JACOBS JAY INC, PRE 14A, 1998-01-30

JACOBS JAY INC
PRE 14A, 1998-01-30
FAMILY CLOTHING STORES

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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. __)

Filed by the Registrant [ X ]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[ X ] Preliminary Proxy Statement

[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))

[ ] Definitive Proxy Statement

[ ] Definitive Additional Materials

[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12

JAY JACOBS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[ X ] No fee required

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11

1) Title of each class of securities to which transaction applies:

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2) Aggregate number of securities to which transaction applies:

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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: Set forth the amount on which
the filing fee is calculated and state how it was determined.

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4) Proposed maximum aggregate value of transaction:

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5) Total fee paid:

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[ ] Fee paid previously with preliminary materials

[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.

1) Amount Previously Paid:

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2) Form, Schedule or Registration Statement No.:

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3) Filing Party:

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4) Date Filed:

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<PAGE>
JAY JACOBS, INC.
1530 Fifth Avenue
Seattle, Washington 98102

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
March 24, 1998

To the Shareholders of Jay Jacobs, Inc.:

A special meeting (the "Meeting") of the shareholders of Jay Jacobs, Inc. a
Washington corporation, will be held at the Company's headquarters, located at
1530 Fifth Avenue, Seattle, Washington on March 24, 1998, at 10:00 a.m., Pacific
Time, for the following purposes:

1. to approve the Company's 1998 Stock Incentive Plan;

2. to approve an amendment to the Company's Articles of Incorporation to
effect a one-for-fifteen reverse split of the Company's Common Stock;
and

3. to transact any other business that properly comes before the Meeting
or any adjournment of the Meeting.

Only shareholders of record at the close of business on February 9, 1998
will be entitled to vote at the Meeting. The Meeting is subject to adjournment
from time to time as the shareholders present in person or by proxy may
determine. You are requested to date and sign the enclosed proxy and return it
in the postage-prepaid envelope enclosed for that purpose. You may attend the
Meeting in person even though you have sent in your proxy, since retention of
the proxy is not necessary for admission to or identification at the Meeting.

By Order of the Board of Directors

_________________________________________
Secretary

Seattle, Washington
February ___, 1998
<PAGE>
JAY JACOBS, INC.
1530 Fifth Avenue
Seattle, Washington 98102

February ___, 1998

-----------------
PROXY STATEMENT
-----------------

SOLICITATION AND REVOCABILITY OF PROXY

A proxy in the form accompanying this proxy statement is solicited on
behalf of the Board of Directors of Jay Jacobs, Inc., a Washington corporation
(the "Company"), for use at a special meeting of shareholders to be held on
March 24, 1998 (the "Meeting"). The Company will bear the cost of preparing and
mailing the proxy, the proxy statement, and any other material furnished to the
shareholders by the Company in connection with the Meeting. Proxies will be
solicited by use of the mails, and officers and employees of the Company may,
without additional compensation, also solicit proxies by telephone or personal
contact. Copies of solicitation materials will be furnished to fiduciaries,
custodians, and brokerage houses for forwarding to beneficial owners of the
stock held in their names.

Any shares of stock of the Company held in the name of fiduciaries,
custodians, or brokerage houses for the benefit of their clients may only be
voted by the fiduciary, custodian, or brokerage house itself -- the beneficial
owner may not vote the shares directly and must instruct the person or entity in
whose name the shares are held how to vote the shares held for the beneficial
owner. Therefore, if any shares of stock of the Company are held in "street
name" by a brokerage house, only the brokerage house, at the instructions of its
client, may vote the shares.

Any person giving a proxy in the form accompanying this proxy statement has
the power to revoke it at any time before its exercise. The proxy may be revoked
by filing with the Secretary of the Company an instrument of revocation or a
duly executed proxy bearing a later date. The proxy may also be revoked by
affirmatively electing to vote in person while attending the Meeting. However, a
shareholder who attends the Meeting need not revoke the proxy and vote in person
unless the shareholder wishes to do so. All valid, unrevoked proxies will be
voted at the Meeting in accordance with the instructions given. If a signed
proxy is returned without instructions, it will be voted for the nominees for
director, for the approval of the proposals presented, and in accordance with
the recommendations of management on any other business that may properly come
before the Meeting or matters incident to the conduct of the Meeting.
<PAGE>
PROPOSAL 1: APPROVAL OF 1998 STOCK INCENTIVE PLAN

The Board of Directors believes the availability of stock incentives
is an important factor in the Company's ability to attract and retain
experienced and competent employees and to provide an incentive for them to
exert their best efforts on behalf of the Company. Historically, the
Company has issued options to its employees under the terms of its
previously existing stock option plans (the "Former Plans") As of January
30, 1998, out of a total of 916,000 shares reserved for issuance under the
Former Plans, 439,983 shares remained available for grant. The Board of
Directors believes additional shares are needed for issuance pursuant to
the Plan or upon exercise of incentive options granted under the Plan to
provide appropriate incentives to key employees and further believes that
it is advisable to adopt a new plan to reflect current legal standards.
Accordingly, on December 3, 1997 the Board of Directors approved the 1998
Stock Incentive Plan (the "Plan"), subject to shareholder approval, and
reserved an additional 17,342,761 shares of Common Stock (subject to
adjustment in certain events, including the reverse split of the Common
Stock proposed elsewhere in this Proxy Statement) for issuance pursuant to
the Plan or on exercise of options granted under the Plan. Since December
3, 1997, the Board of Directors or its Compensation Committee has granted
Non-Statutory options under the Plan to 51 employees. Each such option is
granted subject to shareholder approval of the Plan. A total of 14,527,694
shares (subject to adjustment in certain events, including the reverse
split of the Common Stock proposed elsewhere in this Proxy Statement) are
issuable on exercise of such options at an exercise price (also subject to
such adjustment) of $0.13 per share. Additionally, if the Plan is approved
by the Shareholders, the Company intends to cancel all options outstanding
under the Former Plans and to reissue an equal number of options under the
Plan. The unadjusted exercise price of all such reissued options would be
$0.13 per share, a price substantially less than the exercise price of the
currently outstanding options under the Former Plans. If the Plan is not
approved by the Shareholders, the Board of Directors intends to reissue
such options at the reduced price under the Former Plans.

The following table sets forth certain information with respect to options
granted to the below named individuals and to all executive officers as a group
and non-executive officer employees as a group. No options have been granted
under the Plan to non-employee directors. All of the options reflected in the
table have been granted by the Board of Directors subject to shareholder
approval of the Plan and are initially exercisable at $0.13 per share. The
remaining 2,815,063 shares subject to options that may be granted under the Plan
are available for grant to executive or non-executive employees or directors but
have not been so granted. The Plan also permits the award of other benefits to
employees or directors of, or consultants to, the Company as more fully
described under "Description of Plan" below. No such benefits have been awarded.

Name and Position Number of Options Granted

Rex Loren Steffey 5,417,612
President and CEO

William L. Lawrence 4,064,082/1
Executive Vice President and CFO

Executive Group 9,481,694/2

Non-Executive Officer Employee Group 5,490,017/3

2
<PAGE>
______________

/1 Includes 124,000 shares subject to options issuable in replacement of
options granted under the Former Plans.

/2 Includes 124,000 shares subject to options issuable in replacement of
options granted under the Former Plans.

/3 Includes 320,017 shares subject to options issuable in replacement of
options granted under the Former Plans.

Description of the Plan

Certain provisions of the Plan are described below. The complete text of
the Plan, marked to show the proposed amendments, is attached to this proxy
statement as Appendix A.

Eligibility. All employees, officers and directors of the Company and its
subsidiaries other than members of the Committee (as defined below) are eligible
to participate in the Plan. Also eligible are nonemployee consultants and
advisors to the Company.

Administration. The Plan is administered by the Compensation Committee of the
Board of Directors (the "Committee"), which designates from time to time the
individuals to whom awards are made under the Plan, the amount of any such award
and the price and other terms and conditions of any such award. Subject to the
provisions of the Plan, the Committee may adopt and amend rules and regulations
relating to the administration of the Plan. Only the Board of Directors may
amend, modify or terminate the Plan.

Term of Plan. The Plan will continue until all shares available for issuance
under the Plan have been issued and all restrictions on such shares have lapsed.
The Board of Directors may suspend or terminate the Plan at any time.

Stock Options. The Committee determines the persons to whom options are
granted, the option price, the number of shares subject to each option, the
period of each option and the times at which options may be exercised and
whether the option is an Incentive Stock Option ("ISO"), as defined in Section
422 of the Code, or an option other than an ISO (a "Non-Statutory Stock Option"
or "NSO"). If the option is an ISO, the option price cannot be less than the
fair market value of the Common Stock on the date of grant. If an optionee of an
ISO at the time of grant owns stock possessing more than 10% of the combined
voting power of the Company, the option price may not be less than 110% of the
fair market value of the Common Stock on the date of grant. If the option is an
NSO, the option price may be any price determined by the Committee. The
aggregate fair market value, on the date of the grant, of the stock for which
ISOs are exercisable for the first time by an employee during any calendar year
may not exceed $100,000. No monetary consideration is paid to the Company upon
the granting of options.

