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

                                    FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     FOR THE QUARTERLY PERIOD ENDED: JULY 31, 2005

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from ___________________ to ___________________

Commission File number: 1-15615

                            Whitehall Jewellers, Inc.
             (Exact name of registrant as specified in its charter)


                                                          
                  Delaware                                        36-1433610
      (State or other jurisdiction of                          (I.R.S. Employer
       incorporation or organization)                        Identification No.)



                                                               
155 N. Wacker Drive, Suite 500, Chicago, IL                         60606
  (Address of principal executive offices)                        (zip code)


                                  312/782-6800
              (Registrant's telephone number, including area code)

________________________________________________________________________________
             (Former name, former address and former fiscal year, if
                           changed since last report)

     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       No   X
                                              -----    -----

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes   X   No
                                                -----    -----

     Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes       No   X
                                                -----    -----

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: the number of shares of the
Registrant's common stock, $.001 par value per share, outstanding as of October
24, 2005 was 13,961,216 and the number of shares of the Registrant's Class B
common stock, $1.00 par value per share, outstanding as of October 24, 2005 was
142.



Forward-Looking Statements

This report contains certain forward-looking statements (as such term is defined
in Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) and information relating to the Company that are based on
the current beliefs of management of the Company as well as assumptions made by
and information currently available to management including statements related
to the markets for our products, general trends and trends in our operations or
financial results, plans, expectations, estimates and beliefs. In addition, when
used in this release, the words "anticipate," "believe," "estimate," "expect,"
"intend," "plan," "predict," "opinion," "will" and similar expressions and their
variants, as they relate to the Company or our management, may identify
forward-looking statements. Such statements reflect our judgment as of the date
of this release with respect to future events, the outcome of which is subject
to certain risks, including the factors described above and below, which may
have a significant impact on our business, operating results or financial
condition. Investors are cautioned that these forward-looking statements are
inherently uncertain. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results or
outcomes may vary materially from those described herein. The Company undertakes
no obligation to update forward-looking statements. The following factors, among
others, may impact forward-looking statements contained in this release: (1) our
ability to execute our business strategy and our continued net losses and
declines in comparable store sales; (2) our ability to manage our liquidity and
to obtain adequate financing on acceptable terms and the effect on us if an
event of default were to occur under any of the Company's financing
arrangements; (3) a change in economic conditions or the financial markets which
negatively impacts the retail sales environment and reduces discretionary
spending on goods such as jewelry; (4) reduced levels of mall traffic caused by
economic or other factors; (5) increased competition from specialty jewelry
retail stores, the Internet and mass merchant discount stores which may
adversely impact our sales and gross margin; (6) the high degree of fourth
quarter seasonality of our business and the impact on the Company's sales,
profitability and liquidity; (7) the extent and success of our merchandising,
marketing and/or promotional programs; (8) personnel costs and the extent to
which we are able to retain and attract key personnel and disruptions caused by
the loss of key personnel; (9) the availability, terms and cost of consumer
credit; (10) relationships with suppliers including the timely delivery to the
Company of appropriate merchandise on acceptable payment, delivery and other
terms; (11) our ability to maintain adequate information systems, capacity and
infrastructure; (12) our leverage and cost of funds and changes in interest
rates that may increase financing costs; (13) developments relating to the
Securities Purchase Agreement, Notes, Warrants and Registration Rights Agreement
with Prentice Capital Management, L.P. and Holtzman Opportunity Fund, L.P.,
including the impact of any adverse developments with respect to such
agreements, that may require the Company to seek new financing, for which there
can be no assurance of availability on acceptable terms or at all; (14) the
lease termination and other expenses that we will incur in connection with
closing stores and the revenues we achieve in the liquidation of their inventory
and associated inventory valuation allowances taken; (15) our ability to
maintain adequate loss prevention measures; (16) fluctuations in raw material
prices, including diamond, gem and gold prices; (17) the impact of current or
future price reductions on margins and resultant valuation allowances taken on
certain merchandise inventory identified from time to time as items which would
not be part of the Company's future merchandise presentation as well as
alternative methods of disposition of this merchandise inventory and resulting
valuation allowances taken; (18) developments relating to settlement of the
consolidated Capital Factors actions, the non-prosecution agreement entered into
with the United States Attorney's Office, the SEC investigation, and shareholder
and other civil litigation, including the impact of such developments on our
results of operations and financial condition and relationship with our lenders
or with our vendors; (19) regulation affecting the industry generally, including
regulation of marketing practices; and (20) the risk factors identified from
time to time in our filings with the SEC.


                                        2



PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

                            Whitehall Jewellers, Inc.
                            Statements of Operations
        for the three months and six months ended July 31, 2005 and 2004
                (unaudited, in thousands, except per share data)



                                                 Three months ended     Six months ended
                                                -------------------   -------------------
                                                July 31,   July 31,   July 31,   July 31,
                                                  2005       2004       2005       2004
                                                --------   --------   --------   --------
                                                                     
Net sales                                       $ 68,410   $72,284    $139,409   $145,312

Cost of sales (including buying and occupancy
   expenses)                                      50,928    48,220      99,371     96,971
                                                --------   -------    --------   --------
   Gross profit                                   17,482    24,064      40,038     48,341

Selling, general and administrative expenses      27,652    26,972      55,336     54,007
Professional fees and other charges                1,007     1,644       2,229      4,298
Impairment of goodwill                             5,662        --       5,662         --
                                                --------   -------    --------   --------
   Loss from operations                          (16,839)   (4,552)    (23,189)    (9,964)

Interest expense                                   2,123     1,094       3,421      2,000
                                                --------   -------    --------   --------
   Loss before income taxes                      (18,962)   (5,646)    (26,610)   (11,964)
Income tax expense (benefit)                       5,124    (2,463)      2,420     (5,085)
                                                --------   -------    --------   --------
   Net loss                                     $(24,086)  $(3,183)   $(29,030)  $ (6,879)
                                                ========   =======    ========   ========

Basic earnings per share:
   Net loss                                     $  (1.72)  $ (0.23)   $  (2.08)  $  (0.49)
                                                ========   =======    ========   ========
   Weighted average common shares and common
      share equivalents                           13,967    13,947      13,962     13,937
                                                ========   =======    ========   ========

Diluted earnings per share:
   Net loss                                     $  (1.72)  $ (0.23)   $  (2.08)  $  (0.49)
                                                ========   =======    ========   ========
   Weighted average common shares and common
      share equivalents                           13,967    13,947      13,962     13,937
                                                ========   =======    ========   ========


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


                                        3



                            Whitehall Jewellers, Inc.
                                 Balance Sheets
             As of July 31, 2005, January 31, 2005 and July 31, 2004
                  (unaudited, in thousands, except share data)



                                                       July 31,   January 31,   July 31,
                                                         2005         2005        2004
                                                       --------   -----------   --------
                                                                       
                       ASSETS
Current Assets:
   Cash                                                $  1,530    $  2,206     $  1,433
   Accounts receivable, net                               2,909       2,688        2,295
   Merchandise inventories                              199,221     183,676      199,241
   Other current assets                                     682         383          797
   Current income tax benefit                               249       3,959        4,255
   Deferred financing costs                                 988         360          301
   Deferred income taxes, net                                --       2,255        6,273
                                                       --------    --------     --------
      Total current assets                              205,579     195,527      214,595

Property and equipment, net                              48,179      54,200       57,750
Goodwill, net                                                --       5,662        5,662
Deferred income taxes, net                                   --         902           --
Deferred financing costs                                     --         539          603
                                                       --------    --------     --------
      Total assets                                     $253,758    $256,830     $278,610
                                                       ========    ========     ========

        LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Revolver loans                                      $102,426    $ 73,793     $ 97,496
   Current portion of long-term debt                         --          --          640
   Accounts payable                                      56,599      60,076       42,559
   Customer deposits                                      3,009       3,042        3,047
   Accrued payroll                                        3,314       3,829        3,474
   Other accrued expenses and credits                    14,202      14,587       25,828
                                                       --------    --------     --------
      Total current liabilities                         179,550     155,327      173,044

Deferred income taxes, net                                   --          --        2,990
Other long-term liabilities and credits                   6,433       4,880        3,589
                                                       --------    --------     --------
      Total liabilities                                 185,983     160,207      179,623
                                                       --------    --------     --------

Commitments and contingencies                                --          --           --

Stockholders' Equity:
   Common stock ($.001 par value; 60,000,000 shares
      authorized; 18,058,902; 18,058,902 and
      18,058,152 shares issued, respectively)                18          18           18
   Class B common stock ($1.00 par value; 26,026
      shares authorized; 142 shares issued and
      outstanding)                                           --          --           --
   Additional paid-in capital                           106,162     106,123      106,162
   Retained earnings                                        398      29,428       32,432

   Treasury stock, at cost (4,092,611; 4,108,703 and
      4,117,172 shares, respectively)                   (38,803)    (38,946)     (39,625)
                                                       --------    --------     --------
      Total stockholders' equity, net                    67,775      96,623       98,987
                                                       --------    --------     --------
      Total liabilities and stockholders' equity       $253,758    $256,830     $278,610
                                                       ========    ========     ========


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


                                        4



                            Whitehall Jewellers, Inc.
                            Statements of Cash Flows
                 for the six months ended July 31, 2005 and 2004
                            (unaudited, in thousands)



                                                         Six months ended
                                                      ---------------------
                                                       July 31,    July 31,
                                                         2005        2004
                                                      ---------   ---------
                                                            
Cash flows from operating activities:
   Net loss                                           $ (29,030)  $  (6,879)
      Adjustments to reconcile net loss to net
         cash used in operating activities:
   Depreciation and amortization                          6,412       6,253
   Impairment of long-lived assets                        3,070          --
   Impairment of goodwill                                 5,662          --
   Loss on disposition of assets                             27         148
   Deferred compensation expense                            186          64
   Proceeds from private label credit card contract
      sign-on bonus                                       2,000          --
   Changes in assets and liabilities:
      (Increase) decrease in accounts receivable,
         net                                               (244)        249
      (Increase) decrease in merchandise
         inventories                                    (15,545)      6,905
      (Increase) decrease in other current assets          (299)         78
      Decrease(increase) in current income tax
         benefit                                          3,710      (1,961)
      Decrease (increase) in deferred income
         taxes, net                                       3,157      (1,210)
      (Decrease) in customer deposits                       (33)       (554)
      (Decrease) in accounts payable                     (6,988)    (16,135)
      (Decrease) in accrued payroll                        (515)       (983)
      (Decrease) increase in accrued liabilities           (658)      1,349
      (Decrease) increase in other long-term
         liabilities                                       (108)         54
                                                      ---------   ---------
      Net cash used in operating activities             (29,196)    (12,622)
Cash flows from investing activities:
      Capital expenditures                               (3,172)     (3,060)
                                                      ---------   ---------
      Net cash used in investing activities              (3,172)     (3,060)
Cash flows from financing activities:
   Borrowing on revolver loan                           181,438     536,257
   Repayment of revolver loan                          (152,805)   (519,101)
   Proceeds from exercise of stock options                   --           7
   Proceeds under employee stock purchase plan               20          27
   Financing costs                                         (472)       (132)
   Increase(decrease) in outstanding checks, net          3,511      (1,844)
                                                      ---------   ---------
      Net cash provided by financing activities          31,692      15,214
                                                      ---------   ---------
      Net change in cash and cash equivalents              (676)       (468)
Cash and cash equivalents at beginning of period          2,206       1,901
                                                      ---------   ---------
Cash and cash equivalents at end of period            $   1,530   $   1,433
                                                      =========   =========


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


                                        5



                            Whitehall Jewellers, Inc.
                          Notes to Financial Statements

1. DESCRIPTION OF OPERATIONS

          The financial statements of Whitehall Jewellers, Inc. (the "Company")
include the results of the Company's chain of specialty retail fine jewelry
stores. The Company operates exclusively in one business segment, specialty
retail jewelry. The Company has a national presence with 388 stores as of July
31, 2005, located in 38 states, operating in regional and superregional shopping
malls.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis for Presentation

          The accompanying unaudited financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X. Consequently, they do not include
all of the disclosures required under accounting principles generally accepted
in the United States of America for complete financial statements.

          The unaudited financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has experienced
recurring losses from operations in the first six months of fiscal year 2005 and
in the two previous fiscal years. During the second quarter of fiscal year 2005,
the Company slowed payments to certain vendors and received temporary extension
of payment terms with certain other vendors in order to manage its liquidity
needs. Subsequent to July 31, 2005, the Company has received temporary extension
of payment terms, beyond the stated payment terms, with certain of its key
merchandise vendors. On October 3, 2005, the Company signed a securities
purchase agreement with funds managed by Prentice Capital Management, L.P. and
the Holtzman Opportunity Fund, L.P. (collectively "Prentice") which, if approved
by the shareholders of the Company, would bring substantial additional capital
to the Company. For information regarding the securities purchase agreement,
refer to Note 13 to the financial statements. Should the Company be unable to
consummate the transaction contemplated by the securities purchase agreement or
other financing alternatives, the Company may be unable to continue as a going
concern and, therefore, it may be unable to realize its assets and discharge its
liabilities in the normal course of business. The unaudited financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.

