sale of men's and women's apparel is a highly competitive business.
The Company believes that the key competitive factors are price, quality,
fashion and merchandise selection. Other competitive factors include brand name
recognition, store location and layout, and customer service. In the broadest
sense, the Company competes with all retailers that sell fashionable apparel to
young men and women. More specifically, the Company competes with a wide variety
of national and regional men's and women's apparel retailers such as the Limited
Express, Structure, J. Riggins, The Gap, Banana Republic, The Buckle and others.
The Company also competes with chain stores such as Nordstrom, The Bon Marche,
Lamonts, Mervyn's, Federated and Dayton Hudson. Many of the Company's
competitors are considerably larger with greater financial and other resources.

Trademarks
----------

"Jay Jacobs", "American Sportswear Exchange", "D.D. Sloane", "Private Edition"
and several other trademarks of lesser importance have been registered with the
U.S. Patent and Trademark Office.

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

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

Employees
---------

As of January 31, 1998 the Company had approximately 326 full-time and 547
part-time store employees. Additionally, the Company had 83 management,
distribution and clerical associates at its corporate headquarters and
Distribution Center. During peak seasons, the Company typically employs
additional store and distribution personnel. Each store employs approximately 3
to 20 sales associates, including store management. None of the Company's
employees are covered by a collective bargaining agreement. The Company
considers its relations with its employees to be satisfactory.

                               ITEM 2. PROPERTIES

Leases
------

Jay Jacobs leases all of its stores. In general, store leases have an initial
term of two to fifteen years, and some have one or more renewal options.
Additionally, the Company has 9 month-

                                     Page 6
<PAGE>
to-month leases with no expiration. The following table shows the years in which
store leases expire that were effective at January 31, 1998:

<TABLE>
<CAPTION>
                             Number of           Number of Leases
    Year Ending                Leases              Expiring with
                              Expiring            Renewal Options

<S>                              <C>                  <C>
   January 1999                  31                   1
   January 2000                  22                   5
   January 2001                  13                   2
   January 2002                  10                   1
   January 2003                  7                    1
   January 2004                  4                    1
   January 2005                  3                    0
   January 2006                  6                    0
   January 2007                  3                    1
</TABLE>


The Company's leases generally provide for a base rental rate and typically
require the payment of a percentage of sales as additional rent when sales reach
specified levels. In addition, the Company is generally responsible for all mall
merchant dues and common area charges in shopping center locations and, in
certain instances, for real estate taxes and other expenses.

The Company currently leases 60,000 square feet for its Distribution Center in a
warehousing complex near Seattle. The Company's lease for the Distribution
Center extends through January 1999, with an option to renew.

The Company leases 36,000 square feet for its corporate headquarters in downtown
Seattle. The lease extends through January 2000.

                            ITEM 3. LEGAL PROCEEDINGS

On May 13, 1994, the Company filed a voluntary petition for relief under Chapter
11 of the Bankruptcy Code in the United Stated Bankruptcy Court for the Western
District of Washington (Case No. 94-03993). During the bankruptcy case,
management restructured operations and capitalization and formulated a plan of
reorganization. On November 16, 1995, the Bankruptcy Court confirmed the
Company's Second Amended Plan of Reorganization (the "Plan"), which became
effective on November 28, 1995, and on June 23, 1997, the Bankruptcy Court
approved a final decree closing the bankruptcy case. In connection with the $7.1
million capital infusion from the sale of two series of the Company's preferred
stock, on December 1, 1997, the Bankruptcy Court re-opened the bankruptcy case,
approved a modification of treatment of Class 3 (general unsecured) claims under
the Plan to permit the Company to satisfy approximately $2,500,000 in debt to
its 

                                     Page 7
<PAGE>
Class 3 creditors with cash payments totaling approximately $1,500,000 and the
issuance of 1,889,763 shares of common stock, and re-closed the case. The cash
was paid and stock issued in December 1997. At this time the Company believes it
has made all payments required to be made under the Plan, except for five
remaining quarterly payments in the amount of $80,000 each of certain priority
tax claims, the last of which payments is due in April 1999.

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

The Company did not hold an annual meeting during the fiscal year ended January
31, 1998.

                                     Page 8
<PAGE>
                                     PART II

   ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS


Market Prices of Common Stock
-----------------------------

The common stock of Jay Jacobs, Inc. is currently listed on the Electronic
Bulletin Board under the symbol "JAYJD". Prior to April 6, 1998 the company
stock symbol was "JAYJ". The symbol was changed on April 6 to reflect trade
after the reverse split. The common stock was listed for trading on the NASDAQ
National Market under the symbol "JAYJ". On June 28, 1996 the Company was
delisted from the NASDAQ National Market due to not meeting their Net Tangible
Asset Requirement.

The table below sets forth the high and low closing prices as reported by NASDAQ
and the OTC Bulletin Board for the last eight fiscal quarters.

<TABLE>
<CAPTION>
                                             Closing Prices
                Quarter Ended              High           Low
        ------------------------------ -------------- -------------
        <S>                               <C>            <C>
        January 31, 1998                  $14.06         $5.63
        November 1, 1997                   24.38          1.95
        August 2, 1997                      4.50          1.65
        May 3, 1997                         6.56          3.15

        February 1, 1997                  $11.25         $5.63
        October 26, 1996                    8.44          4.20
        July 27, 1996                      31.88          5.63
        April 27, 1996                     34.69         22.50
</TABLE>


On April 14, 1998 the closing price for the Company's stock was $6.25. All stock
prices have been adjusted to reflect the 1-for-15 reverse split effective April
3, 1998.

Number of Record Holders
------------------------

The number of record holders of the Company's common stock as of April 14, 1998
was 806.

Dividend Policy
---------------

The Company has never paid cash dividends on its common stock.

                                     Page 9
<PAGE>
<TABLE>
<CAPTION>
                         ITEM 6. SELECTED FINANCIAL DATA
                      (in thousands, except per share data)

                                                                                 Periods Ended
                                                     January 31,   February 1,   January 27,   January 28,  February 26,
                                                           1998          1997          1996          1995          1994
<S>                                                     <C>           <C>           <C>           <C>          <C>     
Statement of Income Data:
Net sales                                               $62,418       $61,571       $72,886       $90,490      $139,767
Operating costs and expenses
   Cost of sales, buying and
   occupancy costs                                       47,273        48,157        55,722        71,715       107,552
   Restructuring Items                                        0             0             0             0         7,577
   Selling, general and
   administrative expenses                               16,122        17,266        19,975        25,254        39,417
   Interest expense                                         499           320             0          (103)         (165)
   Expense related to equity
   investment                                               375             0             0             0             0
                                                   ------------  ------------  ------------  ------------  ------------

Net operating costs                                      64,269        65,743        75,697        96,866       154,381
                                                   ------------  ------------  ------------  ------------  ------------

Loss before reorganization items and
     income taxes                                        (1,851)       (4,172)       (2,811)       (6,376)      (14,614)
Reorganization (income) expense                               0          (340)            0         7,597             0
Income tax benefit                                            0           471             0             0           300
                                                   ------------  ------------  ------------  ------------  ------------

Loss before extraordinary item                           (1,851)       (3,361)       (2,811)      (13,973)      (14,314)

Extraordinary gain                                          600             0             0             0             0
                                                   ------------  ------------  ------------  ------------  ------------
Net loss                                               $(1,251)      $(3,361)       $(2,811)     $(13,973)     $(14,314)
                                                   ============  ============  ============  ============  ============

Loss per share before extraordinary
    item, basic & diluted                              $ (9.38)      $ (8.26)       $ (7.05)     $ (35.55)     $ (36.42)
Loss per share, basic & diluted                        $ (7.99)      $ (8.26)       $ (7.05)     $ (35.55)     $ (36.42)

Weighted average number of
   shares & equivalents outstanding                        432           407            399           393           393

Balance Sheet Data:
  Working capital                                      $ 2,686       $(2,633)       $ 3,021      $ 13,786      $ 12,929
  Total assets                                          16,406        14,297         14,247        24,142        31,423
  Shareholders' equity                                   1,070            44          3,335         5,994        19,943

Note: See Management's Discussion and Analysis ("MD&A") and notes to the
Consolidated Financial Statements.