Options granted under the Plan generally continue in effect for the period
fixed by the Committee, except that ISOs are not exercisable after the
expiration of 10 years from the date of grant or five years in the case of 10%
shareholders. Options are exercisable

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<PAGE>
in accordance with the terms of an option agreement entered into at the time of
grant and, except as otherwise determined by the Committee with respect to a
NSO, are nontransferable except on death of a holder or pursuant to a qualified
domestic relations order. Options may be exercised only while an optionee is
employed by or in the service of the Company or a subsidiary or within 12 months
following termination of employment by reason of death or disability or 30 days
following termination for any other reason. The Plan provides that the Committee
may extend the exercise period for any period up to the expiration date of the
option and may increase the number of shares for which the option may be
exercised up to the total number underlying the option. The purchase price for
each share purchased pursuant to exercise of options must be paid in cash,
including cash which may be the proceeds of a loan from the Company, or, with
the consent of the Committee, in whole or in part, in shares of Common Stock
valued at fair market value, in restricted stock, in performance units or other
contingent awards denominated in either stock or cash, in deferred compensation
credits, in promissory notes, or in other forms of consideration. Upon the
exercise of an option, the number of shares subject to the option and the number
of shares available under the Plan for future option grants are reduced by the
number of shares with respect to which the option is exercised.

Stock Appreciation Rights. Stock appreciation rights ("SARs") may be granted
under the Plan. SARs may, but need not, be granted in connection with an option
grant or an outstanding option previously granted under the Plan. A SAR gives
the holder the right to payment from the Company of an amount equal in value to
the excess of fair market value on the date of exercise of a share of Common
Stock of the Company over its fair market value on the date of grant, or if
granted in connection with an option, the option price per share under the
option to which the SAR relates. A SAR is exercisable only at the time or times
established by the Committee. If a SAR is granted in connection with an option
it is exercisable only to the extent and on the same conditions that the related
option is exercisable. Payment by the Company upon exercise of a SAR may be made
in Common Stock of the Company valued at its fair market value, in cash, or
partly in stock and partly in cash, as determined by the Committee. The
Committee may withdraw any SAR granted under the Plan at any time and may impose
any condition upon the exercise of a SAR or adopt rules and regulations from
time to time affecting the rights of holders of SARs. The existence of SARs, as
well as certain bonus rights described below, would require charges to income
over the life of the right based upon the amount of appreciation, if any, in the
market value of the Common Stock of the Company over the exercise price of
shares subject to exercisable SARs or bonus rights. No SARs have been granted
under the Plan.

Stock Bonus Awards. The Committee may award Common Stock of the Company as a
stock bonus under the Plan. The Committee may determine the recipients of the
awards, the number of shares to be awarded and the time of the award. Stock
received as a stock bonus is subject to the terms, conditions and restrictions
determined by the Committee at the time the stock is awarded. No stock bonuses
have been granted under the Plan.

Restricted Stock. The Plan provides that the Company may issue restricted stock
in such amounts, for such consideration, subject to such restrictions and on
such terms as the Committee may determine. No restricted stock has been granted
under the Plan.

Cash Bonus Rights. The Committee may grant cash bonus rights under the Plan in
connection with (i) options granted or previously granted, (ii) SARs granted or
previously granted, (iii) stock bonuses awarded or previously awarded, and (iv)
shares sold or previously sold under the Plan.

4
<PAGE>
Bonus rights granted in connection with options entitle the optionee to a cash
bonus if and when the related option is exercised. The amount of the bonus is
determined by multiplying the excess of the total fair market value of the
shares acquired upon the exercise over the total option price for the shares by
the applicable bonus percentage. The bonus percentage applicable to any bonus
right is determined by the Committee but may in no event exceed 75%. Bonus
rights granted in connection with stock bonuses or restricted stock purchases
entitle the recipient to a cash bonus, in an amount determined by the Committee,
at the time the stock is awarded or purchased, or at such time as any
restrictions to which the stock is subject lapse. No bonus rights have been
granted under the Plan.

Performance Units. The Committee may grant performance units consisting of
monetary units which may be earned in whole or in part if the Company achieves
goals established by the Committee over a designated period of time, but in any
event not more than 10 years. Payment of an award earned may be in cash or stock
or both, and may be made when earned, or vested and deferred, as the Committee
determines. No performance units have been granted under the Plan.

Changes in Capital Structure. The Plan provides that if the outstanding Common
Stock of the Company is increased or decreased or changed into or exchanged for
a different number or kind of shares or other securities of the Company or of
another corporation by reason of any recapitalization, stock split or certain
other transactions, appropriate adjustment will be made by the Committee in the
number and kind of shares available for awards under the Plan. In addition, the
Committee will make appropriate adjustments in outstanding options and SARs. In
the event of dissolution of the Company or a merger, consolidation or plan of
exchange affecting the Company, in lieu of the foregoing treatment for options
and SARs, the Committee may, in its sole discretion, provide a 30-day period
prior to such event during which optionees shall have the right to exercise
options and SARs in whole or in part without any limitation on exercisability
and upon the expiration of which 30-day period all unexercised options and SARs
shall immediately terminate.

Tax Consequences

Certain options authorized to be granted under the Plan are intended to
qualify as ISOs for federal income tax purposes. Under federal income tax law
currently in effect, the optionee will recognize no income upon grant or
exercise of the ISO. If an employee exercises an ISO and does not dispose of any
of the option shares within two years following the date of grant and within one
year following the date of exercise, then any gain realized upon subsequent
disposition of the shares will be treated as income from the sale or exchange of
a capital asset. If an employee disposes of shares acquired upon exercise of an
ISO before the expiration of either the one-year holding period or the two-year
waiting period, any amount realized will be taxable as ordinary compensation
income in the year of such disqualifying disposition to the extent that the
lesser of the fair market value of the shares on the exercise date or the fair
market value of the shares on the date of disposition exceeds the exercise
price. The Company will not be allowed any deduction for federal income tax
purposes at either the time of the grant or exercise of an ISO. Upon any
disqualifying disposition by an employee, the Company will generally be entitled
to a deduction to the extent the employee realized ordinary income.

5
<PAGE>
Certain options authorized to be granted under the Plan will be treated as
NSOs for federal income tax purposes. Under federal income tax law presently in
effect, no income is realized by the grantee of an NSO until the option is
exercised. At the time of exercise of an NSO, the optionee will realize ordinary
compensation income, and the Company will generally be entitled to a deduction,
in the amount by which the market value of the shares subject to the option at
the time of exercise exceeds the exercise price. The Company is required to
withhold on the income amount. Upon the sale of shares acquired upon exercise of
an NSO, the excess of the amount realized from the sale over the market value of
the shares on the date of exercise will be taxable.

An employee who receives stock in connection with the performance of
services will generally realize taxable income at the time of receipt unless the
shares are not substantially vested for purposes of Section 83 of the Code and
no Section 83(b) election is made. If the shares are not vested at the time of
receipt, the employee will realize taxable income in each year in which a
portion of the shares substantially vest, unless the employee elects under
Section 83(b) of the Code within 30 days after the original transfer. The
Company generally will be entitled to a tax deduction in the amount includable
as income by the employee at the same time or times as the employee recognizes
income with respect to the shares. The Company is required to withhold on the
income amount. A participant who receives a cash bonus right under the Plan
generally will recognize income equal to the amount of any cash bonus paid at
the time of receipt of that bonus, and the Company generally will be entitled to
a deduction equal to the income recognized by the participant.

Section 162(m) of the Code, as adopted in 1993, limits to $1,000,000 per
person the amount that the Company may deduct for compensation paid to any of
its most highly compensated officers in any year. Under IRS regulations,
compensation received through the exercise of an option or stock appreciation
right will not be subject to the $1,000,000 limit if the option or stock
appreciation right and the plan pursuant to which it is granted meet certain
requirements. One requirement is shareholder approval of a per-employee limit on
the number of shares as to which options and stock appreciation rights may be
granted, as proposed in this proposal. Other requirements are that the option or
stock appreciation right be granted by a committee of at least two outside
directors and that the exercise price of the option or stock appreciation right
be not less than fair market value of the Common Stock on the date of grant.
Accordingly, the Company believes that if this proposal is approved by
shareholders, compensation received on exercise of options and stock
appreciation rights granted under the Plan in compliance with all of the above
requirements will be exempt from the $1,000,000 deduction limit.