          The interim financial statements reflect all adjustments (consisting
only of normal recurring adjustments), which are, in the opinion of management,
necessary for a fair statement of the financial position, results of operations
and cash flows for the interim periods presented. For further information
regarding the Company's accounting policies, refer to the financial statements
and footnotes thereto included in the Whitehall Jewellers, Inc. Annual Report on
Form 10-K for the fiscal year ended January 31, 2005, as amended on May 31,
2005. References in the following notes to years and quarters are references to
fiscal years and fiscal quarters.

Consolidation

          The consolidated financial statements include the accounts and
transactions of the Company and its subsidiaries. Intercompany accounts and
transactions have been eliminated.

Use of Estimates

          The preparation of financial statements in conjunction with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities


                                        6



at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Valuation reserves for inventory, accounts
receivable, sales returns and deferred tax assets are significant examples of
the use of such estimates. Actual results could differ from those estimates.

Merchandise Inventories

          Merchandise inventories are stated principally at the lower of
weighted average cost or market. Purchase cost is reduced to reflect certain
allowances and discounts received from merchandise vendors. Periodic credits or
payments from merchandise vendors in the form of consignment conversions, volume
or other purchase discounts and other vendor consideration are reflected in the
carrying value of the inventory and recognized as a component of cost of sales
as the merchandise is sold. Additionally, to the extent it is not addressed by
established vendor return privileges, and if the amount of cash consideration
received from the vendor exceeds the estimated fair value of the goods returned,
that excess amount is reflected as a reduction in the purchase cost of the
inventory acquired. Allowances for inventory shrink, scrap and other provisions
are recorded based upon analysis and estimates by the Company.

          Certain of the Company's agreements with merchandise vendors provide
credits for co-op advertising calculated as a percentage of net merchandise
purchases. The Company adopted Emerging Issues Task Force ("EITF") Issue No.
02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" ("EITF 02-16") in fiscal year 2002, which
was effective for all arrangements entered into after December 31, 2002. In
accordance with EITF 02-16, the Company classifies certain merchandise vendor
allowances as a reduction to inventory cost unless evidence exists supporting an
alternative classification. The Company earned $1,075,000 and $978,000 of vendor
allowances for advertising for the first six months of fiscal years 2005 and
2004, respectively. The Company records such allowances as a reduction of
inventory cost, and as the inventory is sold, the Company will recognize a lower
cost of sales.

          The Company also obtains merchandise from vendors under various
consignment agreements. The consigned inventory and related contingent
obligations associated with holding and safekeeping such consigned inventory are
not reflected in the Company's financial statements. At the time of sale of
consigned merchandise to customers, the Company records the purchase liability
and the related consignor cost of such merchandise in cost of sales.

Long-Lived Assets

          On a quarterly basis or earlier whenever facts and circumstances
indicate potential impairment, the Company evaluates the recoverability of
long-lived asset carrying values, using projections of undiscounted future cash
flows over remaining asset lives. When impairment is indicated, any impairment
loss is measured by the excess of carrying values over fair values. In
evaluating long-lived retail store assets for impairment, the Company considers
a number of factors such as a history of consistent store operating losses,
sales trends, store management turn-over, local competition and changes in mall
demographic profiles.

Advertising and Marketing Expense

          The Company expenses the production costs of advertising the first
time the advertising takes place, except for direct-response advertising, which
is capitalized and amortized over the expected period of future benefit.
Advertising expense was $3,266,000 and $3,292,000 for the first six months of
fiscal years 2005 and 2004, respectively.

          Direct-response advertising consists primarily of mailings to
customers including special price-off merchandise offers and value-off coupons
for merchandise.


                                        7



Contract Sign-on Bonus

          During the second quarter of fiscal year 2005, the Company received a
$2.0 million contract sign-on bonus related to the renewal of the Company's
private label credit card contract. The Company is amortizing the contract
proceeds over the five-year term of the contract as a reduction to credit
expense. The unamortized portion of the contract sign-on bonus is included in
the Company's balance sheet.

Income Taxes

          In the second quarter of fiscal year 2005, the Company recorded a
valuation allowance of $13.5 million against all of its deferred tax assets. In
recording the valuation allowance, management considered whether it was more
likely than not that some or all of the deferred tax assets would be realized.
This analysis included consideration of expected reversals of existing temporary
differences and projected future taxable income.

          Due to the seasonal nature of its business, the Company tends to
generate all or a significant majority of its income in the fourth quarter. In
accordance with the guidance in FASB Interpretation No. 18 "Accounting for
Income Taxes in Interim Periods - an interpretation of APB Opinion No. 28" ("FIN
18"), the Company's current estimate of the income tax expense associated with
the cumulative year-to-date fiscal year 2005 loss and valuation allowance
recorded against its deferred tax assets results in an effective income tax rate
of 9.1%. Based on the current facts and circumstances, the provisions of FIN 18
effectively limit the amount of income tax expense that can be recorded in the
interim period. The effective income tax rate of 27.0% for the three months
ended July 31, 2005 is the result of reducing the cumulative year-to-date
effective tax rate from a benefit of 35.3% used in the first three months to an
expense of 9.1% in the second quarter. To the extent that results in the third
and fourth quarter quarters are significantly more or less than expected, the
Company's effective income tax rate for the third and fourth quarters and for
the full year could vary significantly from that of the first six months of
fiscal year 2005.

          The provision for income taxes on income differs from the statutory
tax expense computed by applying the federal corporate rate of 34% for the
respective three and six-month periods ended July 31, 2005 and 2004.



                                Three months ended     Six months ended
                               -------------------   -------------------
                               July 31,   July 31,   July 31,   July 31,
                                 2005       2004       2005       2004
                               --------   --------   --------   --------
                                                    
(in thousands)
Taxes (benefit) computed at
   statutory rate              $(6,447)   $(1,919)   $(9,049)   $(4,068)
State income tax (benefit)
   net of federal tax effect      (850)      (269)    (1,369)      (967)
Valuation expense               13,508        100     13,704        318
Other                           (1,087)      (375)      (866)      (368)
                               -------    -------    -------    -------
Total income tax expense
   (benefit)                   $ 5,124    $(2,463)   $ 2,420    $(5,085)
                               =======    =======    =======    =======


Stock-Based Compensation

          The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure," during 2002. SFAS 148 amends Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and amends the disclosure requirements to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect


                                        8



of the method used on reported results. The Company adopted the disclosure
requirements of SFAS 148 as of January 31, 2003.

          The Company accounts for stock-based compensation according to
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," which results in no charge to earnings when options are issued at
fair market value.

          The following table illustrates the effect on net income and earnings
per share for the three and six months ended July 31, 2005 and 2004 as if the
Company had applied the fair value recognition provisions of SFAS 123, as
amended by SFAS 148, to stock-based employee compensation.



                                         Three months ended     Six months ended
                                        -------------------   -------------------
                                        July 31,   July 31,   July 31,   July 31,
                                          2005       2004       2005       2004
                                        --------   --------   --------   --------
                                      (in thousands, except for per share amounts)
                                                             
Net loss, as reported                   $(24,086)  $(3,183)   $(29,030)  $(6,879)

Deduct: Total stock-based
   employee compensation expense
   determined under fair value
   based method, net of related tax
   effects                                    84       122         142       276
                                        --------   -------    --------   -------
Pro forma net loss                      $(24,170)  $(3,305)   $(29,172)  $(7,155)
                                        ========   =======    ========   =======
Earnings per share:
   Basic-as reported                    $  (1.72)  $ (0.23)   $  (2.08)  $ (0.49)
                                        ========   =======    ========   =======
   Basic-pro forma                      $  (1.73)  $ (0.24)   $  (2.09)  $ (0.51)
                                        ========   =======    ========   =======
   Diluted-as reported                  $  (1.72)  $ (0.23)   $  (2.08)  $ (0.49)
                                        ========   =======    ========   =======
   Diluted-pro forma                    $  (1.73)  $ (0.24)   $  (2.09)  $ (0.51)
                                        ========   =======    ========   =======


          The FASB issued SFAS No. 123 (revised 2004), "Shared-Based Payment"
("SFAS 123R"). This statement revised SFAS No. 123 and requires companies to
expense the value of employee stock options and similar awards. The effective
date of this standard is annual periods beginning after June 15, 2005.

Upon the adoption of SFAS No. 123R, the Company will be required to expense
stock options over the vesting period in its statement of operations. In
addition, the Company will need to recognize compensation expense over the
remaining vesting period associated with unvested options outstanding for fiscal
years beginning after June 15, 2005. The Company is currently evaluating which
transition method to use and the effects on its financial statements in
connection with the adoption of SFAS No. 123R.

Accounting for Guarantees

          In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission
of FASB Interpretation No. 34."

          The Company has adopted the guidance of FIN 45 and has reflected the
required disclosures in its financial statements commencing with the financial
statements for the fiscal year ended January 31, 2003. Under its bylaws, the
Company has agreed to indemnify its officers and directors for certain events or
occurrences while the officer or director is serving, or was serving, at its
request in such capacity. The maximum potential amount of future payments the
Company could be required to make pursuant to these indemnification obligations
is unlimited; however, the Company has a directors and officers liability
insurance policy that, under certain circumstances, enables it to recover a
portion of any future amounts paid. The Company has no liabilities


                                        9



recorded for these obligations as of July 31, 2005; however, reference should be
made to Note 10 to the financial statements with respect to legal contingencies.

3. ACCOUNTS RECEIVABLE, NET

          As of July 31, 2005, January 31, 2005 and July 31, 2004, accounts
receivable consisted of (in thousands):



                           July 31, 2005   January 31, 2005   July 31, 2004
                           -------------   ----------------   -------------
                                                     
Accounts receivable            $3,263           $3,083            $2,668
Less: allowance for
   doubtful accounts             (354)            (395)             (373)
                               ------           ------            ------
Accounts receivable, net       $2,909           $2,688            $2,295
                               ======           ======            ======


4. MERCHANDISE INVENTORIES

          As of July 31, 2005, January 31, 2005 and July 31, 2004, merchandise
inventories consisted of (in thousands):



                          July 31, 2005   January 31, 2005   July 31, 2004
                          -------------   ----------------   -------------
                                                    
Raw Materials               $  8,256          $  9,796          $ 10,386
Finished Goods               190,965           173,880           188,855
                            --------          --------          --------
Merchandise Inventories     $199,221          $183,676          $199,241
                            ========          ========          ========


          Raw materials primarily consist of diamonds, precious gems,
semi-precious gems and gold. Included within finished goods inventory were
allowances for inventory shrink, scrap, and miscellaneous costs of $3,797,000;
$4,257,000; and $4,872,000 as of July 31, 2005, January 31, 2005 and July 31,
2004, respectively. As of July 31, 2005, January 31, 2005 and July 31, 2004,
consignment inventories held by the Company that were not included in the
balance sheets totaled $72,489,000; $82,819,000; and $71,035,000, respectively.

          Certain merchandise procurement, distribution and warehousing costs
are allocated to inventory. As of July 31, 2005, January 31, 2005 and July 31,
2004, the amounts included in inventory were $3,796,000; $3,589,000 and
$3,520,000, respectively.

5. IMPAIRMENT OF LONG-LIVED ASSETS

          The Company has recognized impairment charges, included in cost of
sales, measured as the excess of net book value of furniture, fixtures and
leasehold improvements over their fair values. When facts and circumstances
indicate potential impairment, the Company evaluates the recoverability of
long-lived asset carrying values, using projections of undiscounted future cash
flows over remaining asset lives. In evaluating long-lived retail store assets
for impairment, the Company considers a number of factors such as a history of
consistent store operating losses, sales trends, store management turn-over,
local competition and changes in mall demographic profiles. When impairment is
indicated, any impairment loss is measured by the excess of carrying values over
fair values. For the quarter ended July 31, 2005, the Company recorded
impairment charges of $3,070,000 compared to none in the prior fiscal year's
quarter. The loss on the impairment of long-lived assets was primarily
furniture, fixtures and leasehold improvements in thirty-one of the Company's
retail stores.

          On November 1, 2005, the Company announced that it plans to close 77
of its retail stores. As a result, the Company will


                                       10



record, in accordance with Financial Accounting Standards No. 144 ("FAS 144")
"Accounting for the Impairment or Disposal of Long-Lived Assets" asset held for
use model, an impairment charge of approximately $5.4 million during the third
quarter of fiscal year 2005. The Company plans to liquidate inventory through
store closure sales, and such sales will require additional inventory valuation
allowances. It is currently anticipated that such inventory allowances will be
no less than $14.0 million. The Company currently expects to close these stores
by February 2006. The decision to close these stores will result in an
impairment of the respective stores' long-lived assets, as the carrying amount
of the respective stores' long-lived fixed assets will not be recoverable as
such assets will be disposed of before the end of its previously estimated
useful life.

          In accordance with FASB Statement No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities," the Company has not
recorded any exit or disposal related expenses, including lease terminations,
personnel costs and other expenses, associated with the planned store closures.
Such expenses will be recorded in the period in which the liability is incurred.
At this time, no agreements have been reached which would permit the Company to
estimate such disposal costs, which may be material to the financial statements.

6. GOODWILL, NET

          In accordance with the FASB Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," the
Company evaluates goodwill for impairment on an annual basis in the fourth
quarter or earlier whenever indicators of impairment exist. SFAS 142 requires
that if the carrying value of a reporting unit to which the goodwill relates
exceeds its fair value, an impairment loss is recognized to the extent that the
carrying value of the reporting unit goodwill exceeds the "implied fair value"
of reporting unit goodwill.