The fiscal period ended January 1995 was an eleven-month period. During fiscal
1995, the Company changed its fiscal year end from the last Saturday in February
to the Saturday closest to January 31 (see Item 7, below).
</TABLE>

                                    Page 10
<PAGE>
           ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

General
-------

The following information should be read in conjunction with the Company's
Consolidated Financial Statements and related notes included in this Form 10-K/A
report. References to fiscal 1999 refer to the twelve months ending January 30,
1999. References to fiscal 1998 refer to the twelve months ended January 31,
1998. Reference to fiscal 1997 refers to the twelve months ended February 1,
1997 (which contained 53 weeks). References to fiscal 1996 refer to the twelve
months ended January 27, 1996. The Company uses a 4-5-4 fiscal calendar, which
allows for four weeks in the first and third month of a fiscal quarter, and five
weeks in the middle month. The Company made the decision during fiscal 1995 to
end future fiscal years at the completion of its fiscal January, as opposed to
the end of February, as it had previously done. This change was made to align
the Company's fiscal calendar to the seasonal patterns that it experiences, as
well as to enhance comparability of its fiscal quarter and year end results with
similar retail companies in its industry segment.

Recapitalization of the Company
-------------------------------

During December 1997, the Company sold two series of newly issued preferred
stock in a Private Placement for $7,100,000.

The Series A Preferred Stock (which pays a dividend at the rate of 5%, payable
quarterly, from the date of closing) is redeemable and was issued for
$4,600,000. The Series A Preferred Stock is mandatorily redeemable upon the
occurrence of a restructuring event (as described in the agreement) or anytime
after January 1, 2003. The Series B Preferred Stock (which pays a dividend at
the rate of 8%, payable quarterly beginning March 5, 2000) is convertible
(subject to adjustment in certain events) and was issued for $2,500,000. As of
the date of this Report, the shares of common stock issuable upon conversion of
the Series B Preferred Stock would represent, if issued, 86.25% of the issued
and outstanding common stock on a fully diluted basis. Both series of preferred
stock pay dividends at a rate of 20%, if still outstanding, effective January 1,
2003 and thereafter. Series B Preferred Stock shall be entitled to vote,
together with the holders of common stock and Series B Preferred Stock as a
single class, on any matter submitted to the stockholders for a vote. The
holders of Series B Preferred Stock shall have one vote for each full share of
common stock into which their shares of Series B Preferred Stock are
convertible. The conversion feature of the Series B Preferred Stock is more
favorable than the intrinsic value of the common stock as required to be
measured against the trading value on date of purchase. This "discount" is
accounted for as a dividend to the preferred shareholders, with no net effect on
shareholders' equity. For purposes of calculating earnings per share, a total of
$2,072,000 has been recognized as a dividend for the year ended January 31, 1998
(See Note 11 to the financial statements).

The Company received net proceeds from recapitalization of approximately
$5,900,000 after fees and expenses of this financing. Fees and expenses include
a banking fee of $355,000, together with $40,000 of expense reimbursement
payable to the purchasers of the Series A and Series B Preferred Stock; a
break-up fee payable to a second potential group of investors of $300,000,
together with expenses of up to $75,000; an investment banking fee payable to

                                    Page 11
<PAGE>
the Company's investment advisors of $275,000; and $145,000 of legal and other
professional fees.

The Series A Preferred Stock has been recorded as mezzanine financing and the
Series B Preferred Stock has been recorded as additional equity during the
fourth quarter of fiscal 1998. The Series A and Series B stock has been recorded
net of the direct cost of the Private Placement of approximately $1,154,000. The
direct costs have been allocated pro rata between the Series A and Series B
stock. The direct costs that have been charged to the Series A stock will be
amortized over five years directly against retained earnings. The dividends
associated with the Series A stock will also be charged directly against
retained earnings as they are paid. The break-up fee and related expenses of
approximately $375,000 have been charged to expense during the fourth quarter of
fiscal 1998.

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

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

Results of Operations
---------------------

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

<TABLE>
<CAPTION>
                                                               Year ended         Year ended           Year ended
                                                              Jan. 31, 1998       Feb. 1, 1997       Jan. 27, 1996
     <S>                                                          <C>                <C>                 <C> 
     Net sales                                                    100.0%             100.0%              100.0%
     Cost of sales, buying and occupancy costs                     75.7               78.2                76.5
     Selling, general and administrative expenses                  25.8               28.0                27.4
     Interest expense                                               0.8                0.5                   0
     Expense related to equity investment                           0.6                  0                   0
     Reorganization income                                            0                0.6                   0
     Income tax benefit                                               0                0.7                   0

     Loss before extraordinary item                                (2.9)              (5.4)               (3.9)

     Extraordinary gain                                             0.9                  0                   0

     Net loss                                                      (2.0)%             (5.4)%              (3.9)%
</TABLE>


Fiscal 1998 Compared to Fiscal 1997
-----------------------------------

Net sales increased by $847,000 or 1%, for fiscal 1998 compared to fiscal 1997.
This increase was primarily due to an increase in comparable store sales of 17%,
and the relocation of 15 stores to more productive locations within the mall,
partially offset by a reduction in store count. The Company began fiscal 1998
with 123 stores, closed 18 stores, relocated 15 stores and 

                                    Page 12
<PAGE>
opened 3 new stores, to end fiscal 1998 with 108 stores, a net reduction of 15
stores or 12%. Average sales per store increased to $545,000 in fiscal 1998 from
$466,000 in fiscal 1997. The Company attributes the increase in comparable
stores sales to the customer acceptance of its new merchandising strategy,
adopted in fiscal 1996, and its ability to increase inventory levels as a result
of support from its key merchandise suppliers. The support from key vendors was
enhanced as a result of the Company's improved performance and the change in
credit facility that increased the Company's borrowing capacity (see Item 7 --
"Liquidity and Capital Resources"). Average inventory per store increased 18%
during the year as a result of the improved vendor support and liquidity
position of the Company.

Cost of sales, buying and occupancy costs decreased as a percent of sales by
2.5%, a decline of $884,000. Cost of sales related to merchandise decreased 2.2%
as a result of improved initial mark-on and lower markdowns which was a result
of the customers buying earlier in the selling season. Cost of sales related to
occupancy costs decreased by 0.3% as a result of the ability to leverage these
generally fixed costs over a higher sales base per store.

Selling, general and administrative expenses decreased as a percentage of net
sales by 2.2%, a decline of $1,144,000. This decrease was the result of
continued corporate downsizing and cost constraint measures implemented during
the past three years as well as the Company's ability to leverage expenses over
the higher sales base per store.

Interest expense increased to $499,000 (0.8% of sales) in fiscal 1998 from
$320,000 (0.5% of sales) in fiscal 1997. This was as a result of increased
borrowings during the year that was available as a result of the increased
credit facility (see Item 7 -- "Liquidity and Capital Resources").

The Company recorded an extraordinary gain related to the resolution of the
final payment due creditors under the Company's Second Amended Plan of
Reorganization (see Note 4 - "Emergence From Chapter 11 and Reorganization
Expenses"). The extraordinary gain arises from the unsecured creditors accepting
1,889,763 shares of common stock of the Company in lieu of a portion of the
scheduled cash payment. This gain of $600,000 is net of costs of the transaction
including legal and professional fees of $170,000 and the $230,000 which was
recorded as an increase in common stock representing the difference between the
issue price of the common and its fair value on the transaction date.

The Company incurred a net loss of $1,251,000 in fiscal 1998 ($7.99 per share)
or 2.0% of sales. As a percent of sales, this represents an improvement of 3.4%
over fiscal 1997. This improvement results from a decrease in cost of goods sold
of 2.5%, a decrease in selling, general and administrative expense of 2.2%, and
an extraordinary gain of 1.0% offset by an increase in interest expense of 0.3%,
expense related to the recapitalization of 0.6%, and lack of a tax benefit of
0.8%. Earnings per share in fiscal 1998 was impacted by a one time charge of
$4.80 per share as a result of the conversion feature of the Series B Preferred
Stock (See Note 11 to the financial statements). The conversion feature of the
Series B Preferred Stock is more favorable than the intrinsic value of the
common stock as required to be measured against the trading value on date of
purchase. This "discount" is accounted for as a dividend to the preferred
shareholders, with no net effect on shareholders' equity. For purposes of
calculating earnings per share, a total of $2,072,000 has been recognized as a
dividend for the year ended January 31, 1998.

                                    Page 13
<PAGE>
Fiscal 1997 Compared to Fiscal 1996
-----------------------------------

Net sales decreased by $11,315,000 or 15.5% for fiscal 1997 compared to fiscal
1996. This decrease was primarily due to a reduction in store count. The Company
began fiscal 1997 with 136 stores, closed 28 stores and opened 15 new stores, to
end fiscal 1997 with 123 stores, a net reduction of 13 stores or 9.6%.
Comparable store sales for fiscal year 1997 decreased by 4.2% from fiscal year
1996. The Company attributes this decline in sales to cash flow problems that
resulted in a decline in comparable store inventories of 16.1%. Although
inventories declined significantly, inventory turnover increased as a result of
increased acceptance of the Company's new merchandise strategy during the third
and fourth quarters of fiscal year 1997. Increased inventory turnover resulted
in comparable store sales performance that was significantly better than would
be expected given the decline in inventories. During the fourth quarter of
fiscal 1997 comparable store sales increased by 4%.