Recommendation by the Board of Directors

The Board of Directors recommends that the Plan be approved. The
affirmative vote of the holders of shares of Common Stock and Series B Preferred
Stock with a majority of the votes of the holders present in person or
represented by proxy and entitled to vote on the matter is required to approve
this proposal. Abstentions have the same effect as "no" votes in determining
whether the amendment is approved. Broker non-votes are counted for purposes of
determining whether a quorum exists at the Meeting but are not counted and have
no effect on the results of the vote on the proposal. The proxies will be voted
for or against the proposal or as an abstention, in accordance with the
instructions specified on the proxy form. If no instructions are given, proxies
will be voted for approval of the Plan.

6
<PAGE>
PROPOSAL 2: REVERSE SPLIT OF THE COMMON STOCK

The Board of Directors is seeking the approval of the shareholders to amend
the Articles of Incorporation of the Company, effective on such date as the
Articles of Amendment are filed with the Secretary of State of Washington (the
"Effective Date"), to implement a one-for-fifteen reverse stock split (the
"Reverse Split"). If the Reverse Split is approved by the requisite vote of the
Company's shareholders, each certificate representing Common Stock outstanding
immediately prior to the Reverse Split will be deemed automatically, without any
action on the part of the holder of such certificate, to represent one-fifteenth
the number of shares of Common Stock after the Reverse Split. No fractional
shares shall be issued on reclassification of the Common Stock and the number of
shares of Common Stock for which the Common Stock is reclassified shall be
rounded up to the next greatest whole number. The proposed amendment to the
Company's Articles of Incorporation is set forth in Appendix B to this proxy
statement.

Reasons for the Reverse Split

The principal purpose of the Reverse Split is to decrease the number of
shares of Common Stock outstanding. Under the terms of the Company's Series B
Preferred Stock, shares of Series B Preferred Stock are convertible into Common
Stock at the election of the holders of the Series B Preferred Stock. The price
at which the Series B Preferred Stock is convertible into Common Stock is
subject to adjustment in the event of an exchange or modification of the Common
Stock. At the current conversion price, the Series B Preferred Stock is
convertible, in the aggregate, into a greater number of shares of Common Stock
than are currently authorized under the Company's Articles of Incorporation. In
order to fulfill its obligations in the event of the conversion of the Series B
Preferred Stock into Common Stock, the Company must either increase the number
of shares of Common Stock authorized, or reduce the number of Common Stock
issued and outstanding. By effecting the Reverse Split, the Company both
decreases the number of shares of Common Stock issued and outstanding, and
proportionately decreases the number of shares of Common Stock into which the
Series B Preferred Stock is convertible. The number of shares of Common Stock
authorized under the Company's Articles of Incorporation will remain unchanged.

An additional reason for the Reverse Split is to increase the price per
share of Common Stock. The Board of Directors believes that the current per
share price of the Common Stock may limit the effective marketability of the
Common Stock. Many brokerage firms and institutional investors are reluctant to
recommend lower-priced stocks to their clients or to hold them in their own
portfolios. Certain policies and practices of the securities industry may tend
to discourage individual brokers within those firms from dealing in lower-priced
stocks. Some of those policies and practices involve time-consuming procedures
that make the handling of lower-priced stocks economically unattractive. The
Board of Directors believes that the marketability of the Common Stock would be
significantly improved if the Common Stock were listed on a national securities
exchange. Currently, the Common Stock is traded in the over-the-counter market
and is quoted on the OTC Electronic Bulletin Board. Future eligibility of the
Common Stock for listing on a national securities exchange or other market of
comparable reputation will in part be dependent on the per share price of the
Common Stock meeting certain minimum thresholds. The minimum thresholds vary
depending on the national securities exchange. For example, for a stock to
qualify for listing on the NASDAQ National Market the per share price must be at
least $5. The minimum per share price requirement is only one of many
requirements

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<PAGE>
that must be met in order for the Company's Common Stock to be listed on a
national securities exchange. Moreover, the Company has no immediate plans to
list its stock in any new market. There can be no assurance that following the
Reverse Split the Common Stock will meet such additional requirements, or that
the Common Stock will be listed on a national securities exchange or other
market of comperable reputation in the near future, if at all.

Effect of the Reverse Split

The Reverse Split will be effected by means of an amendment to the
Company's Articles of Incorporation. At the Effective Date, without further
action on the part of the Company or the shareholders, each share of Common
Stock will be reclassified and changed into and constitute one-fifteenth of a
share of Common Stock.

The Reverse Split will decrease the number shares of the Company's Common
Stock issued and outstanding on the Record Date from 8,216,546 shares to
approximately 547,770 shares, and will decrease the number of shares issuable
under the Company's 1998 Stock Incentive Plan from 17,342,761 shares to
approximately 1,156,185 shares. The number of shares of Common Stock authorized
by the Company's Articles of Incorporation will not change as a result of the
Reverse Split. The Reverse Split will not affect any shareholder's proportionate
equity interest in the Company (other than as a result of the treatment of
fractional interests, discussed below) or the rights, preferences, privileges or
priorities of the Company's Common Stock or its par value. The Reverse Split
will not affect the shareholders' equity of the Company as reflected in the
financial statements of the Company except to change the number of the issued
and outstanding shares of Common Stock. The Reverse Split will result in an
automatic adjustment of any and all outstanding options and other rights
exercisable or convertible into shares of the Company's Common Stock. The
adjustment will consist of an increase in the exercise price or conversion value
per share by the factor of the Reverse Split and a corresponding decrease in the
number of shares issuable upon exercise or conversion by the factor of the
Reverse Split.

The following table illustrates the principal effects of the Reverse Split:

<TABLE>
<CAPTION>
Number of Shares of Common Stock
(At January 30, 1998)
---------------------------------------------------------
Prior to Reverse Split After Reverse Split/1
---------------------- ---------------------
<S> <C> <C>
Authorized Shares 20,000,000 20,000,000

Shares Issued and Outstanding 8,216,546 547,770

Shares Reserved for Issuance 18,258,761 1,217,251
Under Stock Option Plans 2

Shares Reserved for Issuance 56,637,970 3,775,865
Upon Conversion of Series B
Preferred Stock

Shares Available for Issuance 11,783,454 19,452,230

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<PAGE>
- --------------

/1 No adjustment has been made for the rounding of the number of shares of
Common Stock issuable upon reclassification of the Common Stock to the next
greatest whole number.

/2 Assumes approval by the shareholders of the 1998 Stock Incentive Plan.
</TABLE>

It is anticipated that following the Reverse Split, the shares of Common
Stock will trade at a price per share that is significantly higher than the
current market price. However, there can be no assurance that, following the
Reverse Split, the shares of Common Stock will trade at fifteen times the market
price of the Common Stock prior to the Reverse Split.

Exchange of Stock Certificates

If the Reverse Split is approved, on the Effective Date, each share of the
Common Stock issued and outstanding immediately prior thereto, will be
reclassified as and changed into the appropriate fraction of a share of the
Company's post-split Common Stock, subject to the treatment of fractional share
interests described below. The Company's transfer agent, Chase/Mellon
Shareholder Services (the "Exchange Agent") will exchange certificates. In the
event that the number of shares of post-split Common Stock includes a fraction,
the Company will issue to the shareholder, in lieu of the issuance of fractional
shares of the Company, a number of shares of Common Stock equal to the next
greatest whole number of shares. The Company's shareholder list indicates that a
portion of the outstanding Common Stock is registered in the names of clearing
agencies and broker nominees. It is, therefore, not possible to predict with
certainty the number of fractional shares and the total number of additional
shares the Company may issue as a result of rounding to the next whole number of
shares. However, it is not anticipated that the dilution to the share holdings
of any shareholder which may occur as a result of rounding to the next whole
number of shares will be material. No certificates or scrip representing
fractional share interests in the post-split Common Stock will be issued.

As soon as practicable after the Effective Date, transmittal forms will be
mailed to each holder of record of certificates for shares of Common Stock to be
used in forwarding their certificates for surrender and exchange for
certificates representing the number of shares of post-split Common Stock such
shareholders are entitled to receive as a consequence of the Reverse Split.
After receipt of such transmittal form, each holder should surrender the
certificates representing pre-split shares of Common Stock of the Company. Each
holder who surrenders certificates will receive new certificates representing
the whole number of shares of post-split Common Stock to which such shareholder
is entitled under the terms of the Reverse Split. The transmittal forms will be
accompanied by instructions specifying other details of the exchange. Until
surrendered, outstanding certificates representing shares of pre-split Common
Stock held by shareholders will be deemed for all purposes to represent the
number of whole shares of Common Stock to which such shareholders are entitled
as a result of the Reverse Split. Shareholders should not send their share
certificates to the Exchange Agent until they have received the transmittal
form. Shares not presented for surrender as soon as practicable after the
transmittal form is sent shall be exchanged at the first time they are presented
for transfer. No new certificates will be issued to a shareholder until such
shareholder has surrendered all certificates representing pre-split Common Stock
together with a properly completed and executed letter of transmittal to the
Exchange Agent.