          As of July 31, 2005, the Company evaluated goodwill for impairment
using discounted cash flow and a market multiple approach for impairment and
concluded that the entire amount of the Company's goodwill was impaired. This
analysis was based in part upon the Company's sales performance and financial
results for the second quarter of fiscal year 2005 and management's current
expectation of future financial results. The Company recorded a non-cash
impairment charge of $5,662,000 to write-off the entire goodwill asset in the
second quarter of fiscal year 2005.

7. ACCOUNTS PAYABLE

          Accounts payable includes outstanding checks, which were $7,544,000,
$4,033,000 and $2,322,000 as of July 31, 2005, January 31, 2005 and July 31,
2004, respectively.

8. FINANCING ARRANGEMENTS

          Effective July 29, 2003, the Company entered into a Second Amended and
Restated Revolving Credit and Gold Consignment Agreement (as amended, the
"Credit Agreement") with certain members of its prior bank group to provide for
a total facility of up to $125.0 million through July 28, 2007. Interest rates
and the commitment fee charged on the unused portion of the facility float based
upon the Company's financial performance as calculated quarterly.

          Under the Credit Agreement, the banks have a collateral security
interest in substantially all of the assets of the Company. The Credit Agreement
contains certain restrictions, including restrictions on investments, payment of
dividends, assumption of additional debt, acquisitions and divestitures. The
Credit Agreement also requires the Company to maintain a specified ratio of the
sum of earnings before interest, taxes, depreciation and amortization plus
minimum store rent to the sum of minimum store rent plus cash interest expense.
As of July 31, 2005, the calculated revolver availability, pursuant to the
Credit Agreement, was $117.1 million. The


                                       11



Company had $102.4 million of outstanding borrowings under the revolving loan
facility as of July 31, 2005.

          On October 3, 2005, the Company entered into a Bridge Term Loan Credit
Agreement (the "Bridge Loan Agreement") with PWJ Lending LLC ("PWJ Lending"), an
investment fund managed by Prentice Capital Management, L.P. ("Prentice
Capital"), and Holtzman Opportunity Fund, L.P. ("Holtzman") (together with any
other lenders under such agreement from time to time, the "Lenders"), and PWJ
Lending as administrative agent and collateral agent for the Lenders. Under the
Bridge Loan Agreement, the Lenders provided a term loan (the "Term Loan") to the
Company in the aggregate principal amount of $30,000,000 (the "Commitment
Amount"), which bears interest at a fixed rate of 18% per annum, payable
monthly, and has a stated maturity date as early as December 30, 2005. The
proceeds of the Term Loan were used, among other purposes, to repay a portion of
the revolving credit loans then outstanding under the Senior Credit Agreement,
to fund a segregated account that will promptly be disbursed into a third party
escrow account established for the benefit of certain of the Company's trade
vendors and to pay fees and expenses associated with the transaction. The
Company's obligations under the Bridge Loan Agreement are secured by a lien on
substantially all of the Company's assets which ranks junior in priority to the
liens securing the Company's obligations under the Senior Credit Agreement. The
Bridge Loan Agreement contains a number of affirmative and restrictive covenants
and representations and warranties that generally are consistent with those
contained in the Company's Senior Credit Agreement (as amended by the Fourth
Amendment). The Company may prepay the Term Loan at any time, provided, however,
that if the Term Loan is prepaid with funds from any source other than the
proceeds of the Notes (as defined below), then the Company will be required to
pay to the Lenders an exit fee of 4% of the Commitment Amount. Under the Bridge
Loan Agreement, the Company is required to use the proceeds of a sale of the
Notes to retire the Term Loan. While the Lenders may accelerate the obligations
of the Company under the Bridge Loan Agreement to be immediately due and payable
upon an Event of Default (as defined in the Bridge Loan Agreement), the rights
of the Lenders to enforce the obligations are subject to an intercreditor
agreement with the holders of debt under the Senior Credit Agreement.

          In connection with the Bridge Loan Agreement, the Company issued
7-year warrants (the "Warrants"), which are immediately exercisable, with an
exercise price of $0.75 per share to the Lenders to purchase 2,792,462 shares of
the Company's common stock (i.e., 19.99% of the number of shares currently
outstanding). The exercise price of the Warrants will be reduced, subject to
certain limited exceptions, if the Company subsequently issues common stock or
the right to acquire common stock at a price of less than $0.75 per share.

          On October 3, 2005, the Company entered into a Waiver, Consent and
Fourth Amendment (the "Fourth Amendment") to the Second Amended and Restated
Revolving Credit and Gold Consignment Agreement (the "Senior Credit Agreement"),
dated as of July 29, 2003, by and among the Company, LaSalle Bank National
Association ("LaSalle"), as administrative agent and collateral agent for the
banks party thereto ("Banks"), the Banks, Bank of America, N.A., as managing
agent, and Back Bay Capital Funding LLC, as accommodation facility agent.

          Under the Senior Credit Agreement (as amended by the Fourth
Amendment), the Banks provide a revolving line of credit of up to $140,000,000
(the "Revolving Facility") and an accommodation facility of $15,000,000 (the
"Accommodation Facility"), each having a maturity date of October 3, 2008. The
Fourth Amendment removes the financial performance covenants and modifies the
borrowing base calculation and increases the minimum required availability
covenant. The Senior Credit Agreement remains secured by substantially all of
the assets of the Company. The Senior Credit Agreement continues to contain
affirmative and negative covenants and representations and warranties customary
for such financings. Borrowings under the Revolving Facility shall bear interest
at the option of the Company (i) at the LIBOR rate plus 250 basis points, or
(ii) at the lesser of (a) LaSalle Bank, National Association's prime rate and
(b) the federal funds effective rate plus 50


                                       12



basis points (such lesser rate, the "Base Rate"). Borrowings under the
Accommodation Facility bear interest at the Base Rate plus 800 basis points. The
Company may prepay without penalty and reborrow under the Revolving Facility.
The Company will be required to pay an early termination fee under certain
circumstances if the Revolving Facility is terminated early or if the
Accommodation Facility is prepaid. The Banks may accelerate the obligations of
the Company under the Senior Credit Agreement to be immediately due and payable
upon an Event of Default. The Company intends to use the proceeds for working
capital needs, fees and costs associated with the Bridge Loan Agreement and the
proposed Note conversion (as described in Note 13 to the financial statements)
and for general corporate purposes.

          The Company was in compliance with the financial covenants of the
amended Credit Agreement as of July 31, 2005. Should the Company be unable to
consummate the transaction contemplated by the securities purchase agreement, as
described in Note 13 to the financial statements, the Company would be in
default of the Senior Credit Agreement. The Company's business is highly
seasonal, and historically, income generated in the fourth fiscal quarter ending
each January 31 represents all or a significant majority of the income generated
during the fiscal year.

9. DILUTIVE SHARES THAT WERE OUTSTANDING DURING THE PERIOD

          The following table summarizes the reconciliation of the numerators
and denominators for the basic and diluted earnings per share ("EPS")
computations for the three and six months ended July 31, 2005 and 2004.



                                    Three months ended               Six Months Ended
                              -----------------------------   -----------------------------
                              July 31, 2005   July 31, 2004   July 31, 2005   July 31, 2004
                              -------------   -------------   -------------   -------------
                                                      (in thousands)
                                                                  
Net loss                        $(24,086)        $(3,183)       $(29,030)        $(6,879)

Weighted average shares for
basic EPS                         13,967          13,947          13,962          13,937

Incremental shares upon
conversions:
Stock options                         --              --              --              --

Weighted average shares for
diluted EPS                       13,967          13,947          13,962          13,937

Stock options excluded from
the calculation of diluted
earnings per share due to
their antidilutive effect
on the calculations                2,667           2,640           2,665           2,314


10. COMMITMENTS AND CONTINGENCIES

Class Action Lawsuits

          On February 12, 2004, a putative class action complaint captioned
Greater Pennsylvania Carpenters Pension Fund v. Whitehall Jewellers, Inc., Case
No. 04 C 1107, was filed in the U.S. District Court for the Northern District of
Illinois against the Company and certain of the Company's current and former
officers. The complaint makes reference to the litigation filed by Capital
Factors, Inc. ("Capital Factors") and settled as disclosed in the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2004 and
to the Company's November 21, 2003 announcement that it had discovered
violations of Company policy by the Company's Executive Vice President,
Merchandising, with respect to Company documentation regarding the age of
certain store inventory. The complaint further makes reference to the Company's
December 22, 2003 announcement that it would restate results for certain prior
periods. The complaint purports to allege that the Company and its officers made
false and misleading statements and falsely accounted for


                                       13



revenue and inventory during the putative class period of November 19, 2001 to
December 10, 2003. The complaint purports to allege violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 ("1934 Act") and Rule 10b-5
promulgated thereunder.

          On February 17, 2004, a putative class action complaint captioned
Michael Radigan v. Whitehall Jewellers, Inc., Case No. 04 C 1196, was filed in
the U.S. District Court for the Northern District of Illinois against the
Company and certain of the Company's current and former officers. The factual
allegations and claims of this complaint are similar to those made in the
Greater Pennsylvania Carpenters Pension Fund complaint discussed above.

          On February 19, 2004, a putative class action complaint captioned
Milton Pfeiffer, v. Whitehall Jewellers, Inc., Case No. 04 C 1285, was filed in
the U.S. District Court for the Northern District of Illinois against the
Company and certain of the Company's current and former officers. The factual
allegations and claims of this complaint are similar to those made in the
Greater Pennsylvania Carpenters Pension Fund complaint discussed above.

          On April 6, 2004, the District Court in the Greater Pennsylvania
Carpenters case, No. 04 C 1107 consolidated the Pfeiffer and Radigan complaints
with the Greater Pennsylvania Carpenters action, and dismissed the Radigan and
Pfeiffer actions as separate actions. On April 14, 2004, the court designated
the Greater Pennsylvania Carpenters Pension Fund as the lead plaintiff in the
action and designated Greater Pennsylvania's counsel as lead counsel.

          On June 10, 2004, a putative class action complaint captioned Joshua
Kaplan v. Whitehall Jewellers, Inc., Case No. 04 C 3971, was filed in the U.S.
District Court for the Northern District of Illinois against the Company and
certain of the Company's current and former officers. The factual allegations
and claims of this complaint are similar to those made in the Greater
Pennsylvania Carpenters Pension Fund complaint discussed above.

          On June 14, 2004, lead plaintiff Greater Pennsylvania Carpenters
Pension Fund in Case No. 04C 1107 filed a consolidated amended complaint. On
July 14, 2004, the District Court in the Greater Pennsylvania Carpenters action
consolidated the Kaplan complaint with the Greater Pennsylvania Carpenters
action, and dismissed the Kaplan action as a separate action. On August 2, 2004,
the Company filed a motion to dismiss the consolidated amended complaint. On
January 7, 2005, the motion to dismiss was granted in part and denied in part,
with plaintiffs granted leave to file an amended complaint by February 10, 2005.
On February 10, 2005, the lead plaintiff filed a first amended consolidated
complaint. On March 2, 2005, the Company filed a motion to dismiss the amended
complaint. On June 30, 2005, the Court denied Defendants' motions to dismiss. On
July 28, 2005, Defendants filed their Answers to the First Amended Consolidated
Complaint. Written discovery has commenced and document production is ongoing.
On September 23, 2005, lead plaintiff filed its motion for class certification.
Briefing on this motion is not yet completed. The parties have scheduled a
mediation for November 8, 2005 in an attempt to resolve the 10(b)-5 claims and
the below described state and federal derivative claims.


                                       14



State Derivative Complaints

          On June 17, 2004, a shareholder derivative action complaint captioned
Richard Cusack v. Hugh Patinkin, Case No. 04 CH 09705, was filed in the Circuit
Court of Cook County, Illinois, for the alleged benefit of the Company against
certain of the Company's officers and directors. The complaint asserts claims
for breach of fiduciary duty, abuse of control, gross mismanagement, waste of
corporate assets, unjust enrichment, breach of fiduciary duties for insider
selling and misappropriation of information, and contribution and
indemnification. The factual allegations of the complaint are similar to those
made in the Greater Pennsylvania Carpenters Pension Fund complaint discussed
above.

          On April 19, 2005, a shareholder derivative action complaint captioned
Marilyn Perles v. Executor of the Estate of Hugh M. Patinkin, Case No. 05 CH
06926, was filed in the Circuit Court of Cook County, Illinois, for the alleged
benefit of the Company against, inter alia, certain of the Company's officers
and directors. The complaint asserts claims for breach of fiduciary duty, abuse
of control, gross mismanagement, waste of corporate assets, unjust enrichment,
breach of fiduciary duties for insider selling and misappropriation of
information, and contribution and indemnification. The factual allegations of
the complaint are similar to those made in the Cusack complaint discussed above.
The Perles complaint also purports to assert claims on behalf of the Company
against PricewaterhouseCoopers LLP, the Company's outside auditor.

          On June 13, 2005, a shareholder derivative action complaint captioned
Carey Lynch v. Berkowitz, Case No. 05CH09913, was filed in the Circuit Court of
Cook County, Illinois, for the alleged benefit of the Company against certain of
the Company's officers and directors. The complaint asserts, inter alia, a claim
for breach of fiduciary duty. The factual allegations of the complaint are
similar to those made in the Cusack and Perles complaints discussed above.