Cost of sales, buying and occupancy costs increased as a percent of sales by
2.7%, while decreasing by $7,565,000. The higher occupancy costs, as a
percentage of sales, result from the Company's inability to properly leverage
these generally fixed costs due to store closures and the decline in sales. Cost
of sales related to merchandise, as a percent of sales, remained the same as the
prior year.

Selling, general and administrative expenses increased as a percentage of net
sales by 0.7% primarily as a result of the comparable stores sales decline,
which resulted in less sales to leverage expenses over, partially offset by
corporate downsizing and cost constraint measures implemented during the year.

Interest expense increased to $320,000 in fiscal 1997 from $0 in fiscal 1996 as
a result of lower cash balances available for investment and increased
borrowings during the year.

The Company recorded a benefit of $471,000 during fiscal 1997 due to a federal
income tax refund, received in October 1996, and a state income tax refund
received in January 1997, which was a result of net operating loss carry-backs.

The Company incurred a loss of $3,361,000 in fiscal 1997 ($8.26 per share) or
5.4% of sales. As a percent of sales, this represents a decline of 1.5% under
fiscal 1996. Of this decrease, 2.3% resulted from a comparable store sales
decrease of 4.2% partially offset by reductions in general and administrative
expenses and store operating expenses, and by the income tax benefit.

Effects of Inflation
--------------------

The effect of changing prices has had minimal impact on sales and cost of sales
during the past three years. However, occupancy costs and certain selling,
general and administrative costs have been affected by inflation during the
period. In general, these increases have been modest and reflect current general
economic trends in the markets in which the Company operates.

                                    Page 14
<PAGE>
Liquidity and Capital Resources
-------------------------------

General
-------

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

During the twelve months ended January 31, 1998, the Company's primary source of
liquidity was from borrowings under its secured Line of Credit and, the net
capital infusion of $5,900,000 received from the sale of two series of preferred
stock (see Item 7 - "Recapitalization of the Company" for more information
regarding the capital infusion).

During December 1995 the Company entered into a financing agreement on a
revolving credit basis with LaSalle National Bank ("LaSalle"). The LaSalle
Facility provided for borrowings and letters of credit, the aggregate of which
could not exceed the lower of $10,000,000 or a computed borrowing base. Letters
of credit were limited to a maximum of $5,000,000. A first lien was granted to
LaSalle on all Company assets (excluding capitalized leases and permitted liens
of up to $400,000). Interest was charged at LaSalle's announced prime rate. The
Company was charged an annual fee of 1% of the aggregate loan limit, normal
audit fees, and a letter of credit fee of 1.25% per annum on the aggregate
undrawn face amount of letters of credit outstanding.

The Company replaced the LaSalle facility with a Line of Credit with General
Electric Capital Corporation ("GECC") on August 29, 1997. As amended, effective
December 5, 1997, the GECC Line of Credit provides for borrowing and letters of
credit, the aggregate of which cannot exceed the lesser of 60% of eligible
inventory, as defined, and outstanding letters of credit, or $10,000,000.
Letters of credit are limited to a maximum of $5,000,000. A first lien is
granted to GECC on all the Company's assets. The Company must maintain a
scheduled minimum fixed charge coverage ratio, and may not declare or pay
dividends or other distributions on account of any equity interest in the
Company, except dividends to be paid on Series A and Series B Preferred Stock
until payment or satisfaction in full of liabilities under the GECC Line of
Credit and termination of the financing agreement. Interest is charged at GECC's
index rate plus 3% (index rate averaged 5.5% during fiscal 1998). The Company is
charged an annual fee of 0.375% of the unused credit under this facility, normal
audit fees, and a letter of credit fee of 1% per annum on the aggregate undrawn
face amount of letters of credit outstanding.

On October 23, 1997, the Company amended its agreement with GECC to temporarily
increase the Company's borrowing capacity for seasonal purposes, by $500,000.
This temporary increase in availability permitted the Company to stock its
remaining stores at near full inventory levels for the 1997 Christmas holiday
sales season and was repaid at the closing of the new equity investment in the
Company, in December 1997 (see Item 7 - "Recapitalization of the Company" for
more information regarding the capital infusion). At January 31, 1998, the
Company had remaining availability under the line of $400,000, in addition to
the cash balance of $1,567,000 on hand and no outstanding letters of credit. The
Company expects to continue to draw significantly on its Line of Credit to fund
working capital 

                                    Page 15
<PAGE>
needs throughout fiscal 1999.

Net cash used for operations for the fiscal year ended January 31, 1998 was
$7,023,000. This use of cash resulted primarily from payments to unsecured
creditors ($2,322,000), an increase in inventory ($1,597,000), a decrease in
accounts payable ($2,661,000) and from the operating loss ($1,251,000). The
Company had working capital of $2,686,000 at January 31, 1998 compared to a
working capital deficit of $2,633,000 at February 1, 1997. The working capital
increase of $5,319,000 results primarily from the equity investment described in
Item 7 and increased borrowings of $2,510,000.

Net cash used for operations for fiscal 1997 and fiscal 1996 was $2,814,000 and
$7,761,000, respectively. Cash used in fiscal 1997 was primarily the result of
payments of accrued reorganization expenses ($4,485,000) losses from operations,
net of depreciation and deferred rents, ($2,875,000) and higher inventories
($612,000); partially offset by increases in accounts payable ($3,334,000).
Accounts payable increased as a result of higher purchases during January of
1997 compared to January 1996 in support of increased sales levels, and the need
to extend terms on existing trade debt, as a result of the Company's previous
liquidity problems. Cash used in fiscal 1996 was primarily the result of
payments of accrued reorganization expenses ($5,455,000) and losses, net of
depreciation and deferred rents from operations ($1,977,000). Inventory and
accounts payable both decreased as a result of lower purchases at year end
resulting from the Company's reduction in stores.

Property and equipment expenditures were $90,000, $889,000 and $509,000 in
fiscal 1998, 1997, and 1996, respectively. The expenditures in 1998 were
primarily related to store relocations and store openings. Expenditures in 1997
and 1996 were primarily related to the opening of new stores and remodeling of
existing stores.

The Company is currently planning to open at least 20 stores and relocate 10
stores during fiscal 1999. In addition, the Company is researching alternatives
to its existing management information system and expects to incur capital
expenditures to replace existing systems during fiscal 1999. The estimated
capital expense for fiscal 1999 is $1,500,000. These forward looking statements
will be influenced by the Company's financial position and the number of
advantageous mall store locations that become available.

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

The Company  believes that cash flow from  operations,  available  bank lines of
credit  and the  subordinated  debenture  closed  in  March  1998  will  provide
sufficient liquidity to meet its presently anticipated cash requirements through
fiscal 1999.

                                    Page 16
<PAGE>
Information Concerning Forward-Looking Statements
-------------------------------------------------

Certain matters discussed in this report concerning the business outlook,
anticipated financial results, and ability to obtain additional financing
constitute forward-looking statements and are based upon management's
expectations and beliefs concerning future events impacting the Company. There
can be no assurance that these events will occur or that the Company's results
will be as estimated.

The assumptions used as a basis for the forward-looking statements include many
estimates which, among other things, depend on the Company's ability to purchase
inventory in quantities required to achieve its sales estimates and the
continued support of its vendors. In addition, many factors outside the control
of the Company, including potential competitive pressures on selling price as
well as general economic conditions in the markets in which the Company does
business, also could impact the realization of such estimates.

Year 2000 Compliance
--------------------

In anticipation of the unique challenges the year 2000 issue will present to the
Company, management has taken a pro-active approach in addressing computerized
information systems. The Company realizes that many software applications and
operational programs currently in use may be unable to distinguish the year 2000
from the year 1900. If not addressed in a timely and effective manner, this
problem could result in inaccurate information, or, in the worst case, an
inability of the system to continue to function.

The Company has initiated the process of preparing its computer systems and
applications for the year 2000. This process may include replacing the store
point of sale systems during fiscal 1998 and upgrading corporate hardware and
software components by the first quarter of fiscal 2000. Management estimates
the total cumulative costs of hardware and software will be approximately
$1,500,000, which will be financed over the term of its useful life.

                                    Page 17
<PAGE>
               ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
And Shareholders of
Jay Jacobs, Inc.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on Page 37 present fairly, in all material
respects, the financial position of Jay Jacobs, Inc. and its subsidiary at
January 31, 1998 and February 1, 1997 and the results of their operations and
their cash flows for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.