9
<PAGE>
Federal Income Tax Consequences

The following discussion describes certain federal income tax consequences
of the Reverse Split. This discussion is based upon the Internal Revenue Code of
1986 (the "Code"), existing and proposed regulations thereunder, reports of
congressional committees, judicial decisions and current administrative rulings
and practices, all as amended and in effect on the date hereof. Any of these
authorities could be repealed, overruled or modified at any time. Any such
change could be retroactive and, accordingly, could cause the tax consequences
to vary substantially from the consequences described below. No ruling from the
Internal Revenue Service (the "IRS") with respect to the matters discussed
herein has been requested, and there is no assurance that the IRS would agree
with the conclusions set forth in this discussion.

This discussion is for general information only and does not address the
federal income tax consequences that may be relevant to particular shareholders
in light of their personal circumstances or to certain types of shareholders
(such as dealers in securities, insurance companies, foreign individuals and
entities, financial institutions and tax-exempt entities) who may be subject to
special treatment under the federal income tax laws. This discussion also does
not address any tax consequences under state, local or foreign laws.
Shareholders are urged to consult their tax advisors as to the particular tax
consequences to them of participation in the reverse split, including the
applicability of any state, local or foreign tax laws, changes in applicable tax
laws and any pending or proposed legislation.

The Company should not recognize any gain or loss as a result of the
Reverse Split. No gain or loss should be recognized by a shareholder who
receives only Common Stock upon the Reverse Split. The aggregate tax basis of
post-split Common Stock received by such a shareholder in connection with the
Reverse Split will equal the shareholder's aggregate tax basis in the pre-split
Common Stock exchanged therefor and generally will be allocated among post-split
Common Stock received on a pro rata basis. Shareholders who have used the
specific identification method to identify their basis in pre-split Common Stock
surrendered in the Reverse Split should consult their own tax advisors to
determine their basis in the post-split Common Stock received in exchange
therefor.

Recommendation by the Board of Directors

The Board of Directors believes that it is in the best interests of the
Company and its shareholders to amend the Company's Articles of Incorporation to
effect the Reverse Stock Split and recommends that the Reverse Split be
approved. The affirmative vote of the holders of shares of Common Stock and
Series B Preferred Stock with a majority of the votes of the holders present in
person or represented by proxy and entitled to vote on the matter is required to
approve this proposal. Abstentions have the same effect as "no" votes in
determining whether the amendment is approved. Broker non-votes are counted for
purposes of determining whether a quorum exists at the Meeting but are not
counted and have no effect on the results of the vote on the proposal. The
proxies will be voted for or against the proposal or as an abstention, in
accordance with the instructions specified on the proxy form. If no instructions
are given, proxies will be voted for approval of the Plan.

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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The Company's voting securities consist of its Common Stock and its Series
B Preferred Stock. Except as set forth below, the Series B Preferred Stock is
entitled to vote, together with the holders of Common Stock as a single class,
on any matter submitted to the stockholders for a vote. At any time at which the
Series B Preferred Stock constitutes less than a majority, by voting power, of
the stock entitled to vote in the election of directors of the Company, (i) the
Series B Preferred Stock, voting as a separate class, shall be entitled to elect
not less than three of the seven directors mandated by the Company's Articles of
Incorporation while any Series B Preferred Stock remains outstanding and the
remaining four directors shall be elected by the Series B Preferred Stock and
the Common Stock, voting as a single class, and (ii) not less than two directors
elected by the Series B Preferred Stock and the Common Stock, voting as a single
class, shall be non-employee directors reasonably satisfactory to the holders of
the Series B Preferred Stock. Holders of the Series B Preferred Stock are also
afforded class voting rights to the extent required by the Washington Business
Corporation Act.

The record date for determining holders of Common Stock entitled to vote at
the Meeting is February 9, 1998. On that date there were __________ shares of
Common Stock outstanding, entitled to one vote per share and 25,000 shares of
Series B Preferred Stock outstanding entitled to 2,266 votes per share.

The following table sets forth certain information regarding ownership of
the Company's Common Stock as of January 30, 1998 by (i) each person known by
the Company to own beneficially more than 5% of the Common Stock, (ii) each
director and director nominee of the Company, (iii) the Chief Executive Officer
and each of the other named executive officers, and (iv) all directors and
officers as a group:

<TABLE>
<CAPTION>
Number of Shares Percentage of
Beneficially Shares
Name Owned Outstanding
---- ---------------- -------------
<S> <C> <C>
Rex L. Steffey/1 1,180,022 1.8

William L. Lawrence/2 912,016 1.4

Michael D. Sullivan 797,463 1.2

Edward L. Cahill/3 35,897,145 55.4

Kim Z. Golden/4 19,943,362 30.8

T. Rowe Price Recovery Fund II, L.P. 19,943,362 30.8

Cahill, Warnock Strategic Partners Fund, L.P. 34,014,499 52.4

Strategic Associates, L.P. 1,882,646 2.9

All Officers and Directors as a Group 58,730,008 87.9

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

11
<PAGE>
/1 Includes 1,083,522 shares issuable on exercise of currently exercisable
options or options exercisable within 60 days of the date of this proxy,
and assumes that all options granted subject to approval of the Incentive
Plan are exercisable within 60 days of this proxy.

/2 Consists of shares issuable on exercise of currently exercisable options or
options exercisable within 60 days of the date of this proxy, and assumes
that 788,016 options granted subject to approval of the Incentive Plan are
exercisable within 60 days of this proxy.

/3 Consists of shares issuable on conversion of Series B Preferred Stock held
by Cahill, Warnock Strategic Partners Fund, L.P. and Strategic Associates,
L.P., both limited partnerships managed by Cahill, Warnock & Company, LLC.
Mr. Cahill is a managing member of Cahill, Warnock & Company, LLC.

/4 Consists of shares issuable on conversion of Series B Preferred Stock held
by T. Rowe Price Recovery Fund II, L.P., a limited partnership managed by
T. Rowe Price Recovery Fund II Associates, LLC. Mr. Golden is a Managing
Director of T. Rowe Price Recovery Fund II Associates, LLC. Mr. Golden
disclaims beneficial ownership of shares owned by T. Rowe Price Recovery
Fund II, L.P. or T. Rowe Price Recovery Fund II Associates, LLC.
</TABLE>

CHANGE IN CONTROL

On December 5, 1997 (the "Closing Date"), the Company created two new
series of its Preferred Stock, denominated Series A Preferred Stock and Series B
Preferred Stock (the "A Stock" and the "B Stock", respectively, and,
collectively, the "Preferred Stock") and sold the entirety of both series (the
"Sale") to a group of investors (the "Investors") led by Cahill, Warnock &
Company, LLC ("Cahill"). The A Stock is non convertible and non voting. The B
Stock is convertible into 86.25% of the sum of (i) the outstanding Common Stock
on the Closing Date, (ii) additional shares of Common Stock issuable to certain
creditors of the Company immediately following the Closing Date and (iii) the
shares of Common Stock into which the B Stock is convertible. The B Stock votes
in the election of directors and other general corporate matters on an "as
converted" basis as a single class with the Common Stock.

Two funds managed by Cahill (the "Funds") purchased, in the aggregate,
63.4% of each series of Preferred Stock. T. Rowe Price Recovery Fund II, L.P.
("TRP") also purchased shares of each series of Preferred Stock representing
35.2% of the class. The shares of B Stock purchased by the Funds represents
approximately 55.4% of the voting power of the Company in the election of
directors and other general corporate matters. Accordingly, Cahill may be deemed
to control the Company. On the Closing Date, the purchasers of the B Stock
agreed with Rex L. Steffey and William L. Lawrence, Jr. the Company's
President--Chief Executive Officer and Executive Vice President--Chief Financial
Officer, respectively, that they would vote and otherwise act so as to cause
Messrs. Steffey and Lawrence to be elected and to continue as directors of the
Company so long as they are employed by the Company. The Investors, other than
TRP, also agreed that they would vote and otherwise act so as to cause a
representative of TRP to be elected and to continue as a director of the Company
for as long as TRP continues to own at least 50% of the investment represented
by its A Stock and B Stock. The Company believes that neither of these
agreements would prevent the exercise of control by Cahill.

Prior to the Closing Date, the Company had operated under a Second Amended
Chapter 11 Plan of Reorganization (the "Plan") confirmed pursuant to Chapter 11
of Title 11 of

12
<PAGE>
the United States Code ("Chapter 11") and was effectively controlled by
representatives of the Postconfirmation Creditors Committee formed in connection
with the Plan and the Company's petition under Chapter 11. Concurrently with the
Sale, the Plan was modified to provide for the discharge of certain of the
Company's obligations to its pre-petition general unsecured creditors upon the
payment of $1,500,000 in cash and the issuance of 1,889,763 shares of Common
Stock. Accordingly, the directors of the Company prior to the Closing Date,
except Mr. Steffey, have resigned and been replaced by Mr. Lawrence, a
representative of TRP, a representative of Cahill and an independent director.
Two director positions remain open and are expected to be filled by an
additional representative of Cahill and an additional independent director.