          On July 18, 2005, the Circuit Court of Cook County consolidated the
Cusack, Perles and, Lynch actions. On August 26, 2005, plaintiffs filed a
consolidated amended derivative complaint against certain of the Company's
current and former officers and directors and PricewaterhouseCoopers LLP, the
Company's outside auditor. On October 3, 2005, defendants, other than
PricewaterhouseCoopers LLP, filed their motion to dismiss the consolidated
amended derivative complaint based, inter alia, on the failure of plaintiffs to
make a pre-suit demand upon the Company's Board of Directors and failure to
state a claim.

Federal Derivative Complaints

          On February 22, 2005, a verified derivative complaint captioned Myra
Cureton v. Richard K. Berkowitz, Case No. 05 C 1050, was filed in the United
States District Court, Northern District of Illinois, Eastern Division, for the
alleged benefit of the Company against certain of the Company's officers and
directors. The complaint asserts a claim for breach of fiduciary duty. The
factual allegations of the complaint are similar to those made in the Cusack and
Greater Pennsylvania Carpenters Pension Fund complaints discussed above.

          On April 13, 2005, a verified derivative complaint captioned Tai Vu v.
Richard Berkowitz, Case No. 05 C 2197, was filed in the United States District
Court, Northern District of Illinois, Eastern Division, for the alleged benefit
of the Company against certain of the Company's officers and directors. The
complaint asserts a claim for breach of fiduciary duty. The factual allegations
of the complaint are similar to those made in the Cusack and Greater
Pennsylvania Carpenters Pension Fund complaints discussed above. On May 11,
2005, plaintiffs in the Cureton and Vu actions filed an unopposed motion to
consolidate those two actions, and these cases were consolidated on


                                       15



May 25, 2005. On June 20, 2005, plaintiffs filed a consolidated amended
derivative complaint asserting claims for breach of fiduciary duty of good
faith, breach of duty of loyalty, unjust enrichment, a derivative Rule 10b-5
claim, and a claim against Browne for reimbursement of compensation under
Section 304 of the Sarbanes-Oxley Act. On July 15, 2005, defendants moved to
stay the consolidated action under the Colorado River doctrine pending the
outcome of the state derivative actions. The motion is fully briefed and
awaiting decision from the court.

          The Company intends to contest vigorously these putative class actions
and the shareholder derivative suits and exercise all of its available rights
and remedies. Given that these cases are in their early stages and may not be
resolved for some time, it is not possible to evaluate the likelihood of an
unfavorable outcome in any of these matters, or to estimate the amount or range
of potential loss, if any. While there are many potential outcomes, an adverse
outcome in any of these actions could have a material adverse effect on the
Company's results of operations, financial condition and/or liquidity.

Other

          As previously disclosed, in September 2003 the Securities and Exchange
Commission (the "SEC") initiated a formal inquiry of the Company with respect to
matters that were the subject of the consolidated Capital Factors actions. The
Company has fully cooperated with the SEC in connection with this formal
investigation.

          By letter from counsel dated October 26, 2004, A.L.A. Casting Company,
Inc. ("ALA"), a supplier and creditor of Cosmopolitan Gem Corporation
("Cosmopolitan"), informed the Company that it had been defrauded by
Cosmopolitan and was owed $506,081.55 for goods shipped to Cosmopolitan for
which payment was never received. ALA claimed that the Company is jointly and
severally liable for the full amount of $506,081.55 owed by Cosmopolitan because
the Company aided and abetted Cosmopolitan's fraud and participated in, induced
or aided and abetted breaches of fiduciary duty owed to ALA by Cosmopolitan. ALA
has indicated its intention to pursue its claim, but the Company has not
received notice that litigation has been filed. The Company intends to
vigorously contest this claim and exercise all of its available rights and
remedies.

          On September 27, 2005, the Company filed an arbitration proceeding, as
required under the Beryl Raff employment agreement, seeking damages and to
enforce the non-competition provision. See note 13 to the financial statements
regarding the employment matters involving Ms. Raff. Ms. Raff's response has not
yet been filed. In addition, on October 21, 2005, the Company was served with a
declaratory judgment action, filed by J.C. Penney (Ms. Raff's employer), in the
380th Judicial District in Collin County, Texas seeking a declaration of rights,
that among other things, J.C. Penney has not violated any of the rights of the
Company with respect to Ms. Raff's employment. The Company's answer is due on or
about November 14, 2005.

          The Company is also involved from time to time in certain other legal
actions and regulatory investigations arising in the ordinary course of
business. Although there can be no certainty, it is the opinion of management
that none of these other actions or investigations will have a material adverse
effect on the Company's results of operations or financial condition.

11. RELATED PARTY TRANSACTIONS

          The Company offers health insurance coverage to the members of its
Board of Directors. The health insurance policy options and related policy cost
available to the Directors are similar to those available to the Company's
employees.


                                       16



12. SALES BY MERCHANDISE CATEGORY

          The following table sets forth our percentage of total merchandise
sales by category for the following periods:



                           Three Months Ended     Six Months Ended
                          -------------------   -------------------
                          July 31,   July 31,   July 31,   July 31,
                            2005       2004       2005       2004
                          --------   --------   --------   --------
                                               
Diamonds                    66.2%      65.8%      67.1%      65.6%
Gold                        16.2       15.6       16.2       16.0
Precious/Semi-Precious      11.4       12.2       11.4       13.1
Watches                      6.2        6.4        5.3        5.3
                           -----      -----      -----      -----
Total Merchandise Sales    100.0%     100.0%     100.0%     100.0%
                           =====      =====      =====      =====


Along with our merchandise assortments, we provide jewelry repair services to
our customers (sales from which represented 2.8% and 2.9% of net sales in the
three months ended July 31, 2005 and 2004, respectively; and 2.9% of net sales
in each of the six months ended July 31, 2005 and 2004, respectively) and
jewelry service plans provided through a third party provider (sales from which
represented 3.2% and 3.1% in the three months ended July 31, 2005 and 2004,
respectively; and 3.2% and 3.0% of net sales in the six months ended July 31,
2005 and 2004, respectively). Jewelry repair services are provided through
independent jewelers under contract.

13. SUBSEQUENT EVENTS

          On August 12, 2005, the Company announced that Ms. Beryl Raff was
named Chief Executive Officer and would join the Company's Board of Directors.
On September 8, 2005, the Company announced that Ms. Raff had resigned all
positions with the Company. All transition related compensation paid to Ms. Raff
has been subsequently returned to the Company. In addition, all incentive stock
options granted to Ms. Raff by the Company have been cancelled. Ms. Lucinda
Baier, who had served as Chief Executive Officer, continued as President and
Chief Operating Officer of the Company. On September 27, 2005, the Company
commenced an arbitration proceeding relating to Ms. Raff's employment with the
Company seeking damages as well as enforcement of a non-competition agreement.
Ms. Raff's response has not yet been filed. On October 21, 2005, the Company was
served with a declaratory judgment, filed by J.C Penney (Ms. Raff's employer),
in the 380th Judicial District in Collin County, Texas seeking a declaration of
rights, that among other things, J.C. Penney has not violated any of the rights
of the Company with respect to Ms. Raff's employment. The Company's answer is
due on or about November 14, 2005.

          On October 11, 2005, the Company's Board of Directors elected Daniel
H. Levy to serve as interim Chief Executive Officer, while the Company conducts
a search to find a permanent Chief Executive Officer. On October 12, 2005, the
Company announced that Lucinda Baier resigned as President and Chief Operating
Officer.

          On November 1, 2005, the Company announced that Robert Baumgardner has
been hired as its President and Chief Executive Officer. Mr. Baumgardner plans
to join the Company on November 14, 2005.

          On October 3, 2005, the Company entered into a Bridge Term Loan Credit
Agreement (the "Bridge Loan Agreement") with PWJ Lending LLC ("PWJ Lending"), an
investment fund managed by Prentice Capital Management, L.P. ("Prentice
Capital"), and Holtzman Opportunity Fund, L.P. ("Holtzman") (together with any
other lenders under such agreement from time to time, the "Lenders"), and PWJ
Lending as administrative agent and collateral agent for the Lenders. Under the
Bridge Loan Agreement, the Lenders provided a term loan (the "Term Loan") to the
Company in the aggregate principal amount of $30,000,000 (the "Commitment
Amount"), which bears interest at a fixed rate of 18% per annum, payable
monthly, and has a stated maturity date as early as December 30, 2005, but no
later than January 31, 2005. The proceeds of the Term Loan were used, among
other purposes, to repay a portion of the revolving credit loans then
outstanding under the Senior Credit Agreement, to fund a segregated account


                                       17



that will promptly be disbursed into a third party escrow account established
for the benefit of certain of the Company's trade vendors and to pay fees and
expenses associated with the transaction. The Company's obligations under the
Bridge Loan Agreement are secured by a lien on substantially all of the
Company's assets which ranks junior in priority to the liens securing the
Company's obligations under the Senior Credit Agreement. The Bridge Loan
Agreement contains a number of affirmative and restrictive covenants and
representations and warranties that generally are consistent with those
contained in the Company's Senior Credit Agreement (as amended by the Fourth
Amendment). The Company may prepay the Term Loan at any time, provided, however,
that if the Term Loan is prepaid with funds from any source other than the
proceeds of the Notes (as defined below), then the Company will be required to
pay to the Lenders an exit fee of 4% of the Commitment Amount. Under the Bridge
Loan Agreement, the Company is required to use the proceeds of a sale of the
Notes to retire the Term Loan. While the Lenders may accelerate the obligations
of the Company under the Bridge Loan Agreement to be immediately due and payable
upon an Event of Default (as defined in the Bridge Loan Agreement), the rights
of the Lenders to enforce the obligations are subject to an intercreditor
agreement with the holders of debt under the Senior Credit Agreement.

          In connection with the Bridge Loan Agreement, the Company issued
7-year warrants (the "Warrants"), which are immediately exercisable, with an
exercise price of $0.75 per share to the Lenders to purchase 2,792,462 shares of
the Company's common stock (i.e., 19.99% of the number of shares currently
outstanding). The exercise price of the Warrants will be reduced, subject to
certain limited exceptions, if the Company subsequently issues common stock or
the right to acquire common stock at a price of less than $0.75 per share.

          Contemporaneously with the entry into the Bridge Loan Agreement, the
Company, PWJ Funding LLC ("PWJ Funding"), another fund affiliated with Prentice
Capital, and Holtzman entered into a Securities Purchase Agreement (the
"Purchase Agreement," and PWJ Lending, PWJ Funding and Holtzman are collectively
referred to herein as "Prentice").

          Subject to certain terms and conditions set forth in the Purchase
Agreement, the Company has agreed to issue to Prentice $50,000,000 of secured
convertible notes (the "Notes"). The stated maturity of the Notes will be three
years after the date of issuance which maturity generally may be extended by the
Company for up to two years. Prentice will have the option to extend the
maturity date in the event and for so long as an event of default shall have
occurred and be continuing under the Notes or through the date that is ten
business days after the consummation of a change of control of the Company in
the event a change of control is publicly announced prior to the maturity date.
The Notes will be secured by the same second security interest that secures the
Term Loan.

          The Notes will bear interest at a rate of 12% per annum, payable
quarterly. Interest that becomes payable during the initial three year term of
the Notes will be paid in shares of common stock of the Company at the
Conversion Price (initially $0.75 per share). The Conversion Price will be
reduced, subject to certain limited exceptions, if the Company subsequently
issues common stock or the right to acquire common stock at a price of less than
$0.75 per share. Interest that becomes payable after the initial three year term
of the Notes will be paid in cash.

          Upon a change of control of the Company (as defined in the Purchase
Agreement), the holder of a Note may require the Company to redeem all or any
portion of the Note for a price equal to (i) the outstanding principal amount of
the Notes, together with any accrued and unpaid interest or late charges thereon
multiplied by (ii) 125% (unless the change of control is not approved by a
majority of the disinterested members of the Company's board of directors, in
which case the 125% will be 100%).


                                       18



          The issuance of the Notes under the Purchase Agreement is subject to
certain conditions including (i) the approval by the stockholders of the Company
of (A) the issuance of the shares of common stock pursuant to the terms of the
Notes, (B) an amendment to the Company's certificate of incorporation providing
for a 1-for-2 reverse stock split, and (C) the election of persons designated by
Prentice to the Company's board of directors (the "Board Nominees"), (ii) upon
election, such Board Nominees constituting a majority of the members of the
board of directors, and (iii) no occurrence of an event, circumstance or fact
which resulted in, would result in or could reasonably be expected to a result
in an extremely detrimental event to the Company. The Company may terminate the
Purchase Agreement under certain circumstances in order to accept a superior
proposal. The Notes will contain certain covenants, including limitations on
indebtedness, and liens and a prohibition on dividends.

          Under the Purchase Agreement, the Company may not solicit offers,
inquiries or proposals or conduct negotiations with any third parties regarding
a transaction that involved debt or equity fundraising or that would otherwise
be done in lieu of the transaction with Prentice, subject to the Company's board
of directors fulfilling its fiduciary duties to the Company's shareholders and
creditors. The Company may terminate the Purchase Agreement under certain
circumstances in order to accept a superior proposal.