Price Waterhouse LLP
Seattle, Washington
May 8, 1998

                                    Page 18
<PAGE>
<TABLE>
<CAPTION>
                         JAY JACOBS, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET
                          (Dollar amounts in thousands)

       ASSETS
                                                              January 31, 1998        February 1, 1997
       <S>                                                           <C>                     <C>      
       Current Assets:
            Cash and cash equivalents                                $   1,567               $     249
            Accounts receivable                                            336                     540
            Inventories                                                  9,532                   7,935
            Prepaid expenses                                               562                     276
                                                                   -----------             -----------
                 Total current assets                                   11,997                   9,000

       Property and equipment, net                                       4,409                   5,297
                                                                   -----------             -----------

            Total assets                                             $  16,406               $  14,297
                                                                   -----------             -----------

       LIABILITIES AND SHAREHOLDERS' EQUITY

       Current liabilities:
            Accounts payable                                         $   2,074               $   4,735
            Accrued payroll                                                162                     217
            Accrued reorganization expenses                                400                   2,618
            Other accrued expenses                                         988                     886
            Line of credit                                               5,687                   3,177
                                                                   -----------             -----------
          Total current liabilities                                      9,311                  11,633

       Deferred rental credits                                             171                     331

       Federal income tax refund reserve                                 1,980                   1,955
       Accrued reorganization expenses                                       0                     334
                                                                   -----------             -----------
          Total liabilities                                             11,462                  14,253

       Series A preferred stock - 46,000 and 0 shares
          issued and outstanding -mandatorily
          redeemable                                                     3,874                       0

       Shareholders' equity:
          Preferred stock: 5,000,000 shares authorized;
          Series B preferred stock - 25,000 and 0
           shares issued and outstanding                                 2,072                       0

          Common stock:  20,000,000 shares
          authorized; 544,323 and 408,266 issued and
          outstanding                                                   13,257                  12,990
          Accumulated deficit                                          (14,259)                (12,946)
                                                                   -----------             -----------

       Total shareholders' equity                                        1,070                      44
                                                                   -----------             -----------

       Commitments and contingencies (Notes 4 & 7)

       Total liabilities & shareholders' equity                      $  16,406               $  14,297
                                                                   -----------             -----------


          See accompanying notes to consolidated financial statements.
</TABLE>

                                    Page 19
<PAGE>
<TABLE>
<CAPTION>
                         JAY JACOBS, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENT OF OPERATIONS
                    (In thousands, except per share amounts)

                                                       Year ended           Year ended            Year ended
                                                      Jan. 31, 1998         Feb. 1, 1997        Jan. 27, 1996
<S>                                                       <C>                  <C>                  <C>    
Net sales                                                 $  62,418            $  61,571            $  72,886

Operating costs and expenses:
     Cost of sales, buying and
     occupancy costs                                         47,273               48,157               55,722
     Selling, general, and
     administrative expenses                                 16,122               17,266               19,975
     Interest expense                                           499                  320                    0
     Expense related to equity
     investment                                                 375                    0                    0
                                                      -------------         ------------         ------------
                                                             64,269               65,743               75,697
                                                      -------------         ------------         ------------

Loss before reorganization items
    and income taxes                                         (1,851)              (4,172)              (2,811)

Reorganization expense (income)                                   0                 (340)                   0
Income tax benefit                                                0                  471                    0
                                                      -------------         ------------         ------------

Loss before extraordinary item                               (1,851)              (3,361)              (2,811)
Extraordinary gain (Note 4)                                     600                    0                    0
                                                      -------------         ------------         ------------

Net loss                                                  $  (1,251)           $  (3,361)           $  (2,811)
                                                      -------------         ------------         ------------

Basic & diluted earnings per share:
     Loss before extraordinary item                       $   (9.38)           $   (8.26)           $   (7.05)
     Extraordinary gain                                        1.39                    0                    0
                                                      -------------         ------------         ------------
     Net loss                                             $   (7.99)           $   (8.26)           $   (7.05)
                                                      -------------         ------------         ------------

Weighted average number of
  shares outstanding (basic & diluted)                          432                  407                  399
                                                      -------------         ------------         ------------


          See accompanying notes to consolidated financial statements.
</TABLE>

                                    Page 20
<PAGE>
<TABLE>
<CAPTION>
                         JAY JACOBS, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

                       FOR THE YEAR ENDED JANUARY 27, 1996
                         THE YEAR ENDED FEBRUARY 1, 1997
                       AND THE YEAR ENDED JANUARY 31, 1998
                                 (In thousands)
                                                                                                  Retained
                                       Preferred Stock                 Common Stock               earnings
                                  Shares            Amount         Shares         Amount           deficit            Total
<S>                                      <C>         <C>               <C>         <C>              <C>                  <C>   
Balance Jan. 28, 1995                                                  394         $12,768           $(6,774)            $5,994

Issuance of shares to CEO                                                7             113                                  113

Stoc options exercised                                                   3              39                                   39

Net loss                                                                                              (2,811)            (2,811)
                               ------------      ----------     ----------     -----------      ------------      -------------

Balance Jan. 27, 1996                                                  404          12,920            (9,585)             3,335

Stock options exercised                                                  4              70                                   70

Net loss                                                                                              (3,361)            (3,361)
                               ------------      ----------     ----------     -----------      ------------      -------------

Balance Feb. 1, 1997                                                   408          12,990           (12,946)                44

Stock options exercised                                                 10              37                                   37

Series B Preferred shares
issued to new investors                  26          $2,072                                                               2,072

Shares issued to unsecured
pre-petition creditors                                                 126             230                                  230

Accretion on Series A
preferred stock                                                                                          (24)               (24)

Dividends on Series A
preferred stock                                                                                          (38)               (38)

Net loss                                                                                              (1,251)            (1,251)
                               ------------      ----------     ----------     -----------      ------------      -------------

Balance Jan. 31, 1998                    26          $2,072            544         $13,257          $(14,259)            $1,070
                               ------------      ----------     ----------     -----------      ------------      -------------


          See accompanying notes to consolidated financial statements.
</TABLE>

                                    Page 21
<PAGE>
<TABLE>
<CAPTION>
                         JAY JACOBS, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (In thousands)

                                                            Year ended           Year ended            Year ended
                                                           Jan. 31, 1998         Feb. 1, 1997        Jan. 27, 1996
<S>                                                            <C>                  <C>                  <C>    
Cash flows from operating activities:
   Net loss                                                    $  (1,251)           $  (3,361)           $  (2,811)
   Adjustments to reconcile net loss to net cash
     used in operating activities:
      Depreciation and amortization                                  977                1,150                1,157
      Reversal of provision for deferred rents, net                 (160)                (664)                (323)

      Change in assets and liabilities:
         Accounts receivable                                         204                  (98)                (181)
         Inventories                                              (1,597)                (612)               1,256
         Prepaid expenses                                           (285)                 (57)                 (59)
         Accounts payable                                         (2,661)               3,334                 (832)
         Accrued payroll                                             (55)                (312)                 (72)
         Other accrued expenses                                      102                  336                 (461)
         Accrued reorganization expenses                          (2,322)              (4,485)              (5,435)
         Federal income tax refund reserve                            25                1,955                    0
                                                             -----------          -----------          -----------
                                                                  (7,023)              (2,814)              (7,761)
                                                             -----------          -----------          -----------

Cash flows from investing activities:
   Capital expenditures                                              (90)                (889)                (509)
   Net proceeds from sales of assets                                   0                    0                   38
                                                             -----------          -----------          -----------
                                                                     (90)                (889)                (471)
                                                             -----------          -----------          -----------

Cash flows from financing activities:
   Net borrowing from line of credit                               2,510                3,177                    0
   Proceeds from sale of preferred stock, net                      5,884                    0                    0
   Proceeds from options exercised                                    37                   70                   39
                                                             -----------          -----------          -----------
                                                                   8,431                3,247                   39
                                                             -----------          -----------          -----------

Net increase (decrease) in cash and cash
   equivalents                                                     1,318                 (456)              (8,193)
Cash and cash equivalents - beginning of year                        249                  705                8,898
                                                             -----------          -----------          -----------
Cash and cash equivalents - end of year                        $   1,567            $     249            $     705
                                                             -----------          -----------          -----------

Supplemental disclosure of cash flow information:
   Cash received during the year for income taxes                      0               (2,426)                   0
                                                             -----------          -----------          -----------

   Cash paid during the year for interest                            140                  292                    0
                                                             -----------          -----------          -----------

   Cash paid for reorganization items                              1,721                3,620                4,032
                                                             -----------          -----------          -----------
   Shares issued for services                                          0                    0                  113
                                                             -----------          -----------          -----------
   Shares issued to unsecured creditors                              230                    0                    0
                                                             -----------          -----------          -----------


          See accompanying notes to consolidated financial statements.
</TABLE>

                                    Page 22
<PAGE>
                         JAY JACOBS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - Recapitalization of the Company

During December 1997, the Company sold two series of newly issued preferred
stock in a Private Placement for $7,100,000. The Series A Preferred Stock (which
pays cumulative dividends at the rate of 5%, due quarterly, from the date of
closing), is mandatorily redeemable as of January 1, 2003, and was issued for
$4,600,000. The Series B Preferred Stock (which pays cumulative dividends at the
rate of 8%, due quarterly beginning 90 days after the second anniversary of the
closing) is convertible and was issued for $2,500,000. The Series B Stock is
convertible into shares of common stock (subject to adjustment in certain
events). As of January 31, 1998, the shares of common stock issuable upon
conversion of the Series B Preferred Stock would represent, if issued, 86.25% of
the issued and outstanding common stock on a fully diluted basis. Both series of
preferred stock pay dividends at a rate of 20% effective January 1, 2003. The
Series B Preferred Stock is entitled to vote, together with the holders of
common stock and Series B Preferred Stock as a single class, on any matter
submitted to the shareholders for a vote. The holders of Series B Preferred
Stock have one vote for each full share of common stock into which their shares
of Series B Preferred Stock are convertible.