The Funds were formed to invest in other businesses such as the Company and
used exclusively contributed capital to fund the purchase of the A Stock and the
B Stock.

The Company does not know of any arrangement, including any pledge by any
person of securities of the Company, the operation of which may, at any future
date, result in a change in control of the Company.

DISCRETIONARY AUTHORITY

While the Notice of Meeting provides for transaction of any business that
properly comes before the Meeting, the Board of Directors has no knowledge of
any matters to be presented at the Meeting other than those referred to herein.
The enclosed proxy, however, gives discretionary authority if any other matters
are presented.

OTHER BUSINESS

The Board of Directors does not intend to present any business for action
at the Meeting other than the election of directors and the proposals set forth
herein, nor does it have knowledge of any matters that may be presented by
others. If any other matter properly comes before the Meeting, the persons named
in the accompanying form of proxy intend to vote in accordance with the
recommendations of the Board of Directors.

By Order of the Board of Directors

_________________________________________
Secretary

___________________, 1998

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<PAGE>
APPENDIX A

JAY JACOBS, INC.
1998 STOCK INCENTIVE PLAN

1. Purpose. The purpose of this 1998 Stock Incentive Plan (the "Plan") is
to enable Jay Jacobs, Inc. (the "Company") to attract and retain the services of
(1) selected employees, officers and directors of the Company or of any
subsidiary of the Company and (2) selected nonemployee consultants and advisors
to the Company.

2. Shares Subject to the Plan. Subject to adjustment as provided below and
in paragraph 13, the shares to be offered under the Plan shall consist of Common
Stock of the Company, and the total number of shares of Common Stock that may be
issued under the Plan shall not exceed 17,342,761 shares. The shares issued
under the Plan may be authorized and unissued shares or reacquired shares. If an
option, stock appreciation right or performance unit granted under the Plan
expires, terminates or is cancelled, the unissued shares subject to such option,
stock appreciation right or performance unit shall again be available under the
Plan. If shares sold or awarded as a bonus under the Plan are forfeited to the
Company or repurchased by the Company, the number of shares forfeited or
repurchased shall again be available under the Plan.

3. Effective Date and Duration of Plan.

(a) Effective Date. The Plan shall become effective when adopted by
the Board of Directors; provided, however, that prior to shareholder approval of
the Plan, any awards shall be subject to and conditioned on approval of the Plan
by a majority of the votes cast at a shareholders meeting at which a quorum is
present. Options, stock appreciation rights and performance units may be granted
and shares may be awarded as bonuses or sold under the Plan at any time after
the effective date and before termination of the Plan.

(b) Duration. The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued and all restrictions on
such shares have lapsed. The Board of Directors may suspend or terminate the
Plan at any time except with respect to options, performance units and shares
subject to restrictions then outstanding under the Plan. Termination shall not
affect any outstanding options, any right of the Company to repurchase shares or
the forfeitability of shares issued under the Plan.

4. Administration. The Plan shall be administered by a committee of the
Board of Directors of the Company (the "Committee"), which shall determine and
designate from time to time the individuals to whom awards shall be made, the
amount of the awards, and the other terms and conditions of the awards. Subject
to the provisions of the Plan, the Committee may from time to time adopt and
amend rules and regulations relating to administration of the Plan, advance the
lapse of any waiting period, accelerate any exercise date, waive or modify any
restriction applicable to shares (except those restrictions imposed by law) and
make all other determinations in the judgment of the Committee necessary or
desirable for the administration of the Plan. The interpretation and
construction of the provisions of the Plan and related agreements by the
Committee shall be final and conclusive. The Committee may correct any defect or
supply any omission or reconcile any inconsistency in the Plan or in any related
agreement in the manner

14
<PAGE>
and to the extent it shall deem expedient to carry the Plan into effect, and it
shall be the sole and final judge of such expediency.

5. Types of Awards; Eligibility. The Committee may, from time to time, take
the following actions, separately or in combination, under the Plan: (i) grant
Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), as provided in paragraphs 6(a) and 6(b); (ii)
grant options other than Incentive Stock Options ("Non-Statutory Stock Options")
as provided in paragraphs 6(a) and 6(c); (iii) award stock bonuses as provided
in paragraph 7; (iv) sell shares subject to restrictions as provided in
paragraph 8; (v) grant stock appreciation rights as provided in paragraph 9;
(vi) grant cash bonus rights as provided in paragraph 10; (vii) grant
performance units as provided in paragraph 11 and (viii) grant foreign qualified
awards as provided in paragraph 12. Any such awards may be made to employees,
including employees who are officers or directors, and to other individuals
described in paragraph 1 who the Committee believes have made or will make an
important contribution to the Company or its subsidiaries; provided, however,
that only employees of the Company shall be eligible to receive Incentive Stock
Options under the Plan. The Committee shall select the individuals to whom
awards shall be made and shall specify the action taken with respect to each
individual to whom an award is made. At the discretion of the Committee, an
individual may be given an election to surrender an award in exchange for the
grant of a new award. No employee may be granted options or stock appreciation
rights under the Plan for more than 5,000,000 shares of Common Stock in any
calendar year.

6. Option Grants.

(a) General Rules Relating to Options.

(i) Terms of Grant. The Committee may grant options under the
Plan. With respect to each option grant, the Committee shall determine the
number of shares subject to the option, the option price, the period of the
option, the time or times at which the option may be exercised and whether the
option is an Incentive Stock Option or a Non-Statutory Stock Option. At the time
of the grant of an option or at any time thereafter, the Committee may provide
that an optionee who exercised an option with Common Stock of the Company shall
automatically receive a new option to purchase additional shares equal to the
number of shares surrendered and may specify the terms and conditions of such
new options.

(ii) Exercise of Options. Except as provided in paragraph
6(a)(iv) or as determined by the Committee, no option granted under the Plan may
be exercised unless at the time of such exercise the optionee is employed by or
in the service of the Company or any subsidiary of the Company and shall have
been so employed or provided such service continuously since the date such
option was granted. Absence on leave or on account of illness or disability
under rules established by the Committee shall not, however, be deemed an
interruption of employment or service for this purpose. Unless otherwise
determined by the Committee, vesting of options shall not continue during an
absence on leave (including an extended illness) or on account of disability.
Except as provided in paragraphs 6(a)(iv) and 13, options granted under the Plan
may be exercised from time to time over the period stated in each option in such
amounts and at such times as shall be prescribed by the Committee, provided that
options shall not be exercised for fractional shares. Unless otherwise
determined by the Committee, if the optionee does not exercise an option in any
one year with respect to the full number of shares to

15
<PAGE>
which the optionee is entitled in that year, the optionee's rights shall be
cumulative and the optionee may purchase those shares in any subsequent year
during the term of the option.

(iii) Nontransferability. Except as provided below, each stock
option granted under the Plan by its terms shall be nonassignable and
nontransferable by the optionee, either voluntarily or by operation of law, and
each option by its terms shall be exercisable during the optionee's lifetime
only by the optionee. A stock option may be transferred by will or by the laws
of descent and distribution of the state or country of the optionee's domicile
at the time of death. A Non-Statutory Stock Option shall also be transferable
pursuant to a qualified domestic relations order as defined under the Code or
Title I of the Employee Retirement Income Security Act. The Committee may, in
its discretion, authorize all or a portion of a Non-Statutory Stock Option to be
on terms which permit transfer by the optionee to (A) the spouse, children or
grandchildren of the optionee, including stepchildren and adopted children
("Immediate Family Members"), (B) a trust or trusts for the exclusive benefit of
Immediate Family Members, or (C) a partnership or limited liability company in
which Immediate Family Members are the only partners or members, provided that
(X) there may be no consideration for any transfer, (Y) the stock option
agreement pursuant to which the options are granted or an amendment thereto must
expressly provide for transferability in a manner consistent with this
paragraph, and (Z) subsequent transfers of transferred options shall be
prohibited except by will or by the laws of descent and distribution. Following
any transfer, options shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that for
purposes of paragraphs 6(a)(v) and 13 the term "optionee" shall be deemed to
refer to the transferee. The continued employment requirement of paragraph
6(a)(ii) and the events of termination of employment of paragraph 6(a)(iv) shall
continue to be applied with respect to the original optionee, and following the
termination of employment of the original optionee the options shall be
exercisable by the transferee only to the extent, and for the periods specified,
and all other references to employment, termination of employment, life or death
of the optionee, shall continue to be applied with respect to the original
optionee.

(iv) Termination of Employment or Service.