          The shares of common stock issuable (i) upon exercise of the Warrants,
(ii) upon conversion of the Notes, and (iii) as payment of interest under the
Notes, will represent approximately 87% of the issued and outstanding shares of
common stock of the Company, assuming (A) no anti-dilution adjustment to the
Conversion Price or the Exercise Price and (B) no issuance of common stock or
securities convertible, exercisable or exchangeable for common stock prior to
the closing of the transaction, other than pursuant to the Notes and Warrants.

          The proceeds to be received by the Company upon the sale of the Notes
will be used to retire the Term Loan and for general working capital purposes.

          The Purchase Agreement contains a provision contemplating that 80% of
any proceeds to the Company from any proceedings by the Company against Beryl
Raff or certain other persons relating to the termination of her employment with
the Company, net of litigation costs and the costs relating to any counterclaim
against the Company, would be paid by the Company to a trust or other vehicle to
be established for the benefit of certain shareholders prior to the closing
under the Purchase Agreement and possibly certain creditors.

          Contemporaneously with the entry into the Bridge Loan Agreement and
the Purchase Agreement, the Company and Prentice entered into a Registration
Rights Agreement pursuant to which the Company has agreed to provide certain
registration rights with respect to the shares of common stock that may be
issued (i) upon exercise of the Warrants, (ii) upon conversion of the Notes, and
(iii) in payment of interest under the Notes.

          The Company's Board of Directors formed a Special Committee to
consider the terms of the Bridge Loan Agreement, Warrants, Securities Purchase
Agreement and Registration Rights Agreement, as well as other financing
alternatives. In connection with their evaluation of these transactions the
Special Committee and the Board of Directors received the opinion of Duff &
Phelps, LLC that the terms of these transactions are fair to the shareholders of
the Company from a financial point of view.

          Contemporaneously with the entry into the Bridge Loan Agreement and
the Purchase Agreement, the Company entered into a Waiver, Consent and Fourth
Amendment (the "Fourth Amendment") to the Second Amended and Restated Revolving
Credit and Gold Consignment Agreement (the "Senior Credit Agreement"), dated as
of July 29, 2003, by and among the Company, LaSalle Bank National Association
("LaSalle"), as administrative agent and collateral agent for the banks party
thereto ("Banks"), the Banks, Bank of America, N.A., as


                                       19



managing agent, and Back Bay Capital Funding LLC, as accommodation facility
agent.

          Under the Senior Credit Agreement (as amended by the Fourth
Amendment), the Banks provide a revolving line of credit of up to $140,000,000
(the "Revolving Facility") and an accommodation facility of $15,000,000 (the
"Accommodation Facility"), each having a maturity date of October 3, 2008. The
Fourth Amendment removes the financial performance covenants and modifies the
borrowing base calculation and increases the minimum required availability
covenant. The Senior Credit Agreement remains secured by substantially all of
the assets of the Company. The Senior Credit Agreement continues to contain
affirmative and negative covenants and representations and warranties customary
for such financings. Borrowings under the Revolving Facility shall bear interest
at the option of the Company (i) at the LIBOR rate plus 250 basis points, or
(ii) at the lesser of (a) LaSalle Bank, National Association's prime rate and
(b) the federal funds effective rate plus 50 basis points (such lesser rate, the
"Base Rate"). Borrowings under the Accommodation Facility bear interest at the
Base Rate plus 800 basis points. The Company may prepay without penalty and
reborrow under the Revolving Facility. The Company will be required to pay an
early termination fee under certain circumstances if the Revolving Facility is
terminated early or if the Accommodation Facility is prepaid. The Banks may
accelerate the obligations of the Company under the Senior Credit Agreement to
be immediately due and payable upon an Event of Default. The Company intends to
use the proceeds for working capital needs, fees and costs associated with the
Bridge Loan Agreement and the proposed Note conversion and for general corporate
purposes.

          The Company, Prentice Capital and the Banks executed a term sheet (the
"Term Sheet") with certain trade vendors. Vendors holding over 99% of the
Company's aggregate trade debt to inventory suppliers ("Suppliers") have now
executed the Term Sheet. The Term Sheet provides a mechanism for (i) the
Company's satisfaction of its current trade debt ("Trade Debt") to participating
Suppliers, and (ii) the participating Suppliers' prompt delivery of merchandise
to the Company for the upcoming holiday season. Under the provisions of the Term
Sheet, the Company will make payments totaling 50% of the Trade Debt at various
times up to January 16, 2006. A final payment in the amount of 50% of the Trade
Debt, plus accrued interest at 6% from and after January 17, 2006, is required
to be made on or about September 30, 2007. The obligations to pay the final 50%
of the Trade Debt will be secured by a security interest in substantially all of
the Company's assets ranking junior to the interests securing the Senior Credit
Agreement, the Bridge Loan Agreement and the Notes. The Term Sheet is subject to
and conditioned upon the execution of definitive documentation among the
parties.

          Contemporaneously with the execution of the Purchase Agreement, the
Company entered into an amendment to its Amended and Restated Stockholders
Rights Plan, dated as of April 28, 1999, between the Company and LaSalle Bank,
as the Rights Agent (as so amended, the "Stockholders Rights Plan") to provide
that none of Prentice, any of the other purchasers that may be added under the
Securities Purchase Agreement or any of their affiliates or associates (each, a
"Buying Person") shall be deemed to be an Acquired Person (as defined in the
Stockholders Rights Plan) and no Distribution Date or Share Acquisition Date
(each, as defined in the Stockholders Rights Plan) shall occur and no Rights
will otherwise become exercisable as a result of the execution and delivery of
the Purchase Agreement, the Notes or the Warrants, the public announcement of
such execution and delivery, the performance of the Purchase Agreement, the
Notes or the Warrants or the consummation of the other transactions contemplated
thereby. After the closing of sale of the Notes under the Purchase Agreement,
each Buying Person shall be deemed to be an "Exempt Person" for purposes of the
definition of Acquiring Person and, therefore, not an Acquiring Person
regardless of the amount of common stock of the Company beneficially owned by
such Buying Person.

          On November 1, 2005, the Company announced that it plans to close 77
of its retail stores. As a result, the Company will record, in accordance with
FAS 144 asset held for use model, an impairment


                                       20



charge of approximately $5.4 million during the third quarter of fiscal year
2005. The Company plans to liquidate inventory through store closure sales, and
such sales will require additional inventory valuation allowances. It is
currently anticipated that such inventory allowances will be no less than $14.0
million. The Company currently expects to close these stores by February 2006.
The decision to close these stores will result in an impairment of the
respective stores' long-lived assets, as the carrying amount of the respective
stores' long-lived fixed assets will not be recoverable as such assets will be
disposed of before the end of its previously estimated useful life.

          In accordance with FASB Statement No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities," the Company has not
recorded any exit or disposal related expenses, including lease terminations,
personnel costs and other expenses, associated with the planned store closures.
Such expenses will be recorded in the period in which the liability is incurred.
At this time, no agreements have been reached which would permit the Company to
estimate such disposal costs, which may be material to the financial statements.

          On September 1, 2005, the Company's retail store located in the
Oakwood Mall in Gretna, Louisiana, was damaged by fire. Prior to the fire, the
mall was damaged by hurricane Katrina. During the third quarter of fiscal year
2005, the Company will write-down the net book value of the store's fixed assets
of approximately $0.2 million. The Company expects to file a claim with its
insurance carriers in connection with this loss. It has not yet been determined
if this mall will be reconstructed. As such, the Company is unable to determine
if it will reopen this retail store.

          On October 17, 2005, the Company received notification from the New
York Stock Exchange (the "NYSE") that the Company was not in compliance with the
NYSE continued listing standards because its average market capitalization had
been less than $25 million over a consecutive 30 trading-day period. The
Company's common stock was delisted from the NYSE as of the close of the market
on October 27, 2005. The Company's common stock currently is quoted on the "pink
sheets".

          On October 26, 2005, the Company received a proposal from Newcastle
Partners, L.P. ("Newcastle"). The proposal, which is subject to a number of
conditions and definitive documentation, expresses Newcastle's willingness to
offer $1.10 per share in cash by merger or otherwise and cash out warrants and
in-the-money options based on that price. Under the proposal, Newcastle would
pay off the Company's recent $30 million bridge loan. Newcastle expects to
obtain a commitment to replace the Company's Senior Credit Agreement or obtain
consents from the Company's senior lenders. A copy of the proposal letter was
contained in an amendment to Newcastle's Schedule 13D which was filed
electronically with the SEC on October 27, 2005. On October 27, 2005, the
Special Committee of the Company's Board of Directors responded to the Newcastle
proposal by indicating that, on the advice of its financial advisors and
counsel, it could not conclude, from the information provided in the Newcastle
proposal, that such proposal is reasonably likely to result in a superior
proposal within the meaning of the Securities Purchase Agreement executed by the
Company in connection with the Prentice transactions.


                                       21



PART I - FINANCIAL INFORMATION

Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations

          The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
Company's unaudited financial statements, including the notes thereto. This
section contains statements that constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. See the
Forward Looking Statements disclosure included in this Form 10-Q.

Overview

          The Company is a mall-based national retailer of fine jewelry
operating 388 stores in 38 states as of July 31, 2005. The Company offers a
selection of merchandise in the following categories: diamond, gold, precious
and semi-precious jewelry and watches. Jewelry purchases are discretionary for
consumers and may be particularly affected by adverse trends in the general
economy and perceptions of such conditions, which affect disposable consumer
income and/or its use.

          For the quarter ended July 31, 2005, the Company recorded a net loss
of $24.1 million. The primary contributors to the net loss were a 6.2% decline
in comparable store sales for the second quarter of fiscal year 2005; a decrease
in the merchandise gross margin rate; a $5.7 million non-cash charge to
write-down goodwill; a non-cash charge of $13.5 million to record a full
valuation allowance against all of its deferred tax assets and a $3.1 million
non-cash charge related to the impairment of long-lived assets recorded under
FAS 144 asset held for use model, primarily furniture, fixtures and leasehold
improvements, in thirty-one of the Company's retail stores.

          On August 12, 2005, the Company announced that Ms. Beryl Raff was
named Chief Executive Officer and would join the Company's Board of Directors.
On September 8, 2005, the Company announced that Ms. Raff had resigned all
positions with the Company. All transition related compensation paid to Ms. Raff
has been subsequently returned to the Company. In addition, all incentive stock
options granted to Ms. Raff by the Company have been cancelled. Ms. Lucinda
Baier, who had served as Chief Executive Officer, continued as President and
Chief Operating Officer of the Company. On September 27, 2005, the Company
commenced an arbitration proceeding relating to Ms. Raff's employment with the
Company seeking damages as well as enforcement of a non-competition agreement.
Ms. Raff's response has not yet been filed. On October 21, 2005, the Company was
served with a declaratory judgment action, filed by J.C Penney (Ms. Raff's
employer), in the 380th Judicial District in Collin County, Texas seeking a
declaration of rights, that among other things, J.C. Penney has not violated any
of the rights of the Company with respect to Ms. Raff's employment. The
Company's answer is due on or about November 14, 2005.

          On October 11, 2005, the Company's Board of Directors elected Daniel
H. Levy to serve as interim Chief Executive Officer, while the Company conducts
a search to find a permanent Chief Executive Officer. On October 12, 2005, the
Company announced that Lucinda Baier resigned as President and Chief Operating
Officer.

          On November 1, 2005, the Company announced that Robert Baumgardner has
been hired as its President and Chief Executive Officer. Mr. Baumgardner plans
to join the Company on November 14, 2005.

          The Company entered into a series of transactions on October 3, 2005,
designed to significantly improve its financial condition. The Company has
entered into agreements ("the Prentice Transaction") with investment funds
managed by Prentice Capital Management, L.P. and Holtzman Opportunity Fund, L.P.
(collectively, "Prentice") to provide financing to the Company, as described in
Note 13 to the financial statements. The first stage of this


                                       22



financing was a $30 million secured bridge loan made to the Company. The
agreements also call for the issuance of $50 million of secured convertible
notes not later than January 31, 2006, which is contingent upon shareholder
approval. Proceeds of the planned issuance will be used to pay off the bridge
loan and provide additional liquidity for operations. Both the bridge loan and
the convertible notes are being secured by a lien on substantially all of the
Company's assets ranking junior to the liens securing the Company's bank debt.
Giving effect to an assumed conversion of the notes, the payment of shares as
interest and an exercise of the warrants, Prentice would own 87% of the
Company's common stock.

          In addition, the Company, its banks and Prentice have entered into an
agreement with key trade vendors who hold more than 99% of the Company's trade
debt. This agreement will facilitate the purchase of fresh inventory for the
holiday season and provide for full payment of all amounts owed, plus interest,
to those vendors over time. Also, the Company reached agreement with its banks,
LaSalle, Back Bay and Bank of America, to increase the maximum borrowings under
its credit facility, depending on borrowing base calculations, by $15 million to
$140 million and extending the term of the facility until October 3, 2008.