The Company received net proceeds of approximately $5,900,000 after fees and
expenses of this financing. Fees and expenses include a banking fee of $355,000,
together with $40,000 of expense reimbursement payable to the purchasers of the
Series A and Series B Preferred Stock; a break-up fee payable to a second
potential group of investors of $300,000, together with expenses of up to
$75,000; an investment banking fee payable to the Company's investment advisors
of $275,000; and $145,000 of legal and other professional fees.

The Series A Preferred Stock was recorded as mezzanine equity and the Series B
Preferred Stock was recorded as additional equity during the fourth quarter of
fiscal 1998. The Series A and Series B stock were recorded net of the direct
cost of the Private Placement of approximately $1,154,000. The direct costs were
allocated pro rata between the Series A and Series B stock. The direct costs
that will be charged to the Series A stock will be accreted over five years and
amortized directly against retained earnings. The dividends associated with the
Series A stock will also be charged directly against retained earnings as they
are paid. A separate break-up fee and related expenses of approximately
$375,000, payable to a second potential group of investors, has been charged to
expense during the fourth quarter.

Note 2 - Summary of Significant Accounting Policies

The following accounting principles and practices of Jay Jacobs, Inc. are set
forth to facilitate the understanding of the consolidated financial statements.

                                    Page 23
<PAGE>
Operations
----------

The Company's primary business activity is the retailing of women and men's
apparel. The Company operates 108 stores in 19 states, primarily Washington,
California, Alaska and Oregon.

Principles of Consolidation
---------------------------

The consolidated financial statements include the accounts of Jay Jacobs, Inc.
and its wholly owned subsidiary J.J. Distribution Company. All significant
intercompany balances and transactions have been eliminated.

Cash Equivalents
----------------

For financial reporting purposes, the Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.

Retail Sales
------------

Revenues from retail sales (including lay-a-way transactions) are recognized at
the time of sale, net of returns and exchanges, and exclude sales taxes.

Inventories
-----------

Inventories are valued at the lower of cost or market using the retail method on
a first-in, first-out basis.

Property and Equipment
----------------------

Property and equipment are recorded at cost. Additions, improvements and
expenditures that significantly add to the utility of facilities are capitalized
and depreciated. Expenditures for maintenance and repairs are charged to expense
as incurred.

Depreciation and amortization are computed by the straight-line method for
financial reporting purposes and various methods for tax purposes. For financial
reporting purposes, furniture, fixtures and equipment are depreciated over their
useful lives of three to ten years and leasehold improvements are amortized over
the term of the related lease. It is the Company's policy to write down assets
when it is determined that it is probable that the assets' value is impaired.
The carrying value of fixed assets is assessed for any permanent impairment by
evaluating the operating performance and future undiscounted cash flows from
operations of the underlying businesses. Adjustments are made if the sum of the
expected future undiscounted net cash flows is less than book value. Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable.

                                    Page 24
<PAGE>
Pre-opening and Store Closing Costs
-----------------------------------

Costs associated with the opening of new stores are charged to expense as
incurred. The costs associated with store closures, net of amounts expected to
be recovered, are expensed when the decision to close the store is made.

Advertising Costs
-----------------

The Company did not advertise on its own during the years ended January 31,
1998, February 1, 1997, and January 27, 1996. As is the case with most specialty
retailers, the Company relies mainly on its locations in malls and on in-house
graphics and displays to attract customers to its stores. The Company pays for
cooperative advertising in the form of mall dues. Advertising costs for the
years ended January 31, 1998, February 1, 1997 and January 27, 1996 were
expensed as incurred and totaled $118,000, $122,000 and $219,000, respectively.

Income Taxes
------------

The Company accounts for income taxes under an asset and liability approach. The
asset and liability approach requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities.

Earnings (Loss) Per Share
-------------------------

In February 1997, the Financial Accounting Standards Board issued the Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). The
company adopted SFAS 128 in the fourth quarter of fiscal 1998, as required by
this pronouncement. SFAS 128 establishes standards for computing and presenting
earnings (loss) per share. Basic earnings (loss) per share is calculated by
dividing net income available to common shareholders (before and after
extraordinary items) by the weighted average number of shares outstanding.
Accordingly, diluted earnings per share includes the dilutive effects of stock
options and warrants using the treasury stock method and the effect of the
conversion of the Series B Preferred Stock to common stock in determining the
weighted average number of shares of common stock outstanding, unless the effect
is anti-dilutive. Net income available to common shareholders is computed by
deducting dividends for the period on preferred stock, whether or not the
dividends were paid. Earnings per share for all periods presented have been
restated following the provisions of SFAS 128.

Use of Estimates
----------------

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities, including accrued reorganization expenses, at
the date of the financial statements and the reported 

                                    Page 25
<PAGE>
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

Financial Instruments
---------------------

The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued payroll, accrued
reorganization expenses, line of credit and other accrued expenses. These
balances, as presented in the financial statements at January 31, 1998,
approximate their fair value.


Note 3 - Property and Equipment

The composition of property and equipment is:

                                               January 31,          February 1,
                                                     1998                 1997

     Leasehold improvements                      $  7,947             $  7,910
     Furniture, fixtures and equipment             18,102               18,172
                                                 --------             --------
                                                   26,049               26,082

     Less accumulated depreciation
     and amortization                              21,640               20,785
                                                 --------             --------

                                                 $  4,409             $  5,297
                                                 --------             --------

Note 4 - Emergence From Chapter 11 and Reorganization Expense

On May 13, 1994 (the "Petition Date"), the Company filed a voluntary petition
for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Western
District of Washington (the "Bankruptcy Court"). Under the protection of Chapter
11, the Company managed its affairs and operated its business as a
debtor-in-possession while a Plan of Reorganization was developed. The Company
decided to close 84 stores and recorded a reorganization provision of $7,597,000
related to these events. Property and equipment was written down by $1,978,000,
inventory reserves for closed stores were $1,200,000, $752,000 was incurred in
professional fees and expenses and $3,667,000 represents the provision related
to lease rejection claims.

During the reorganization, management restructured operations and capitalization
in order to strengthen the Company's financial position and operating
performance.

On November 20, 1995, the Bankruptcy Court approved a financing agreement
between the Company and LaSalle National Bank, and on November 28, 1995, the
Company's Plan of Reorganization (the "Plan") became effective.

Unsecured creditors were paid an amount equal to 30% of the approved claim
amount in January 1996 subsequent to the fiscal year end. These creditors made
an election to either 

                                    Page 26
<PAGE>
receive a second 30% payment in 1997, or receive a 15% payment in 1997 plus a
note equal to 42% of the approved claim amount. The notes accrued interest at
9.5% per annum. Creditors elected to receive $390,000 in notes, leaving
$2,485,000 due in a lump sum payment. All administrative expense claims were
paid in full and allowed Priority Tax Claims are paid on a quarterly basis, the
last such payment is due in April 1999.

Pursuant to the Plan, the Company's unsecured creditors received a partial
payment in January 1996, but further scheduled payments were delayed by
inadequate cash flow. In December 1997, the Company received a $5,900,000
capital infusion, after fees and expenses, from the sale of two series of
preferred stock (see Note 1 "Recapitalization of the Company" for more
information regarding the capital infusion). In connection with the capital
infusion, the Plan was modified December 1, 1997 by the U.S. Bankruptcy Court,
to allow for payment of approximately $1,500,000 in cash and issuance of 125,984
shares of the Company's common stock in full satisfaction of the approximately
$2,500,000 payment due creditors by January 1, 1997 under the Plan. The cash was
paid and stock issued in December 1997. This payment has resulted in the
recording of an extraordinary gain of $600,000 during the Company's fourth
quarter of fiscal 1998. The gain of $600,000 was a result of the acceptance of
stock rather than cash payment; less legal and professional fees, representing
$170,000 and $230,000 accounted for as an increase in common stock representing
the value of the transaction. Unpaid costs related to this reorganization were
January 31, 1998 were $400,000 and $2,952,000 at February 1, 1997. Claims
payable within a year, which represents the remaining payments due for priority
tax claims are classified as current liabilities.