(A) General Rule. Unless otherwise determined by the
Committee, in the event the employment or service of the optionee with the
Company or a subsidiary terminates for any reason other than because of physical
disability, death or retirement as provided in subparagraphs 6(a)(iv)(B), (C)
and (D), the option may be exercised at any time prior to the expiration date of
the option or the expiration of 30 days after the date of such termination,
whichever is the shorter period, but only if and to the extent the optionee was
entitled to exercise the option at the date of such termination.

(B) Termination Because of Total Disability. Unless
otherwise determined by the Committee, in the event of the termination of
employment or service because of total disability, the option may be exercised
at any time prior to the expiration date of the option or the expiration of 12
months after the date of such termination, whichever is the shorter period, but
only if and to the extent the optionee was entitled to exercise the option at
the date of such termination. The term "total disability" means a mental or
physical impairment which is expected to result in death or which has lasted or
is expected to last for a continuous period of 12 months or more and which
causes the optionee to be unable, in the opinion of the Company and two
independent physicians, to perform his or her duties as an employee, director,
officer or

16
<PAGE>
consultant of the Company and to be engaged in any substantial gainful activity.
Total disability shall be deemed to have occurred on the first day after the
Company and the two independent physicians have furnished their opinion of total
disability to the Company.

(C) Termination Because of Death. Unless otherwise
determined by the Committee, in the event of the death of an optionee while
employed by or providing service to the Company or a subsidiary, the option may
be exercised at any time prior to the expiration date of the option or the
expiration of 12 months after the date of such death, whichever is the shorter
period, but only if and to the extent the optionee was entitled to exercise the
option at the date of such termination and only by the person or persons to whom
such optionee's rights under the option shall pass by the optionee's will or by
the laws of descent and distribution of the state or country of domicile at the
time of death.

(D) Termination Because of Retirement. Unless otherwise
determined by the Committee, in the event of the termination of employment or
service because of (1) normal retirement after reaching age 65, (2) early
retirement after reaching age 55 and completing 10 years of service, or (3)
early retirement after completing 30 years of service without regard to age, the
option may be exercised at any time prior to the expiration date of the option
or the expiration of 12 months after the date of such termination, whichever is
the shorter period, but only if and to the extent the optionee was entitled to
exercise the option at the date of such termination.

(E) Amendment of Exercise Period Applicable to Termination.
The Committee, at the time of grant or at any time thereafter, may extend the
30-day and 12- month exercise periods any length of time not later than the
original expiration date of the option, and may increase the portion of an
option that is exercisable, subject to such terms and conditions as the
Committee may determine.

(F) Failure to Exercise Option. To the extent that the
option of any deceased optionee or of any optionee whose employment or service
terminates is not exercised within the applicable period, all further rights to
purchase shares pursuant to such option shall cease and terminate.

(v) Purchase of Shares. Unless the Committee determines
otherwise, shares may be acquired pursuant to an option granted under the Plan
only upon receipt by the Company of notice in writing from the optionee of the
optionee's intention to exercise, specifying the number of shares as to which
the optionee desires to exercise the option and the date on which the optionee
desires to complete the transaction, and if required in order to comply with the
Securities Act of 1933, as amended, containing a representation that it is the
optionee's present intention to acquire the shares for investment and not with a
view to distribution. Unless the Committee determines otherwise, on or before
the date specified for completion of the purchase of shares pursuant to an
option, the optionee must have paid the Company the full purchase price of such
shares in cash (including, with the consent of the Committee, cash that may be
the proceeds of a loan from the Company) or, with the consent of the Committee,
in whole or in part, in Common Stock of the Company valued at fair market value,
restricted stock, performance units or other contingent awards denominated in
either stock or cash, deferred compensation credits, promissory notes and other
forms of consideration. The fair market value of Common Stock provided in
payment of the purchase price shall be the closing price of the

17
<PAGE>
Common Stock as reported in The Wall Street Journal on the trading day preceding
the date the option is exercised, or such other reported value of the Common
Stock as shall be specified by the Committee. No shares shall be issued until
full payment therefor has been made. With the consent of the Committee, an
optionee may request the Company to apply automatically the shares to be
received upon the exercise of a portion of a stock option (even though stock
certificates have not yet been issued) to satisfy the purchase price for
additional portions of the option. Each optionee who has exercised an option
shall immediately upon notification of the amount due, if any, pay to the
Company in cash amounts necessary to satisfy any applicable federal, state and
local tax withholding requirements. If additional withholding is or becomes
required beyond any amount deposited before delivery of the certificates, the
optionee shall pay such amount to the Company on demand. If the optionee fails
to pay the amount demanded, the Company may withhold that amount from other
amounts payable by the Company to the optionee, including salary, subject to
applicable law. With the consent of the Committee an optionee may satisfy this
obligation, in whole or in part, by having the Company withhold from the shares
to be issued upon the exercise that number of shares that would satisfy the
withholding amount due or by delivering to the Company Common Stock to satisfy
the withholding amount. Upon the exercise of an option, the number of shares
reserved for issuance under the Plan shall be reduced by the number of shares
issued upon exercise of the option.

(b) Incentive Stock Options. Incentive Stock Options shall be subject
to the following additional terms and conditions:

(i) Limitation on Amount of Grants. No employee may be granted
Incentive Stock Options under the Plan if the aggregate fair market value, on
the date of grant, of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by that employee during any calendar
year under the Plan and under any other incentive stock option plan (within the
meaning of Section 422 of the Code) of the Company or any parent or subsidiary
of the Company exceeds $100,000.

(ii) Limitations on Grants to 10 Percent Shareholders. An
Incentive Stock Option may be granted under the Plan to an employee possessing
more than 10 percent of the total combined voting power of all classes of stock
of the Company or of any parent or subsidiary of the Company only if the option
price is at least 110 percent of the fair market value of the Common Stock
subject to the option on the date it is granted, as described in paragraph
6(b)(iv), and the option by its terms is not exercisable after the expiration of
five years from the date it is granted.

(iii) Duration of Options. Subject to paragraphs 6(a)(ii) and
6(b)(ii), Incentive Stock Options granted under the Plan shall continue in
effect for the period fixed by the Committee, except that no Incentive Stock
Option shall be exercisable after the expiration of 10 years from the date it is
granted.

(iv) Option Price. The option price per share shall be determined
by the Committee at the time of grant. Except as provided in paragraph 6(b)(ii),
the option price shall not be less than 100 percent of the fair market value of
the Common Stock covered by the Incentive Stock Option at the date the option is
granted. The fair market value shall be deemed to be the closing price of the
Common Stock as reported in The Wall Street Journal on the day preceding the
date the option is granted, or if there has been no sale on that date, on the
last

18
<PAGE>
preceding date on which a sale occurred, or such other value of the Common Stock
as shall be specified by the Committee.

(v) Limitation on Time of Grant. No Incentive Stock Option shall
be granted on or after the tenth anniversary of the last action by the Board of
Directors approving an increase in the number of shares available for issuance
under the Plan, which action was subsequently approved within 12 months by the
shareholders.

(vi) Conversion of Incentive Stock Options. The Committee may at
any time without the consent of the optionee convert an Incentive Stock Option
to a Non-Statutory Stock Option.

(c) Non-Statutory Stock Options. Non-Statutory Stock Options shall be
subject to the following additional terms and conditions:

(i) Option Price. The option price for Non-Statutory Stock
Options shall be determined by the Committee at the time of grant and may be any
amount determined by the Committee.

(ii) Duration of Options. Non-Statutory Stock Options granted
under the Plan shall continue in effect for the period fixed by the Committee.

7. Stock Bonuses. The Committee may award shares under the Plan as stock
bonuses. Shares awarded as a bonus shall be subject to the terms, conditions,
and restrictions determined by the Committee. The restrictions may include
restrictions concerning transferability and forfeiture of the shares awarded,
together with such other restrictions as may be determined by the Committee. The
Committee may require the recipient to sign an agreement as a condition of the
award, but may not require the recipient to pay any monetary consideration other
than amounts necessary to satisfy tax withholding requirements. The agreement
may contain any terms, conditions, restrictions, representations and warranties
required by the Committee. The certificates representing the shares awarded
shall bear any legends required by the Committee. The Company may require any
recipient of a stock bonus to pay to the Company in cash upon demand amounts
necessary to satisfy any applicable federal, state or local tax withholding
requirements. If the recipient fails to pay the amount demanded, the Company may
withhold that amount from other amounts payable by the Company to the recipient,
including salary or fees for services, subject to applicable law. With the
consent of the Committee, a recipient may deliver Common Stock to the Company to
satisfy this withholding obligation. Upon the issuance of a stock bonus, the
number of shares reserved for issuance under the Plan shall be reduced by the
number of shares issued.