          The Company has experienced recurring losses from operations in the
first six months of fiscal year 2005 and in the two previous fiscal years.
During the second quarter of fiscal year 2005, the Company slowed payments to
certain vendors and received temporary extension of payment terms with certain
other vendors in order to manage its liquidity needs. Subsequent to July 31,
2005, the Company has received temporary extension of payment terms, beyond the
stated payment terms, with certain of its key merchandise vendors. The Company's
ability to continue as a going concern is highly dependent upon the Prentice
Transaction being approved by the Company's shareholders. In the event that the
Prentice Transaction is not approved there can be no assurance that additional
funding, or another liquidity event, will become available to the Company. In
that event, the Company would be required to consider other alternatives,
including a reorganization under Chapter 11 of the U.S. bankruptcy code or a
liquidation of its assets.

          On November 1, 2005, the Company announced that it plans to close 77
of its retail stores. As a result, the Company will record an impairment charge
of approximately $5.4 million during the third quarter of fiscal year 2005. The
Company plans to liquidate inventory through store closure sales, and such sales
will require additional inventory valuation allowances. It is currently
anticipated that such inventory allowances will be no less than $14.0 million.
The Company currently expects to close these stores by February 2006. The
decision to close these stores will result in an impairment of the respective
stores' long-lived assets, as the carrying amount of the respective stores'
long-lived fixed assets will not be recoverable as such assets will be disposed
of before the end of its previously estimated useful life.

          In accordance with FASB Statement No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities," the Company has not
recorded any exit or disposal related expenses, including lease terminations,
personnel costs and other expenses, associated with the planned store closures.
Such expenses will be recorded in the period in which the liability is incurred.
At this time, no agreements have been reached which would permit the Company to
estimate such disposal costs, which may be material to the financial statements.

          On October 17, 2005, the Company received notification from the New
York Stock Exchange (the "NYSE") that the Company was not in compliance with the
NYSE continued listing standards because its average market capitalization had
been less than $25 million over a consecutive 30 trading-day period. The
Company's common stock was delisted from the NYSE as of the close of the market
on October 27, 2005. The Company's common stock currently is quoted on the "pink
sheets".


                                       23



          On October 26, 2005, the Company received a proposal from Newcastle
Partners, L.P. ("Newcastle"). The proposal, which is subject to a number of
conditions and definitive documentation, expresses Newcastle's willingness to
offer $1.10 per share in cash by merger or otherwise and cash out warrants and
in-the-money options based on that price. Under the proposal, Newcastle would
pay off the Company's recent $30 million bridge loan. Newcastle expects to
obtain a commitment to replace the Company's Senior Credit Agreement or obtain
consents from the Company's senior lenders. A copy of the proposal letter was
contained in an amendment to Newcastle's Schedule 13D which was filed
electronically with the SEC on October 27, 2005. On October 27, 2005, the
Special Committee of the Company's Board of Directors responded to the Newcastle
proposal by indicating that, on the advice of its financial advisors and
counsel, it could not conclude, from the information provided in the Newcastle
proposal, that such proposal is reasonably likely to result in a superior
proposal within the meaning of the Securities Purchase Agreement executed by the
Company in connection with the Prentice transactions.

          The Company's business is highly seasonal. Historically, income
generated in the fourth fiscal quarter ending each January 31 represents all or
a majority of the income generated during the fiscal year. The Company has
historically experienced lower net sales in each of its first three fiscal
quarters and expects this trend to continue. The Company's quarterly and annual
results of operations may fluctuate significantly as a result of factors
including, among others: increases or decreases in comparable store sales;
inventory availability and the Company's ability to fund inventory purchases and
to time such purchases correctly; changes in the Company's cost of financing;
marketing or credit programs; timing of certain holidays and Company-initiated
special events; changes in the Company's merchandise; the timing of new store
openings; net sales contributed by new stores; timing of store remodels and
closures; general economic, industry, weather conditions and disastrous events
that affect consumer spending and the pricing, merchandising, marketing, credit
and other programs of competitors.

Results of Operations

     The following table sets forth for the periods indicated, certain financial
information derived from the unaudited statements of operations of the Company
expressed as a percentage of net sales.



                                   Three months ended    Six months ended
                                  -------------------   -------------------
                                  July 31,   July 31,   July 31,   July 31,
                                    2005       2004       2005       2004
                                  --------   --------   --------   --------
                                                       
Percentage of net sales
Net sales                          100.0%     100.0%     100.0%     100.0%
Cost of sales (including buying
   and occupancy expenses)          74.4       66.7       71.3       66.7
                                   -----      -----      -----      -----
   Gross profit                     25.6       33.3       28.7       33.3
Selling, general and
   administrative expenses          40.4       37.3       39.7       37.2
Professional fees and other
   charges                           1.5        2.3        1.6        2.9
Impairment of goodwill               8.3         --        4.0         --
                                   -----      -----      -----      -----
   Loss from operations            (24.6)      (6.3)     (16.6)      (6.8)
Interest expense                     3.1        1.5        2.5        1.4
                                   -----      -----      -----      -----
   Loss before income taxes        (27.7)      (7.8)     (19.1)      (8.2)
Income tax expense (benefit)         7.5       (3.4)       1.7       (3.5)
                                   -----      -----      -----      -----
   Net loss                        (35.2%)     (4.4%)    (20.8%)     (4.7%)
                                   =====      =====      =====      =====


Three Months Ended July 31, 2005 Compared to Three Months Ended July 31, 2004

Net Sales

          Net sales for the second quarter of fiscal 2005 decreased $3.9
million, or 5.4%, to $68.4 million from $72.3 million in the second quarter of
fiscal 2004. Comparable store sales decreased $4.4 million, or 6.2%, in the
second quarter of fiscal 2005 compared to the same period in fiscal year 2004.


                                       24



Additionally, sales decreased by $0.5 million due to store closings and stores
closed for remodeling for limited periods. These decreases were partially offset
by sales from new store openings of $0.7 million. In addition, net sales
increased by $0.3 million due to changes in the provision for sales returns and
allowances primarily due to a decrease in sales in the second quarter of fiscal
year 2005 as compared to the second quarter of fiscal year 2004. The comparable
store sales decrease was primarily due to lower unit sales in the second quarter
of fiscal year 2005 in comparison to the prior year period. The total number of
merchandise units sold decreased by 14.4% in the second quarter of fiscal year
2005 compared to the second quarter of fiscal year 2004 while the average price
per item sold increased by approximately 9.6% to $331 in the second quarter of
fiscal year 2005 from $302 in the prior year period. The decline in the number
of merchandise units sold was due in part to a decrease in the number of lower
price-point items sold during the second quarter of fiscal year 2005 compared to
the second quarter of fiscal year 2004. In addition, the decrease in unit sales
in the second quarter of fiscal year 2005 was attributable to a major initiative
launched in July 2004 to accelerate the sale of merchandise which was
inconsistent with the Company's branding strategy. During the second half of
July of last year, sales of such merchandise were instrumental in generating
double-digit comparable store sales increases.

          Credit sales as a percentage of net sales decreased to 42.9% in the
second quarter of fiscal year 2005 from 43.6% in the second quarter of fiscal
year 2004. The Company opened 2 new stores in the second quarter of fiscal year
2005, and on July 31, 2005 operated 388 stores. As of July 31, 2004, the Company
operated 386 stores.

Gross Profit

Gross profit for the second quarter of fiscal 2005 decreased $6.6 million, or
27.4%, to $17.5 million from $24.1 million in the same period in fiscal 2004.
Gross profit as a percentage of net sales decreased to 25.6% in the second
quarter of fiscal year 2005 compared to 33.3% in the second quarter of fiscal
year 2004. The gross profit rate decreased by approximately 450 basis points due
to the $3.1 million non-cash charge recorded during the second quarter of fiscal
year 2005 related to the impairment of long-lived store fixed assets. In
addition, the gross profit rate decreased by approximately 180 basis points due
to the de-leveraging of store occupancy, depreciation and buying costs due to
the decrease in second quarter fiscal year 2005 sales, and an increase in such
costs as compared to the second quarter of fiscal year 2004. Merchandise gross
margins declined by approximately 130 basis points resulting primarily from
price reductions on certain discontinued merchandise and by approximately 70
basis points due to lower margins resulting due in part from increases in
diamond and gold prices and changes in merchandise sales mix and promotional
offers in comparison to the prior year period. The gross margin rate increased
by approximately 40 basis points due to a decrease in the provision recorded for
damaged inventory and inventory losses in comparison to the prior year period.

          The Company has historically offered clearance merchandise for sale,
representing merchandise identified from time to time that will not be part of
its future merchandise presentation. During the second and third quarters of
fiscal year 2004, the Company reviewed its merchandise inventory presentation
and determined that, in addition to the items remaining in the Company's
clearance program, $70.4 million of its merchandise inventory at cost would not
be part of its future merchandise presentation. Price reductions were taken on
these items which have resulted in and will continue to result in lower than
historical margins on such merchandise. Sales of these items totaled
approximately $6.5 million with an approximate merchandise cost of $4.5 million
in the second quarter of fiscal year 2005. In addition, the Company has reduced
such discontinued merchandise by approximately $1.0 million due in part to
vendor returns during the second quarter of fiscal year 2005. As of July 31,
2005, the Company had approximately $38.4 million, at cost, of such discontinued
merchandise inventory. The impact of these sales accounted for a margin decline
of approximately 130 basis points during the


                                       25



second quarter of fiscal year 2005. The Company continues to review its
merchandise inventory presentation and offers discounts to accelerate sales on
merchandise that would not be a part of its future merchandise assortment. Based
on currently anticipated selling prices, the Company expects to achieve
positive, but lower than historical, merchandise margins on such merchandise. It
is the Company's current expectation to continue to offer for sale, in a portion
of its stores, the remaining amount of this merchandise in future periods, which
will negatively impact margins. The Company in future periods may consider
alternative methods of disposition for this inventory. Such alternatives may
result in additional valuation allowances.

          On November 1, 2005, the Company announced that it plans to close 77
of its retail stores. The Company plans to liquidate inventory through store
closure sales, and such sales will require additional inventory valuation
allowances. It is currently anticipated that such inventory allowances will be
no less than $14.0 million.

Expenses

          Selling, general and administrative expenses, excluding professional
fees and other charges, increased $0.7 million, or 2.5%, to $27.7 million from
$27.0 million in the second quarter of fiscal 2005 compared to the same period
in fiscal 2004. Selling, general and administrative expense as a percent of
sales increased to 40.4% versus 37.3% in second quarter 2004. The dollar
increase primarily related to higher personnel expense ($1.1 million) partially
offset by lower credit expense ($0.3 million). The increase in personnel expense
is primarily attributable to the addition of support office positions and higher
salary and wage rates. The decrease in credit expense is primarily due to a
decrease in credit card sales in comparison to the prior year period and a shift
in the mix of private label credit card promotions that carried a lower discount
rate. These decreases in credit expense were partially offset by an increase in
credit card discount rate due to increases in the U.S. prime rate in comparison
to the prior year period.

          Professional fees and other charges decreased by $0.6 million to a
total of $1.0 million in the second quarter of fiscal 2005 from $1.6 million in
the prior year period, primarily attributable to the decrease in legal fees and
charges associated with the consolidated Capital Factors actions and the related
United States Attorney and Securities and Exchange Commission (the "SEC")
investigations.

Impairment of Goodwill

          As of July 31, 2005, the Company evaluated goodwill for impairment
using discounted cash flow and a market multiple approach for impairment and
concluded that the entire amount of the Company's goodwill was impaired. This
analysis was based in part upon the Company's sales performance and financial
results for the second quarter of fiscal year 2005 and management's current
expectation of future financial results. The Company recorded a non-cash
impairment charge of $5,662,000 to write-off the entire goodwill asset in the
second quarter of fiscal year 2005.

Loss from Operations

          As a result of the factors discussed above, loss from operations was
$16.8 million in the second quarter of fiscal 2005 compared to a loss of $4.6
million in the second quarter of fiscal 2004. As a percentage of net sales, loss
from operations was 24.6% in the second quarter of fiscal 2005 compared to 6.3%
in the second quarter of fiscal 2004.

Interest Expense

          Interest expense increased $1.0 million, or 94.1%, to $2.1 million in
the second quarter of fiscal year 2005 from $1.1 million in the prior year
period. The increase in interest expense resulted from higher average interest
rates associated with the amendment to the Credit Agreement in April


                                       26



2005 and increases in the U.S. prime rate as compared with the year-ago period,
and higher amortization of deferred loan costs associated with the amended
Credit Agreement. These increases were partially offset by lower average
outstanding borrowings. The Company expects increased interest expense
associated with the financing transactions described in Note 13 to the financial
statements.

Income Tax Expense

          In the second quarter of fiscal year 2005, the Company recorded a
valuation allowance of $13.5 million against all of its deferred tax assets. In
recording the valuation allowance, management considered whether it was more
likely than not that some or all of the deferred tax assets would be realized.
This analysis included consideration of expected reversals of existing temporary
differences and projected future taxable income.

          The income tax expense was $5.1 million in the second quarter of 2005
compared to an income tax benefit of $2.5 million in the second quarter of 2004.
In accordance with the guidance in FASB Interpretation No. 18 "Accounting for
Income Taxes in Interim Periods - an interpretation of APB Opinion No. 28" ("FIN
18"), the Company's current estimate of the income tax expense associated with
the cumulative year-to-date fiscal year 2005 loss and valuation allowance
recorded against its deferred tax assets results in an effective income tax rate
of 9.1%. Based on the current facts and circumstances, the provisions of FIN 18
effectively limit the amount of income tax expense that can be recorded in the
interim period. The effective income tax rate of 27.0% for the three months
ended July 31, 2005 is the result of reducing the cumulative year-to-date
effective tax rate from a benefit of 35.3% used in the first three months to an
expense of 9.1% in the second quarter. To the extent that results in the third
and fourth quarter quarters are significantly more or less than expected, the
Company's effective income tax rate for the third and fourth quarters and for
the full year could vary significantly from that of the first six months of
fiscal year 2005. The Company's annual effective income tax rate was 30.6% for
fiscal year 2004.