Note 5 - Income Taxes

The income tax benefit consists of the following (in thousands):

                                    Fiscal            Fiscal            Fiscal
                                  year end          year end          year end
                                      1998              1997              1996

             Current            $        0        $        0        $        0
             Deferred                    0              (471)                0
                                ----------        ----------        ----------
                                $        0        $     (471)       $        0
                                ----------        ----------        ----------

The difference between the income tax benefit based upon statutory income tax
rates and the income tax benefit recorded in the financial statements is
attributable to the following (in thousands):

<TABLE>
<CAPTION>
                                                             Fiscal year        Fiscal year        Fiscal year
                                                               end 1998           end 1997           end 1996
<S>                                                            <C>               <C>                <C>       
Income taxes at Federal statutory rate of 34%                  $   (425)         $ (1,303)          $    (956)
Change in valuation allowance                                       408            (1,029)                918
Reserve against tentative income tax refund
  received                                                            0             1,955                   0
Other                                                                17               (94)                 38
                                                               --------          --------           ---------
                                                               $      0          $   (471)          $       0
                                                               --------          --------           ---------
</TABLE>

                                    Page 27
<PAGE>
Deferred tax assets (liabilities) at January 31, 1998 and February 1, 1997 were
comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                               January 31, 1998        February 1, 1997
<S>                                                     <C>                     <C>    
Operating loss carryforward                             $ 9,706                 $ 9,089

Deferred rental credits                                      58                     112
Inventory valuation                                         160                      98

Minimum tax credit carryforward                             198                     198
Other, net                                                  (79)                    138
                                                      ---------               ---------
                                                         10,043                   9,635

Less:  Valuation allowance                               10,043                   9,635
                                                      ---------               ---------

Net deferred tax assets                                 $     0                 $     0
                                                      ---------               ---------
</TABLE>

At January 31, 1998, the Company had available Federal Net Operating Loss (NOL)
carryforwards of approximately $28,547,000, which expire in 2009 through 2013.
During the fiscal year substantial changes in the Company's ownership have
occurred as a result of the new investment in the Company (see Note 1 -
"Recapitalization of the Company"). As a result of the changes, limitation on
the Company's ability to recover net operating loss carryforwards will occur.
The limitations are related to the market capitalization at the time of the
change in control in the Company. The limitation per year in recovering the Net
Operating Losses against taxable income is approximately $500,000.

The Company carried back, under IRC section 172 (f), $6,829,000 of the fiscal
1997 net operating loss to tax years beginning on or after January 1, 1984.
Accordingly, the Company filed for and received a tentative refund in October
1996 of $2,355,000 (net of fees paid to prepare the refund claim). The tentative
tax refund is subject to audit by the Internal Revenue Service and as a result
the Company has established a reserve for this claim in the amount of
$1,955,000. The Company also received state income tax refunds of $71,000 during
fiscal 1997. The Internal Revenue Service commenced an audit of the Claim in the
fall of 1997. The audit process is continuing through fiscal 1999.


Note 6 - Lease Commitments

Annual store rentals are primarily fixed amounts, plus a contingent amount
determined on the basis of a percentage of sales exceeding a stipulated amount.
All such leases represent operating leases as defined in Statement of Financial
Accounting Standards No. 13. Lease provisions generally require additional
payments for taxes, maintenance and other miscellaneous expenses. For leases
which have escalation clauses, an amount has been provided so that equal monthly
minimum rents are reported throughout the term lease.

                                    Page 28
<PAGE>
Net rental expense includes the following (in thousands):

<TABLE>
<CAPTION>
                                          Year ended         Year ended        Year ended
                                         Jan. 31, 1998      Feb. 1, 1997     Jan. 27, 1996
<S>                                             <C>               <C>               <C>   
Minimum rent                                    $5,288            $5,554            $5,884
Provision for deferred rent                       (160)             (664)             (323)
Contingent rent                                  1,447             1,378             1,209
Property tax and other                             465               437               701
                                          ------------      ------------      ------------
                                                $7,040            $6,705            $7,471
                                          ------------      ------------      ------------
</TABLE>

Minimum rental commitments for leases in effect at January 31, 1998 are as
follows (in thousands):

Year Ending

January 1999                          $  5,078
January 2000                             3,662
January 2001                             2,951
January 2002                             1,917
January 2003                             1,299
Thereafter                               1,886
                                      --------
                                      $ 16,793


Note 7 - Line of Credit

The existing $10,000,000 credit facility with LaSalle National Bank, entered
into in December, 1995, was replaced with a Line of Credit from General Electric
Capital Corporation ("GECC") on August 29, 1997. As amended, effective December
5, 1997 ("Second Amendment"), the GECC Line of Credit provides for borrowing and
letters of credit, the aggregate of which cannot exceed the lesser of 60% of
eligible inventory, as defined, and outstanding letters of credit, or
$10,000,000. Letters of credit are limited to a maximum of $5,000,000. A first
lien is granted to GECC on all the Company's assets. The Company must maintain a
scheduled minimum fixed charge coverage ratio, and may not declare or pay
dividends or other distributions on account of any equity interest in the
Company, except dividends to be paid on Series A and Series B Preferred Stock
until payment or satisfaction in full of liabilities under the GECC Line of
Credit and termination of the financing agreement.

As of the end of fiscal year 1998 and 1997 the balance under the line of credit
was $5,687,000 and $3,177,000 respectively. The Company is in compliance with
the covenants of its bank agreement.

Note 8 - Stock Option Plans

At January 31, 1998, the Company had stock based compensation plans, which are
described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for 

                                    Page 29
<PAGE>
its plans. Accordingly, no compensation cost has been recognized for its fixed
stock option plans and its stock purchase plan for grants issued at fair market
value. Had compensation cost for the Company's stock-based compensation plans
been determined consistent with FASB Statement No. 123 "Accounting for
Stock-Based Compensation", the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal years 1998, 1997 and 1996, respectively:
no dividends in any of the three years, expected volatility of 75%, 79% and 70%,
weighted-average risk-free interest rates of 5.72% to 6.63%, 5.36% to 6.27% and
5.69% to 7.76% and expected lives of five years for the three periods. The
weighted average fair value of options granted during fiscal years 1998,
1997, and 1996 were $0.81, $9.30, and $18.60, respectively.

<TABLE>
<CAPTION>
                                                         1998             1997            1996
<S>                                                   <C>              <C>             <C>     
Loss before extraordinary item                        $(1,914)         $(3,635)        $(3,158)
Extraordinary gain                                        600                0               0
                                                -------------    -------------    -------------
Net loss                                              $(1,314)         $(3,635)        $(3,158)
                                                -------------    -------------    -------------
Basic and diluted earnings per share:
     Loss before extraordinary item                    $(9.53)          $(8.93)         $(7.91)
     Extraordinary gain                                  1.39                0               0
                                                -------------    -------------    -------------
     Net loss                                          $(8.14)          $(8.93)         $(7.91)
                                                -------------    -------------    -------------
Weighted average number of shares outstanding
  (basic and diluted)                                     432              407             399
                                                -------------    -------------    -------------
</TABLE>


Fixed Stock Option Plans
------------------------

The Company has fixed option plans. Generally, options vest over a three year
period. All options expire ten years from date of grant. The non-qualified plan
has 26,667 authorized shares of which 6,072 were available for future grant as
of January 31, 1998. A retention plan issued 10,071 shares in July 1994, of
which 2,729 options remained outstanding at January 31, 1998. The Directors and
Executives plan had 28,067 shares issued as of January 31, 1998.

During March 1998 the stockholders approved a new non-qualified stock option
plan for associates. The plan reserved 1,094,467 shares for issuance at the
discretion of the compensation committee of the board of directors. The options
under the new plan generally vest over five years and expire ten years from the
date of grant. In addition, the shares outstanding in the Company's previous
plans were rolled over into the new plan.