8. Restricted Stock. The Committee may issue shares under the Plan for such
consideration (including promissory notes and services) as determined by the
Committee. Shares issued under the Plan shall be subject to the terms,
conditions and restrictions determined by the Committee. The restrictions may
include restrictions concerning transferability, repurchase by the Company and
forfeiture of the shares issued, together with such other restrictions as may be
determined by the Committee. All Common Stock issued pursuant to this paragraph
8 shall be subject to a purchase agreement, which shall be executed by the
Company and the prospective recipient of the shares prior to the delivery of
certificates representing such shares to the

19
<PAGE>
recipient. The purchase agreement may contain any terms, conditions,
restrictions, representations and warranties required by the Committee. The
certificates representing the shares shall bear any legends required by the
Committee. The Company may require any purchaser of restricted stock to pay to
the Company in cash upon demand amounts necessary to satisfy any applicable
federal, state or local tax withholding requirements. If the purchaser fails to
pay the amount demanded, the Company may withhold that amount from other amounts
payable by the Company to the purchaser, including salary, subject to applicable
law. With the consent of the Committee, a purchaser may deliver Common Stock to
the Company to satisfy this withholding obligation. Upon the issuance of
restricted stock, the number of shares reserved for issuance under the Plan
shall be reduced by the number of shares issued.

9. Stock Appreciation Rights.

(a) Grant. Stock appreciation rights may be granted under the Plan by
the Committee, subject to such rules, terms, and conditions as the Committee
prescribes.

(b) Exercise.

(i) Each stock appreciation right shall entitle the holder, upon
exercise, to receive from the Company in exchange therefor an amount equal in
value to the excess of the fair market value on the date of exercise of one
share of Common Stock of the Company over its fair market value on the date of
grant (or, in the case of a stock appreciation right granted in connection with
an option, the excess of the fair market value of one share of Common Stock of
the Company over the option price per share under the option to which the stock
appreciation right relates), multiplied by the number of shares covered by the
stock appreciation right or the option, or portion thereof, that is surrendered.
Payment by the Company upon exercise of a stock appreciation right may be made
in Common Stock valued at fair market value, in cash, or partly in Common Stock
and partly in cash, all as determined by the Committee.

(ii) A stock appreciation right shall be exercisable only at the
time or times established by the Committee. If a stock appreciation right is
granted in connection with an option, the following rules shall apply: (1) the
stock appreciation right shall be exercisable only to the extent and on the same
conditions that the related option could be exercised; (2) upon exercise of the
stock appreciation right, the option or portion thereof to which the stock
appreciation right relates terminates; and (3) upon exercise of the option, the
related stock appreciation right or portion thereof terminates.

(iii) The Committee may withdraw any stock appreciation right
granted under the Plan at any time and may impose any conditions upon the
exercise of a stock appreciation right or adopt rules and regulations from time
to time affecting the rights of holders of stock appreciation rights. Such rules
and regulations may govern the right to exercise stock appreciation rights
granted prior to adoption or amendment of such rules and regulations as well as
stock appreciation rights granted thereafter.

(iv) For purposes of this paragraph 9, the fair market value of
the Common Stock shall be the closing price of the Common Stock as reported in
The Wall Street Journal, or such other reported value of the Common Stock as
shall be specified by the Committee, on the trading day preceding the date the
stock appreciation right is exercised.

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(v) No fractional shares shall be issued upon exercise of a stock
appreciation right. In lieu thereof, cash may be paid in an amount equal to the
value of the fraction or, if the Committee shall determine, the number of shares
may be rounded downward to the next whole share.

(vi) Each stock appreciation right granted in connection with an
Incentive Stock Option and, unless otherwise determined by the Board of
Directors, each other stock appreciation right granted under the Plan by its
terms shall be nonassignable and nontransferable by the holder, either
voluntarily or by operation of law, except by will or by the laws of descent and
distribution of the state or country of the holder's domicile at the time of
death, and each stock appreciation right by its terms shall be exercisable
during the holder's lifetime only by the holder; provided, however, that a stock
appreciation right not granted in connection with an Incentive Stock Option
shall also be transferable pursuant to a qualified domestic relations order as
defined under the Code or Title I of the Employee Retirement Income Security
Act.

(vii) Each participant who has exercised a stock appreciation
right shall, upon notification of the amount due, pay to the Company in cash
amounts necessary to satisfy any applicable federal, state and local tax
withholding requirements. If the participant fails to pay the amount demanded,
the Company may withhold that amount from other amounts payable by the Company
to the participant including salary, subject to applicable law. With the consent
of the Committee a participant may satisfy this obligation, in whole or in part,
by having the Company withhold from any shares to be issued upon the exercise
that number of shares that would satisfy the withholding amount due or by
delivering Common Stock to the Company to satisfy the withholding amount.

(viii) Upon the exercise of a stock appreciation right for
shares, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued. Cash payments of stock appreciation
rights shall not reduce the number of shares of Common Stock reserved for
issuance under the Plan.

10. Cash Bonus Rights.

(a) Grant. The Committee may grant cash bonus rights under the Plan in
connection with (i) options granted or previously granted, (ii) stock
appreciation rights granted or previously granted, (iii) stock bonuses awarded
or previously awarded and (iv) shares sold or previously sold under the Plan.
Cash bonus rights will be subject to rules, terms and conditions as the
Committee may prescribe. Unless otherwise determined by the Committee, each cash
bonus right granted under the Plan by its terms shall be nonassignable and
nontransferable by the holder, either voluntarily or by operation of law, except
by will or by the laws of descent and distribution of the state or country of
the holder's domicile at the time of death or pursuant to a qualified domestic
relations order as defined under the Code or Title I of the Employee Retirement
Income Security Act. The payment of a cash bonus shall not reduce the number of
shares of Common Stock reserved for issuance under the Plan.

(b) Cash Bonus Rights in Connection With Options. A cash bonus right
granted in connection with an option will entitle an optionee to a cash bonus
when the related option is exercised (or terminates in connection with the
exercise of a stock appreciation right

21
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related to the option) in whole or in part. If an optionee purchases shares upon
exercise of an option and does not exercise a related stock appreciation right,
the amount of the bonus shall be determined by multiplying the excess of the
total fair market value of the shares to be acquired upon the exercise over the
total option price for the shares by the applicable bonus percentage. If the
optionee exercises a related stock appreciation right in connection with the
termination of an option, the amount of the bonus shall be determined by
multiplying the total fair market value of the shares and cash received pursuant
to the exercise of the stock appreciation right by the applicable bonus
percentage. The bonus percentage applicable to a bonus right shall be determined
from time to time by the Committee but shall in no event exceed 75 percent.

(c) Cash Bonus Rights in Connection With Stock Bonus. A cash bonus
right granted in connection with a stock bonus will entitle the recipient to a
cash bonus payable when the stock bonus is awarded or restrictions, if any, to
which the stock is subject lapse. If bonus stock awarded is subject to
restrictions and is repurchased by the Company or forfeited by the holder, the
cash bonus right granted in connection with the stock bonus shall terminate and
may not be exercised. The amount and timing of payment of a cash bonus shall be
determined by the Committee.

(d) Cash Bonus Rights in Connection With Stock Purchases. A cash bonus
right granted in connection with the purchase of stock pursuant to paragraph 8
will entitle the recipient to a cash bonus when the shares are purchased or
restrictions, if any, to which the stock is subject lapse. Any cash bonus right
granted in connection with shares purchased pursuant to paragraph 8 shall
terminate and may not be exercised in the event the shares are repurchased by
the Company or forfeited by the holder pursuant to applicable restrictions. The
amount and timing of payment of a cash bonus shall be determined by the
Committee.

(e) Taxes. The Company shall withhold from any cash bonus paid
pursuant to paragraph 10 the amount necessary to satisfy any applicable federal,
state and local withholding requirements.

11. Performance Units. The Committee may grant performance units consisting
of monetary units which may be earned in whole or in part if the Company
achieves certain goals established by the Committee over a designated period of
time, but not in any event more than 10 years. The goals established by the
Committee may include earnings per share, return on shareholders' equity, return
on invested capital, and such other goals as may be established by the
Committee. In the event that the minimum performance goal established by the
Committee is not achieved at the conclusion of a period, no payment shall be
made to the participants. In the event the maximum corporate goal is achieved,
100 percent of the monetary value of the performance units shall be paid to or
vested in the participants. Partial achievement of the maximum goal may result
in a payment or vesting corresponding to the degree of achievement as determined
by the Committee. Payment of an award earned may be in cash or in Common Stock
or in a combination of both, and may be made when earned, or vested and
deferred, as the Committee determines. Deferred awards shall earn interest on
the terms and at a rate determined by the Committee. Unless otherwise determined
by the Committee, each performance unit granted under the Plan by its terms
shall be nonassignable and nontransferable by the holder, either voluntarily or
by operation of law, except by will or by the laws of descent and distribution
of the state or country of the holder's domicile at the time of death or
pursuant to a qualified domestic relations order as defined under the Code or
Title I of the Employee Retirement Income Security

22
<PAGE>
Act. Each participant who has been awarded a performance unit shall, upon
notification of the amount due, pay to the Company in cash amounts necessary to
satisfy any applicable federal, state and local tax withholding requirements. If
the participant fails to pay the amount demanded, the Company may withhold that
amount from other amounts payable by the Company to the participant, including
salary or fees for services, subject to applicable law. With the consent of the
Committee a participant may satisfy this obligation, in whole or in part, by
having the Company withhold from any shares to be issued that number of shares
that would satisfy the withholding amount due or by delivering Common Stock to
the Company to satisfy the withholding amount. The payment of a performance unit
in cash shall not reduce the number of shares of Common Stock reserved for
issuance under the Plan. The number of shares reserved for issuance under the
Plan shall be reduced by the number of shares issued upon payment of an award.