Six Months Ended July 31, 2005 Compared to Six Months Ended July 31, 2004

Net Sales

          Net sales for the six months ended July 31, 2005 decreased $5.9
million, or 4.1%, to $139.4 million from $145.3 million in the six months ended
July 31, 2004. Comparable store sales decreased $7.1 million, or 5.0%, in the
first six months of fiscal 2005 from the same period in fiscal 2004.
Additionally, sales decreased by $0.6 million due to store closings and stores
closed for remodeling for limited periods. These decreases were partially offset
by sales from new store openings of $1.4 million. In addition, net sales
increased by $0.4 million due to changes in the provision for sales returns and
allowances primarily due to a decrease in sales in the first six months of
fiscal year 2005 as compared to the first six months of fiscal year 2004. The
comparable store sales decrease was primarily due to lower unit sales in the
first six months of fiscal year 2005 in comparison to the prior year period. The
total number of merchandise units sold decreased by 17.9% in the first six
months of fiscal year 2005 compared to the prior year period while the average
price per item sold increased by approximately 16.3% to $336 in the first six
months of fiscal year 2005 from $289 in the prior year period. The decline in
the number of merchandise units sold was due in part to a decrease in the number
of lower price-point items sold during the first six months of fiscal year 2005
compared to the first six months of fiscal year 2004. In addition, the decrease
in unit sales in the second quarter of fiscal year 2005 was attributable to a
major initiative launched in July 2004 to accelerate the sale of merchandise
which was inconsistent with the Company's branding strategy. During the second
half of July of last year, sales of such merchandise were instrumental in
generating double-digit comparable store sales increases.


                                       27



          Credit sales as a percentage of net sales increased to 42.1% in the
first six months of fiscal year 2005 from 41.6% in the first six months of
fiscal year 2004. The Company opened six new stores in the first six months of
fiscal year 2005, and on July 31, 2005 operated 388 stores. As of July 31, 2004,
the Company operated 386 stores.

Gross Profit

          Gross profit for the first six months of fiscal 2005 decreased $8.3
million, or 17.2%, to $40.0 million from $48.3 million compared to the same
period in fiscal 2004. Gross profit as a percentage of net sales decreased to
28.7% in the first six months of fiscal year 2005 compared to 33.3% in the first
six months of fiscal year 2004. The gross profit rate decreased by approximately
220 basis points due to the $3.1 million non-cash charge recorded during the
second quarter of fiscal year 2005 related to the impairment of long-lived store
fixed assets. The gross profit rate decreased by approximately 130 basis points
due the de-leveraging of store occupancy, depreciation and buying costs due to
the decrease in sales in the first six months of fiscal year 2005, and an
increase in such costs as compared to the prior year period. Merchandise gross
margins declined by approximately 150 basis points resulting primarily from
price reductions on certain discontinued merchandise and by approximately 40
basis points resulting from increases in diamond and gold prices and changes in
merchandise sales mix and promotional offers in comparison to the prior year
period. In addition, the gross profit rate decreased by approximately 20 basis
points due to lower vendor discounts and allowances recognized during the first
six months of fiscal year 2005 compared to the first six months of fiscal year
2004. The gross margin rate increased by approximately 90 basis points due to a
decrease in the provision recorded for damaged inventory and inventory losses in
comparison to the prior year period.

          The Company has historically offered clearance merchandise for sale,
representing merchandise identified from time to time that will not be part of
its future merchandise presentation. During the second and third quarters of
fiscal year 2004, the Company reviewed its merchandise inventory presentation
and determined that, in addition to the items remaining in the Company's
clearance program, $70.4 million of its merchandise inventory at cost would not
be part of its future merchandise presentation. Price reductions were taken on
these items which have resulted in and will continue to result in lower than
historical margins on such merchandise. Sales of these items totaled
approximately $12.3 million with an approximate merchandise cost of $8.2 million
in the first six months of fiscal year 2005. In addition, the Company has
reduced such discontinued merchandise by approximately $2.4 million due in part
to vendor returns during the first six months of fiscal year 2005. As of July
31, 2005, the Company had approximately $38.4 million, at cost, of such
discontinued merchandise inventory. The impact of these sales accounted for a
margin decline of approximately 150 basis points during the first six months of
fiscal year 2005. The Company continues to review its merchandise inventory
presentation and offers discounts to accelerate sales on merchandise that would
not be a part of its future merchandise assortment. Based on currently
anticipated selling prices, the Company expects to achieve positive, but lower
than historical, merchandise margins on such merchandise. It is the Company's
current expectation to continue to offer for sale, in a portion of its stores,
the remaining amount of this merchandise in future periods, which will
negatively impact margins. The Company in future periods may consider
alternative methods of disposition for this inventory. Such alternatives may
result in additional valuation allowances.

          On November 1, 2005, the Company announced that it plans to close 77
of its retail stores. The Company plans to liquidate inventory through store
closure sales, and such sales will require additional inventory valuation
allowances. It is currently anticipated that such inventory allowances will be
no less than $14.0 million.


                                       28


Expenses

          Selling, general and administrative expenses, excluding professional
fees and other charges, for the first six months of fiscal 2005 increased $1.3
million, or 2.5%, to $55.3 million from $54.0 million for the first six months
of fiscal 2004. Selling, general and administrative expense as a percent of
sales increased to 39.7% versus 37.2% in the first six months of fiscal year
2005. The dollar increase primarily related to higher personnel expense ($1.8
million) partially offset by lower credit expense ($0.4 million). The increase
in personnel expense is primarily attributable to the addition of support office
positions and higher salary and wage rates. The decrease in credit expense is
primarily due to a shift in the mix of private label credit card promotions that
carried a lower discount rate and a decrease in credit card sales partially
offset by an increase in the credit card discount rate due to increases in the
U.S. prime rate in comparison to the prior year period.

          Professional fees and other charges decreased by $2.1 million to a
total of $2.2 million in the first six months of fiscal 2005 from $4.3 million
in the prior year period, primarily attributable to the decrease in legal fees
and charges associated with the consolidated Capital Factors actions and the
related United States Attorney and the SEC investigations.

Impairment of Goodwill

          As of July 31, 2005, the Company evaluated goodwill for impairment
using discounted cash flow and a market multiple approach for impairment and
concluded that the entire amount of the Company's goodwill was impaired. This
analysis was based in part upon the Company's sales performance and financial
results for the second quarter of fiscal year 2005 and management's current
expectation of future financial results. The Company recorded a non-cash
impairment charge of $5,662,000 to write-off the entire goodwill asset in the
first six months of fiscal year 2005.

Loss from Operations

          As a result of the factors discussed above, loss from operations was
$23.2 million in the first six months of fiscal 2005 compared to a loss of $10.0
million in the first six months of fiscal 2004. As a percentage of net sales,
loss from operations was 16.6% in the first six months of fiscal 2005 as
compared to 6.8% in the prior year period.

Interest Expense

          Interest expense increased $1.4 million, or 71.1%, to $3.4 million in
the first six months of fiscal 2005 from $2.0 million in the first six months of
fiscal 2004. The increase in interest expense resulted from higher average
interest rates associated with the amendment to the Credit Agreement in April
2005 and increases in the U.S. prime rate as compared with the year-ago period,
and higher amortization of deferred loan costs associated with the amended
Credit Agreement. These increases were partially offset by lower average
outstanding borrowings. The Company expects increased interest expense
associated with the financing transactions described in Note 13 to the financial
statements.

Income Tax Expense

          In the second quarter of fiscal year 2005, the Company recorded a
valuation allowance of $13.5 million against all of its deferred tax assets. In
recording the valuation allowance, management considered whether it was more
likely than not that some or all of the deferred tax assets would be realized.
This analysis included consideration of expected reversals of existing temporary
differences and projected future taxable income.

          Income tax expense was $2.4 million in the first six months of fiscal
2005 compared to an income tax benefit of $5.1 million in the first six months
of fiscal 2004. In accordance with the guidance in FIN 18, the Company's current
estimate of the income tax expense associated with the cumulative


                                       29



year-to-date fiscal year 2005 loss and valuation allowance recorded against its
deferred tax assets results in an effective income tax rate of 9.1%. Based on
the current facts and circumstances, the provisions of FIN 18 effectively limit
the amount of income tax expense that can be recorded in the interim period. The
effective income tax rate of 27.0% for the three months ended July 31, 2005 is
the result of reducing the cumulative year-to-date effective tax rate from a
benefit of 35.3% used in the first three months to an expense of 9.1% in the
second quarter. To the extent that results in the third and fourth quarter
quarters are significantly more or less than expected, the Company's effective
income tax rate for the third and fourth quarters and for the full year could
vary significantly from that of the first six months of fiscal year 2005. The
Company's annual effective income tax rate was 30.6% for fiscal year 2004.

Liquidity and Capital Resources

          The Company's cash requirements consist principally of funding its
highly seasonal working capital needs, inventory for existing and new stores and
capital expenditures. The Company's primary sources of liquidity have
historically been cash flow from operations and bank borrowings under the
Company's Second Amended and Restated Revolving Credit and Gold Consignment
Agreement dated July 29, 2003 (as amended, the "Credit Agreement"). The Company
had $102.4 million of outstanding borrowings under the revolving loan facility
as of July 31, 2005.

          The Company's inventory levels and working capital requirements have
historically been highest in advance of the Christmas season. The Company has
funded these seasonal working capital needs through borrowings under the
Company's revolver and increases in trade payables and accrued expenses. As of
July 31, 2005, the maximum availability under the Credit Agreement was $117.1
million as determined by the weekly borrowing base formula. The credit facility
covenants also require the Company to attain certain operating results.

          During the second quarter of fiscal year 2005, the Company slowed
payments to certain vendors and received temporary extension of payment terms
with certain other vendors in order to manage its liquidity needs. Subsequent to
July 31, 2005, the Company has received temporary extension of payment terms,
beyond the stated payment terms, with certain of its key merchandise vendors.

          A net loss of $29.0 million and increases in merchandise inventories
($15.5 million), other current assets ($0.3 million) and accounts receivable
($0.2 million) and decreases in accounts payable ($7.0 million) and accrued
payroll ($0.5 million) and accrued liabilities ($0.7 million) were partially
offset by decreases in deferred income taxes ($3.2 million) and current income
tax benefit ($3.7 million) and the receipt of a $2.0 million contract sign-on
bonus related to the renewal of the Company's private label credit card
contract.

          The increase in merchandise inventories was attributable to the
purchase of goods previously held on consignment and increased purchasing
activity related to new merchandise assortments. The increase in accounts
payable was due in part to increased purchasing activity as well as slowing
payments to vendors in order to manage liquidity.

          Cash used in investing activities included the funding of capital
expenditures of $3.2 million, related primarily to the opening of 6 new stores
during the first six months of fiscal year 2005, compared to $3.1 million used
for capital expenditures primarily related to the opening of 6 new stores during
the first six months of 2004.

          The Company generated cash from financing activities in the first six
months of fiscal 2005 by increases in its revolver borrowing ($28.6 million) and
outstanding checks ($3.5 million). The Company paid financing costs ($0.5
million) associated with the amendment to the Credit Agreement.


                                       30



          On October 3, 2005, the Company entered into a Bridge Term Loan Credit
Agreement (the "Bridge Loan Agreement") with PWJ Lending LLC ("PWJ Lending"), an
investment fund managed by Prentice Capital Management, L.P. ("Prentice
Capital"), and Holtzman Opportunity Fund, L.P. ("Holtzman") (together with any
other lenders under such agreement from time to time, the "Lenders"), and PWJ
Lending as administrative agent and collateral agent for the Lenders. Under the
Bridge Loan Agreement, the Lenders provided a term loan (the "Term Loan") to the
Company in the aggregate principal amount of $30,000,000 (the "Commitment
Amount"), which bears interest at a fixed rate of 18% per annum, payable
monthly, and has a stated maturity date as early as December 30, 2005. The
proceeds of the Term Loan were used, among other purposes, to repay a portion of
the revolving credit loans then outstanding under the Senior Credit Agreement,
to fund a segregated account that will promptly be disbursed into a third party
escrow account established for the benefit of certain of the Company's trade
vendors and to pay fees and expenses associated with the transaction. The
Company's obligations under the Bridge Loan Agreement are secured by a lien on
substantially all of the Company's assets which ranks junior in priority to the
liens securing the Company's obligations under the Senior Credit Agreement. The
Bridge Loan Agreement contains a number of affirmative and restrictive covenants
and representations and warranties that generally are consistent with those
contained in the Company's Senior Credit Agreement (as amended by the Fourth
Amendment). The Company may prepay the Term Loan at any time, provided, however,
that if the Term Loan is prepaid with funds from any source other than the
proceeds of the Notes (as defined below), then the Company will be required to
pay to the Lenders an exit fee of 4% of the Commitment Amount. Under the Bridge
Loan Agreement, the Company is required to use the proceeds of a sale of the
Notes to retire the Term Loan. While the Lenders may accelerate the obligations
of the Company under the Bridge Loan Agreement to be immediately due and payable
upon an Event of Default, the rights of the Lenders to enforce the obligations
are subject to an intercreditor agreement with the holders of debt under the
Senior Credit Agreement.