                                    Page 30
<PAGE>
A summary of the status of the Company's fixed stock option plans as of January
31, 1998, February 1, 1997, and January 27, 1996 changes during the years then
ended is presented below:

<TABLE>
<CAPTION>
                                                   1998                      1997                       1996
                                          Weighted                  Weighted                  Weighted
                                           Average                   Average                   Average
                                          Exercise                  Exercise                  Exercise
                                            Shares        Price       Shares        Price       Shares        Price
Outstanding at beginning of year            64,633        $3.75       63,453       $20.10       52,089       $14.25
     Granted                                52,190         1.98       58,866         4.80       28,842        27.45
     Exercised                              (9,861)        3.75       (4,628)       15.00       (3,148)       12.45
     Canceled                              (55,572)        3.75      (53,058)       23.40      (14,330)       15.60
                                         ---------    ---------    ---------    ---------    ---------    ---------
<S>                                         <C>           <C>         <C>           <C>         <C>          <C>   
Outstanding at end of year                  51,390        $1.95       64,833        $3.75       63,453       $20.10

Options exercisable at end of year          44,706                    48,594                    21,246
</TABLE>

During fiscal 1998, the Board of Directors of the Company voted to re-price the
exercise price for all outstanding options to $1.95 per share. Therefore, the
weighted average exercise price for all outstanding shares at year end is $1.95
per share, and the weighted-average remaining contractual life is three years.


Note 9 - Stock Purchase Plan

During the year ended February 28, 1991 the Company adopted a stock purchase
plan. Under the plan, employees are allowed to purchase common stock of the
Company at a price equal to 90 percent of the stock's market value as of certain
dates. There were no shares issued in fiscal 1998, 1997, or 1996.


Note 10 - Profit Sharing Plan

The Company maintains a discretionary profit-sharing plan for all employees
meeting certain age and length of service requirements. No contribution was made
for the fiscal periods ended January 31, 1998, February 1, 1997 or January 27,
1996.

Note 11 - Earnings (Loss ) Per Share Calculation

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

<TABLE>
<CAPTION>
                                                  Year ended         Year ended        Year ended
                                                 Jan. 31, 1998      Feb. 1, 1997     Jan. 27, 1996
<S>                                                    <C>               <C>               <C>   
Loss before extraordinary item                         $(1,851)          $(3,361)          $(2,811)
Less:  Non-cash beneficial conversion
   feature of Series B Preferred Stock                  (2,072)                0                 0
Less:  Accretion of Series A Preferred
   Stock to redemption value                               (24)                0                 0
Less: Series A Preferred Stock dividends                   (81)                0                 0

                                    Page 31
<PAGE>
Less: Series B Preferred Stock dividends                   (24)                0                 0
                                                   -----------       -----------       -----------

Loss available to common shareholders                   (4,052)           (3,361)           (2,811)

Extraordinary gain                                         600                 0                 0
                                                   -----------       -----------       -----------

Net loss available to common shareholders              $(3,452)          $(3,361)          $(2,811)
                                                   -----------       -----------       -----------

Weighted average shares (basic and diluted)                432               407               399
                                                   -----------       -----------       -----------

Basic and diluted earnings per share:

   Loss before extraordinary item                       $(9.38)           $(8.26)           $(7.05)
   Extraordinary gain                                     1.39                 0                 0
                                                   -----------       -----------       -----------
   Net loss                                             $(7.99)           $(8.26)           $(7.05)
                                                   -----------       -----------       -----------
</TABLE>

The conversion feature of the Series B Preferred Stock is more favorable than
the intrinsic value of the common stock as required to be measured against the
trading value on date of purchase. This "discount" is accounted for as a
dividend to the preferred shareholders, with no net effect on shareholders'
equity. For purposes of calculating earnings per share, a total of $2,072,000
has been recognized as a dividend for the year ended January 31, 1998.

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


Note 12 - New Accounting Pronouncements

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"), establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS 130 is effective for
fiscal years beginning after December 15, 1997.

Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS 131"), establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS 131 is effective for financial statements
for periods beginning after December 15, 1997.

The Company does not expect SFAS 130 and SFAS 131 to have a material impact on
the financial statements.


Note 13 - Selected Quarterly Financial Data (Unaudited)

Selected quarterly financial data is as follows (in thousands, except per share
amounts):

                                    Page 32
<PAGE>
<TABLE>
<CAPTION>
Restated year ended Jan. 31, 1998                          Fourth          Third         Second          First
                                                          Quarter        Quarter        Quarter        Quarter
<S>                                                       <C>            <C>            <C>            <C>    
Net sales                                                 $18,057        $15,238        $15,657        $13,466
Gross profit, less buying and
   occupancy costs                                          4,712          3,954          4,047          2,513
Net loss before extraordinary item                            (40)           (79)          (135)        (1,597)
Net income (loss)                                             560            (79)          (135)        (1,597)
Net loss per share before extraordinary item                (4.48)         (0.19)         (0.33)         (3.91)
Net loss per share                                          (3.28)         (0.19)         (0.33)         (3.91)
</TABLE>

The restatement for the first, second and third quarter was related to reversal
of income tax benefit provided for in each respective quarter of $423,000 and an
adjustment to cost of goods sold of $753,000.

<TABLE>
<CAPTION>
As originally reported in each respective quarters 10-Q report:

Year ended Jan. 31, 1998                                      Fourth          Third         Second          First
                                                             Quarter        Quarter        Quarter        Quarter
<S>                                                          <C>            <C>            <C>            <C>    
Net sales                                                    $18,057        $15,238        $15,657        $13,466
Gross profit, less buying and occupancy costs                  4,712          4,107          4,247          2,913
Net income (loss) before extraordinary item                      (40)            44             39           (718)
Net income (loss)                                                560             44             39           (718)
Net income (loss) per share before extraordinary item          (4.48)          0.11           0.10          (1.76)
Net income (loss) per share                                    (3.28)          0.11           0.10          (1.76)
</TABLE>

<TABLE>
<CAPTION>
Year ended Feb. 1, 1997                                      Fourth          Third         Second          First
                                                             Quarter        Quarter        Quarter        Quarter
<S>                                                          <C>            <C>            <C>            <C>    
Net sales                                                    $17,795        $13,479        $16,472        $13,825
Gross profit, less buying and occupancy costs                  5,038          2,596          3,484          2,777
Reorganization items                                               0              0            340              0
Federal income tax refund                                         71            400              0              0
Net income (loss)                                                351         (1,261)          (653)        (1,798)
Net income (loss) per share                                     0.86          (3.09)         (1.61)         (4.45)
</TABLE>


Note 14 - Subsequent Events

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

On March 24, 1998, the shareholders of the Company voted on a 1-for-15 reverse
stock split and the Company's new stock option plan that was adapted by the
Board of Directors on December 3, 1997. Both items were approved by the majority
of the shareholders in both classes of the Company's stock. The reverse stock
split was effective on April 3, 1998. As such, all share and per share amounts
presented in the financial statements and related notes thereto have been
retroactively restated to reflect this stock split. Stock options issued to
employees from February 1, 1998 through April 16, 1998 totaled 153,767.

                                    Page 33
<PAGE>
               ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
                     ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

                                    Page 34
<PAGE>
                                    PART III

          ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS
------------------

The current executive officers of the company are as follows:

            Name                    Age                   Position

      Rex Loren Steffey             48    President and Chief Executive Officer

      William L. Lawrence, Jr.      47    Executive Vice President and Chief 
                                          Financial Officer

Rex Loren Steffey came to Jay Jacobs in September 1994 from Paul Harris Stores,
Inc., an Indiana-based fashion retail enterprise similar to that of Jay Jacobs.
He has 20 years of experience in the retail industry. Mr. Steffey served in
various executive merchandising positions at Paul Harris from 1975 to 1986. From
1987 to 1991 Mr. Steffey held senior positions with the Cato Corporation and
Montgomery Ward. Mr. Steffey rejoined Paul Harris as Vice President of
Merchandising in June 1991, shortly after it filed for Chapter 11 protection, to
revamp its merchandising strategy and control. He directed Paul Harris'
merchandise planning, distribution, marketing, and management information
services during and through its successful Chapter 11 reorganization that was
concluded in September 1992.

Mr. Steffey was the Senior Vice President of Operations at Paul Harris from
March 1993 until August 1993. Thereafter, he served as its President and Chief
Operating Officer until he was hired by Jay Jacobs.

William L. Lawrence, Jr. came to Jay Jacobs in January 1995. He has over 20
years of retail experience. Prior to joining the Company, Mr. Lawrence was
Senior Vice President and Chief Financial Officer for Paul Harris Stores, Inc.
from March 1994 until January 1995. From March 1993 to March 1994, he was Senior
Vice President - Finance of Paul Harris. From 1990 until March 1993, Mr.
Lawrence also served as Paul Harris' Vice President - Controller, Corporate
Secretary, and Assistant Treasurer.

CURRENT DIRECTORS

                                             Director
         Name                     Age         Since
         ----                     ---        --------

   William L. Lawrence, Jr.       47          1997

   Rex Loren Steffey              48          1994

   Michael D. Sullivan            57          1997

   Edward L. Cahill               44          1997

   Kim Z. Golden                  42          1997

                                    Page 35
<PAGE>
Set forth below is certain information concerning those persons serving on the
Board of Directors that are not otherwise serving as executive officers of the
Company.