12. Foreign Qualified Grants. Awards under the Plan may be granted to such
officers and employees of the Company and its subsidiaries and such other
persons described in paragraph 1 residing in foreign jurisdictions as the
Committee may determine from time to time. The Committee may adopt such
supplements to the Plan as may be necessary to comply with the applicable laws
of such foreign jurisdictions and to afford participants favorable treatment
under such laws; provided, however, that no award shall be granted under any
such supplement with terms which are more beneficial to the participants than
the terms permitted by the Plan.

13. Changes in Capital Structure. If the outstanding Common Stock of the
Company is hereafter increased or decreased or changed into or exchanged for a
different number or kind of shares or other securities of the Company or of
another corporation by reason of any reorganization, merger, consolidation, plan
of exchange, recapitalization, reclassification, stock split-up, combination of
shares or dividend payable in shares, appropriate adjustment shall be made by
the Committee in the number and kind of shares available for awards under the
Plan. In addition, the Committee shall make appropriate adjustment in the number
and kind of shares as to which outstanding options and stock appreciation
rights, or portions thereof then unexercised, shall be exercisable, so that the
optionee's proportionate interest before and after the occurrence of the event
is maintained. Notwithstanding the foregoing, the Committee shall have no
obligation to effect any adjustment that would or might result in the issuance
of fractional shares, and any fractional shares resulting from any adjustment
may be disregarded or provided for in any manner determined by the Committee.
Any such adjustments made by the Committee shall be conclusive. In the event of
dissolution of the Company or a merger, consolidation or plan of exchange
affecting the Company, in lieu of providing for options and stock appreciation
rights as provided above in this paragraph 13 or in lieu of having the options
and stock appreciation rights continue unchanged, the Committee may, in its sole
discretion, provide a 30-day period prior to such event during which optionees
shall have the right to exercise options and stock appreciation rights in whole
or in part without any limitation on exercisability and upon the expiration of
which 30-day period all unexercised options and stock appreciation rights shall
immediately terminate.

14. Corporate Mergers, Acquisitions, etc. The Committee may also grant
options, stock appreciation rights, performance units, stock bonuses and cash
bonuses and issue restricted stock under the Plan having terms, conditions and
provisions that vary from those specified in this Plan provided that any such
awards are granted in substitution for, or in connection with the assumption of,
existing options, stock appreciation rights, stock bonuses, cash bonuses,
restricted

23
<PAGE>
stock and performance units granted, awarded or issued by another corporation
and assumed or otherwise agreed to be provided for by the Company pursuant to or
by reason of a transaction involving a corporate merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation to
which the Company or a subsidiary is a party.

15. Amendment of Plan. The Board of Directors may at any time, and from
time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason. Except as provided in paragraphs 6(a)(iv), 9 and 13, however, no
change in an award already granted shall be made without the written consent of
the holder of such award.

16. Approvals. The obligations of the Company under the Plan are subject to
the approval of state and federal authorities or agencies with jurisdiction in
the matter. The Company will use its best efforts to take steps required by
state or federal law or applicable regulations, including rules and regulations
of the Securities and Exchange Commission and any stock exchange on which the
Company's shares may then be listed, in connection with the grants under the
Plan. The foregoing notwithstanding, the Company shall not be obligated to issue
or deliver Common Stock under the Plan if such issuance or delivery would
violate applicable state or federal securities laws.

17. Employment and Service Rights. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere in any
way with the right of the Company or any subsidiary by whom such employee is
employed to terminate such employee's employment at any time, for any reason,
with or without cause, or to decrease such employee's compensation or benefits,
or (ii) confer upon any person engaged by the Company any right to be retained
or employed by the Company or to the continuation, extension, renewal, or
modification of any compensation, contract, or arrangement with or by the
Company.

18. Rights as a Shareholder. The recipient of any award under the Plan
shall have no rights as a shareholder with respect to any Common Stock until the
date of issue to the recipient of a stock certificate for such shares. Except as
otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date occurs prior to the date
such stock certificate is issued.

EFFECTIVE DATE: December 3, 1997.

AMENDED:

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APPENDIX B

ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION OF
JAY JACOBS, INC.

Pursuant to the provisions of RCW 23B.10.060 and RCW 23B.10.070, Jay
Jacobs, Inc., a Washington corporation (the "Corporation"), hereby certifies as
follows:

1. The name of the Corporation is Jay Jacobs, Inc..

2. Section 1. of Article VI, of the Restated Articles of Incorporation of
the Corporation is amended and restated to read in its entirety as follows:

1. Authorized Capital. The total number of shares which the
Corporation is authorized to issue is 25,000,000, consisting of
20,000,000 shares of Common Stock, having a par value of $0.01 per
share and 5,000,000 shares of Preferred Stock, having a par value of
$0.01 per share. The Common Stock is subject to the rights and
preferences of the Preferred Stock as hereinafter set forth.

3. Upon the effectiveness of these Articles of Amendment, each share of
common stock of the Corporation issued and outstanding immediately before the
time these Articles become effective shall be reclassified and changed into and
constitute one-fifteenth of a share of fully paid and nonassessable common stock
of the Corporation, without further action of any kind. No fractional shares
shall be issued on reclassification of the Common Stock and the number of shares
of Common Stock for which the Common Stock is reclassified shall be rounded up
to the nearest whole number. No other exchange, reclassification, or
cancellation of issued shares shall be effected by these amendments.

5. The Articles of Amendment were adopted by the Board of Directors on
January 22, 1998.

6. The Articles of Amendment were duly approved by the shareholders of the
Corporation, in accordance with the provisions of RCW 23B.10.030 and 23B.10.040,
on ______________, 1998.

DATED: _________________, 1998

JAY JACOBS, INC.

By: _____________________________________

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PROXY

JAY JACOBS, INC.
Special Meeting, March 24, 1998

PROXY SOLICITED BY BOARD OF DIRECTORS

PLEASE SIGN AND RETURN THIS PROXY

The undersigned hereby appoints Rex Loren Steffey and William L. Lawrence, and
each of them, proxies with power of substitution to vote on behalf of the
undersigned all shares that the undersigned may be entitled to vote at the
special meeting of the shareholders of Jay Jacobs, Inc. (the "Company") on March
24, 1998 and any adjournments thereof, with all powers that the undersigned
would possess if personally present, with respect to the following:

1. Proposal to approve the Company's 1998 Stock Incentive Plan:

FOR [ ] AGAINST [ ] ABSTAIN [ ]

2. Proposal to approve an amendment to the Company's Articles of Incorporation
to effect a one-for-fifteen reverse split of the Company's Common Stock:

FOR [ ] AGAINST [ ] ABSTAIN [ ]

3. Transaction of any business that properly comes before the meeting or any
adjournments thereof. A majority of the proxies or substitutes at the meeting
may exercise all the powers granted hereby.

(Continued and to be signed on the other side.)
<PAGE>
The shares represented by this proxy will be voted as specified on the
reverse hereof, but if no specification is made, this proxy will be voted
for the election of directors. The proxies may vote in their discretion as
to other matters that may come before this meeting.

Date: _____________________, 1998

P
R
0 _________________________________________
X Signature or Signatures
Y

Please date and sign as name is imprinted
hereon, including designation as
executor, trustee, etc., if applicable. A
corporation must sign its name by the
president or other authorized officer.

A Special Meeting of the Shareholders of
Jay Jacobs, Inc. will be held on March
24, 1998 at 10:00 a.m., Pacific, at the
Company's headquarters, located at 1530
Fifth Avenue, Seattle, Washington.

Please Note: Any shares of stock of the Company held in the name of
fiduciaries, custodians or brokerage houses for the benefit of their
clients may only be voted by the fiduciary, custodian or brokerage
house itself--the beneficial owner may not directly vote or appoint a
proxy to vote the shares and must instruct the person or entity in
whose name the shares are held how to vote the shares held for the
beneficial owner. Therefore, if any shares of stock of the Company are
held in "street name" by a brokerage house, only the brokerage house,
at the instructions of its client, may vote or appoint a proxy to vote
the shares.