Michael D. Sullivan has been Chairman of the Board of Golf America Stores, Inc.,
a golf apparel retailing company, from October 1996 to the present. Mr. Sullivan
has also been Chairman of the Board of Pro Axon International, LLC, a hair care
products company since December 1994. From August 1974 to November 1994, Mr.
Sullivan was President and Chief Executive Officer of Merry-Go-Round
Enterprises, Inc., a fashion retailer. Merry-Go-Round filed a reorganization
petition under Chapter 11 of the Federal Bankruptcy law in January 1994, and
subsequently announced a bankruptcy liquidation. Mr. Sullivan is also a director
of Baltimore Gas and Electric Company.

Edward L. Cahill is a founding partner of Cahill, Warnock & Company, LLC, an
asset management firm established to invest in small public companies. Prior to
founding Cahill, Warnock & Company in July 1995, Mr. Cahill was a Managing
director at Alex. Brown & Sons, Incorporated where, from 1986 through 1995, he
headed the firm's Health Care Investment Banking Group. Mr. Cahill is also a
director of Occupational Health + Rehabilitation Inc., GENEMEDICINE, INC., Prism
Health Group, Inc., and The Maryland Bioprocessing Center.

Kim Z. Golden is a Managing Director of T. Rowe Price Recovery Fund II, L.P.
From May 1991 to the present, Mr. Golden has been a Vice President of T. Rowe
Price Associates ("TRPA"), a mutual fund company. Prior to joining TRPA Mr.
Golden held various positions at Chemical Banking Corporation (now Chase
Manhattan) where he was a Vice President of Corporate Finance. Mr. Golden is
also a Director of Seaman Furniture Company.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who own more than ten percent of the
Company's stock to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC"). Executive officers, directors and
beneficial owners of more than ten percent of the Company's stock are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on a review of the copies of such forms received by the
Company and on written representations from certain reporting persons that they
have complied with the relevant filing requirements, the Company believes that,
during Fiscal 1997, its officers and directors have complied with all applicable
Section 16(a) filing requirements


                         ITEM 11. EXECUTIVE COMPENSATION

The information required by Part III (Item 11) is set forth in the Company's
definitive proxy statement which will be filed pursuant to Regulation 14A within
120 days of January 31, 1998. Such information is incorporated herein by
reference and made a part hereof.

                                    Page 36
<PAGE>
                     ITEM 12. SECURITY OWNERSHIP OF CERTAIN
                        BENEFICIAL OWNERS AND MANAGEMENT

The information required by Part III (Item 12) is set forth in the Company's
definitive proxy statement which will be filed pursuant to Regulation 14A within
120 days of January 31, 1998. Such information is incorporated herein by
reference and made a part hereof.


             ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Part III (Item 13) is set forth in the Company's
definitive proxy statement which will be filed pursuant to Regulation 14A within
120 days of January 31, 1998. Such information is incorporated herein by
reference and made a part hereof.

                                     PART IV

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

ITEM 14. (a)(1) FINANCIAL STATEMENTS

         Report of Independent Accountants
         Consolidated Balance Sheet as of January 31, 1998 and February 1, 1997.
         Consolidated Statement of Operations for the years ended January 31,
               1998, February 1, 1997, and January 27, 1996.
         Consolidated Statement of Shareholders' Equity
         Consolidated Statement of Cash Flows for the years ended January 31,
               1998, February 1, 1997, and January 27, 1996.
         Notes to Consolidated Financial Statements

ITEM 14. (a)(2)

Schedule II - Valuation and Qualifying Accounts

ITEM 14. (a)(3) LIST OF EXHIBITS

The Exhibits indexed on pages 41 through 42 of this report are included as part
of this Form 10-K/A.

ITEM 14. (b) REPORTS ON FORM 8-K

Form 8-K dated November 17, 1997, reporting under Item 7 the recapitalization of
the Company and final payment to pre-bankruptcy creditors.

Form 8-K dated December 5, 1997, reporting change of control of Registrant.

                                     Page 37
<PAGE>
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, on May 14, 1998.

                                   Jay Jacobs, Inc.


                                   By: REX LOREN STEFFEY
                                       -----------------------------------------
                                       Rex Loren Steffey
                                       President and Chief Executive Officer and
                                       Director (Principal Executive Officer)

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.

Signature                                 Title                       Date
---------                                 -----                       ----

MICHAEL D. SULLIVAN
-----------------------------
Michael D. Sullivan                Chairman of the Board          May 14, 1998
                                   and Director 

EDWARD L. CAHILL
----------------------------
Edward L. Cahill                   Director                       May 14, 1998


KIM Z. GOLDEN
----------------------------
Kim Z. Golden                      Director                       May 14, 1998


REX LOREN STEFFEY
----------------------------
Rex Loren Steffey                  President, Chief Executive     May 14, 1998
                                   Officer and Director

WILLIAM L. LAWRENCE, JR.
----------------------------
William L. Lawrence, Jr.           Executive Vice President,      May 14, 1998
                                   Chief Financial Officer
                                   and Director

                                     Page 38
<PAGE>
       REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENTS SCHEDULE


To the Board of Directors and
Shareholders of Jay Jacobs, Inc.

Our audit of the consolidated financial statements referred to in our report
dated May 8, 1998 appearing on Page 18 of this Annual Report on Form 10-K/A also
included audits of the information included in the Financial Statement Schedule
listed in Item 14(a)(2) of this Form 10-K/A for the years ended January 31,
1998, February 1, 1997, and January 27, 1996. In our opinion, the Financial
Statement Schedule presents fairly, in all material respects, the information
for the years ended January 31, 1998, February 1, 1997 and January 27, 1996 set
forth therein when read in conjunction with the related consolidated financial
statements.


Price Waterhouse LLP
Seattle, Washington

May 8, 1998

                                    Page 39
<PAGE>
                         JAY JACOBS, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

                                                          Deferred Tax
                                        Balance Beg.         Expense        Balance End
Description                              Of period          (Benefit)        of period
<S>                                       <C>               <C>               <C>     
Deferred tax valuation allowance:
     1998                                 $  9,635          $     408         $ 10,043
     1997                                 $ 10,664          $ (1,029)         $  9,635
     1996                                 $  9,746          $     918         $ 10,664
</TABLE>


                                    Page 40
<PAGE>
                                  EXHIBIT INDEX

ITEM           DESCRIPTION

2.1      Preferred Stock Purchase Agreement (Incorporated by reference to
         Exhibit 2.1 to the Company's Form 8-K filed December 15, 1997 (the
         "Form 8-K"))

3.1      Restated Articles of Incorporation (incorporated by reference to
         Exhibit 3.1 to the Company's Registration Statement on Form S-1,
         Registration No. 33-13112, declared effective May 19, 1987 (the "Form
         S-1")).

3.2      Amendment to the Articles of Incorporation (Incorporated by reference
         to Exhibit 3.1 to Form 8-K).

3.3      Bylaws (Incorporated by reference to Exhibit 3.3 to the Form S-1).

4.1      1998 Stock Incentive Plan (Incorporated by reference to Exhibit 4.1 to
         the Form 8-K).

4.2      Voting Agreement between Investors and Messrs. Steffey and Lawrence
         (Incorporated by reference to Exhibit 4.2 to the Form 8-K).

4.3      Agreement between T. Rowe Price Recovery Fund II, L.P. and remaining
         Investors (Incorporated by reference to Exhibit 4.3 to the Form 8-K).

4.4      Registration Rights Agreement (Incorporated by reference to Exhibit 4.4
         to the Form 8-K).

4.5      GECC Loan and Security Agreement (Incorporated by reference to Exhibit
         4.4 to the Form 8-K).

10.1     First Amendment to GECC Loan and Security Agreement Incorporated by
         reference to Exhibit 10.2 to the Form 10-Q).

10.2     Second Amendment to GECC Loan and Security Agreement Incorporated by
         reference to Exhibit 10.3 to the form 10-Q).

10.3     Employment Agreement with Rex L. Steffey (Incorporated by reference to
         Exhibit 10.2 to the Form 8-K).

10.4     Employment Agreement with William L. Lawrence, Jr. (Incorporated by
         reference to Exhibit 10.3 to the Form 8-K).

21       Schedule of Subsidiaries.

23       Consent of Independent Accountants

27       Financial Data Schedule

                                    Page 41
<PAGE>
99.1     Press Release dated December 5, 1997 (Incorporated by reference to
         Exhibit 99.1 to the Form 8-K).

99.2     Order Reopening Case, Modifying Treatment of Class 3 (General
         Unsecured) Claims under the Company's Plan of Reorganization, and
         Reclosing Case (Incorporated by reference to Exhibit 99.2 to the Form
         8-K).

99.3     Notice of Effectiveness of Plan Modification (Incorporated by reference
         to Exhibit 99.2 to the Form 8-K).

                                    Page 42