          In connection with the Bridge Loan Agreement, the Company issued
7-year warrants (the "Warrants"), which are immediately exercisable, with an
exercise price of $0.75 per share to the Lenders to purchase 2,792,462 shares of
the Company's common stock (i.e., 19.99% of the number of shares currently
outstanding). The exercise price of the Warrants will be reduced, subject to
certain limited exceptions, if the Company subsequently issues common stock or
the right to acquire common stock at a price of less than $0.75 per share.

          Contemporaneously with the entry into the Bridge Loan Agreement, the
Company, PWJ Funding LLC ("PWJ Funding"), another fund affiliated with Prentice
Capital, and Holtzman entered into a Securities Purchase Agreement (the
"Purchase Agreement," and PWJ Lending, PWJ Funding and Holtzman are collectively
referred to herein as "Prentice").

          Subject to certain terms and conditions set forth in the Purchase
Agreement, the Company has agreed to sell to Prentice $50,000,000 of secured
convertible notes (the "Notes"). The stated maturity of the Notes will be three
years after the date of issuance which maturity generally may be extended by the
Company for up to two years. Prentice will have the option to extend the
maturity date in the event and for so long as an event of default shall have
occurred and be continuing under the Notes or through the date that is ten
business days after the consummation of a change of control of the Company in
the event a change of control is publicly announced prior to the maturity date.
The Notes will be secured by the same second security interest that secures the
Term Loan.

          The Notes will bear interest at a rate of 12% per annum, payable
quarterly. Interest that becomes payable during the initial three year term of
the Notes will be paid in shares of common stock of the Company at the
Conversion Price (initially $0.75 per share). The Conversion Price will be
reduced, subject to certain limited exceptions, if the Company subsequently
issues common stock or the right to acquire common stock at a price of less


                                       31



than $0.75 per share. Interest that becomes payable after the initial three year
term of the Notes will be paid in cash.

          Upon a change of control of the Company (as defined in the Purchase
Agreement), the holder of a Note may require the Company to redeem all or any
portion of the Note for a price equal to (i) the outstanding principal amount of
the Notes, together with any accrued and unpaid interest or late charges thereon
multiplied by (ii) 125% (unless the change of control is not approved by a
majority of the disinterested members of the Company's board of directors, in
which case the 125% will be 100%).

          The issuance of the Notes under the Purchase Agreement is subject to
certain conditions including (i) the approval by the stockholders of the Company
of (A) the issuance of the shares of common stock pursuant to the terms of the
Notes, (B) an amendment to the Company's certificate of incorporation providing
for a 1-for-2 reverse stock split, and (C) the election of persons designated by
Prentice to the Company's board of directors (the "Board Nominees"), (ii) upon
election, such Board Nominees constituting a majority of the members of the
board of directors, and (iii) no occurrence of an event, circumstance or fact
which resulted in, would result in or could reasonably be expected to a result
in a extremely detrimental event on the Company. The Company may terminate the
Purchase Agreement under certain circumstances in order to accept a superior
proposal. The Notes will contain certain covenants, including limitations on
indebtedness, and liens and a prohibition on dividends.

          Under the Purchase Agreement, the Company may not solicit offers,
inquiries or proposals or conduct negotiations with any third parties regarding
a transaction that involved debt or equity fundraising or that would otherwise
be done in lieu of the transaction with Prentice, subject to the Company's board
of directors fulfilling its fiduciary duties to the Company's shareholders and
creditors. The Company may terminate the Purchase Agreement under certain
circumstances in order to accept a superior proposal.

          The shares of common stock issuable (i) upon exercise of the Warrants,
(ii) upon conversion of the Notes, and (iii) as payment of interest under the
Notes, will represent approximately 87% of the issued and outstanding shares of
common stock of the Company, assuming (A) no anti-dilution adjustment to the
Conversion Price or the Exercise Price and (B) no issuance of common stock or
securities convertible, exercisable or exchangeable for common stock prior to
the closing of the transaction, other than pursuant to the Notes and Warrants.

          The proceeds to be received by the Company upon the sale of the Notes
will be used to retire the Term Loan and for general working capital purposes.

          Contemporaneously with the entry into the Bridge Loan Agreement and
the Purchase Agreement, the Company and Prentice entered into a Registration
Rights Agreement pursuant to which the Company has agreed to provide certain
registration rights with respect to the shares of common stock that may be
issued (i) upon exercise of the Warrants, (ii) upon conversion of the Notes, and
(iii) in payment of interest under the Notes.

          Contemporaneously with the entry into the Bridge Loan Agreement and
the Purchase Agreement, the Company entered into a Waiver, Consent and Fourth
Amendment (the "Fourth Amendment") to the Second Amended and Restated Revolving
Credit and Gold Consignment Agreement (the "Senior Credit Agreement"), dated as
of July 29, 2003, by and among the Company, LaSalle Bank National Association
("LaSalle"), as administrative agent and collateral agent for the banks party
thereto ("Banks"), the Banks, Bank of America, N.A., as managing agent, and Back
Bay Capital Funding LLC, as accommodation facility agent.

          Under the Senior Credit Agreement (as amended by the Fourth
Amendment), the Banks provide a revolving line of credit of up to $140,000,000
(the


                                       32



"Revolving Facility") and an accommodation facility of $15,000,000 (the
"Accommodation Facility"), each having a maturity date of October 3, 2008. The
Fourth Amendment removes the financial performance covenants and modifies the
borrowing base calculation and increases the minimum required availability
covenant. The Senior Credit Agreement remains secured by substantially all of
the assets of the Company. The Senior Credit Agreement continues to contain
affirmative and negative covenants and representations and warranties customary
for such financings. Borrowings under the Revolving Facility shall bear interest
at the option of the Company (i) at the LIBOR rate plus 250 basis points, or
(ii) at the lesser of (a) LaSalle Bank, National Association's prime rate and
(b) the federal funds effective rate plus 50 basis points (such lesser rate, the
"Base Rate"). Borrowings under the Accommodation Facility bear interest at the
Base Rate plus 800 basis points. The Company may prepay without penalty and
reborrow under the Revolving Facility. The Company will be required to pay an
early termination fee under certain circumstances if the Revolving Facility is
terminated early or if the Accommodation Facility is prepaid. The Banks may
accelerate the obligations of the Company under the Senior Credit Agreement to
be immediately due and payable upon an Event of Default. The Company intends to
use the proceeds for working capital needs, fees and costs associated with the
Bridge Loan Agreement and the proposed Note conversion and for general corporate
purposes.

          The Company, Prentice Capital and the Banks executed a term sheet (the
"Term Sheet") with certain trade vendors. Vendors holding over 99% of the
Company's aggregate trade debt to inventory suppliers ("Suppliers") have now
executed the Term Sheet. The Term Sheet provides a mechanism for (i) the
Company's satisfaction of its current trade debt ("Trade Debt") to participating
Suppliers, and (ii) the participating Suppliers' prompt delivery of merchandise
to the Company for the upcoming holiday season. Under the provisions of the Term
Sheet, the Company will make payments totaling 50% of the Trade Debt at various
times up to January 16, 2006. A final payment in the amount of 50% of the Trade
Debt, plus accrued interest at 6% from and after January 17, 2006, is required
to be made on or about September 30, 2007. The obligations to pay the final 50%
of the Trade Debt will be secured by a security interest in substantially all of
the Company's assets ranking junior to the interests securing the Senior Credit
Agreement, the Bridge Loan Agreement and the Notes. The Term Sheet is subject to
and conditioned upon the execution of definitive documentation among the
parties.

          The Company was in compliance with the financial covenants of the
amended Credit Agreement as of July 31, 2005. The Company's business is highly
seasonal, and historically, income generated in the fourth fiscal quarter ending
each January 31 represents all or a significant majority of the income generated
during the fiscal year. If an event of default occurs pursuant to the Credit
Agreement, the Company may be required to negotiate relief with its lenders or
to seek new financing. There is no assurance that new financing arrangements
would be available on acceptable terms or at all. If the existing lenders were
to cease funding under the revolving loan facility or require immediate
repayment and if the Company were not able to arrange new financing on
acceptable terms, this would have a material adverse effect on the Company,
which could affect the underlying valuation of its assets and liabilities.

          Subject to the Prentice Transaction being approved by the Company's
Shareholders, the contingencies identified in Note 10 to the financial
statements and the matters described in the Risk Factors section and those
identified in Forward-Looking Statements, management expects that cash flow from
operating activities and funds available under the Company's revolving loan
facilities should be sufficient to support the Company's operations. In the
event that the Prentice Transaction is not approved there can be no assurance
that additional funding, or another liquidity event, will become available to
the Company. In that event, the Company would be required to consider other
alternatives, including a reorganization under Chapter 11 of the U.S. bankruptcy
code or a liquidation of its assets.


                                       33



          The Company is involved in certain putative class action claims and
derivative suits as described in Note 10 to the financial statements. The
Company intends to contest vigorously the putative class actions and the
shareholder derivative suits and exercise all of its available rights and
remedies. Given that these cases are in their early stages and may not be
resolved for some time, it is not possible to evaluate the likelihood of an
unfavorable outcome in any of these matters, or to estimate the amount or range
of potential loss, if any. While there are many potential outcomes, an adverse
outcome in these actions could have a material adverse effect on the Company's
results of operations, financial condition and/or liquidity.

Contractual Obligations

          The following summarizes the Company's contractual obligations at July
31, 2005:



                                       PAYMENTS DUE BY PERIOD
                    ------------------------------------------------------------
                               Less than                               More than
(in thousands)        Total      1 year    1 - 3 years   4 - 5 years    5 years
- --------------      --------   ---------   -----------   -----------   ---------
                                                        
Revolver            $102,426    $102,426     $    --       $    --      $    --
Operating leases     179,923      30,176      82,489        36,678       30,580
                    --------    --------     -------       -------      -------
Total contractual
   obligations      $282,349    $132,602     $82,489       $36,678      $30,580
                    ========    ========     =======       =======      =======


          In the normal course of business, the Company issues purchase orders
to vendors for the purchase of merchandise inventories. The outstanding amount
of these purchase orders is not included in the above table, as the purchase
orders may be cancelled prior to delivery at the option of the Company. In
addition, the Company is party to employment and severance agreements,
previously filed with the SEC, with certain executive officers.

Critical Accounting Policies and Estimates

          The Company's critical accounting policies and estimates, including
the assumptions and judgments underlying them, are disclosed in the notes to the
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Form 10-K filing for the year ended
January 31, 2005. These policies have been consistently applied in all material
respects and address such matters as revenue recognition, inventory valuation,
depreciation methods and asset impairment recognition. While the estimates and
judgments associated with the application of these policies may be affected by
different assumptions or conditions, the Company believes the estimates and
judgments associated with the reported amounts are appropriate in the
circumstances. Management has discussed the development and selection of these
critical accounting estimates with the Audit Committee of our Board of
Directors.

          Merchandise inventories are stated principally at the lower of
weighted average cost or market. Purchase cost is reduced to reflect certain
allowances and discounts received from vendors. Periodic credits or payments
from merchandise vendors in the form of consignment conversions, volume or other
purchase discounts and other vendor considerations are reflected in the carrying
value of the inventory and recognized as a component of cost of sales as the
merchandise is sold. Additionally, to the extent it is not addressed by
established vendor return privileges, and if the amount of cash consideration
received from the vendor exceeds the estimated fair value of the goods returned,
that excess amount is reflected as a reduction in the purchase cost of the
inventory acquired. Allowances for inventory shrink, scrap and other provisions
are recorded based upon analysis and estimates by the Company.

          Certain of the Company's agreements with merchandise vendors provide
credits for co-op advertising, as calculated as a percentage of net merchandise.
The Company adopted Emerging Issues Task Force ("EITF") Issue No. 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor" ("EITF 02-16") in fiscal year 2002,


                                       34



which was effective for all arrangements entered into after December 31, 2002.
In accordance with EITF 02-16, the Company classifies certain merchandise vendor
allowances as a reduction to inventory cost unless evidence exists supporting an
alternative classification. The Company earned $1,075,000 and $978,000 of vendor
allowances for advertising during the first six months of fiscal years 2005 and
2004, respectively. The Company records such allowances as a reduction of
inventory cost and as the inventory is sold, the Company will recognize a lower
cost of sales.

          The Company also obtains merchandise from vendors under various
consignment agreements. The consigned inventory and related contingent
obligations associated with holding and safekeeping such consigned inventory are
not reflected in the Company's financial statements. At the time of sale of
consigned merchandise to customers, the Company records the purchase liability
and the related consignor cost of such merchandise in cost of sales.

NEW ACCOUNTING PRONOUNCEMENTS

ACCOUNTING FOR EXCHANGES OF NONMONETARY ASSETS

The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 153 ("SFAS No. 153"), "Exchanges of
Nonmonetary Assets - An Amendment of Accounting Principles Board Opinion No. 29
("APB No. 29"), "Accounting for Nonmonetary Transactions." SFAS No. 153
eliminated the exception from fair value measurement for nonmonetary exchanges
of similar productive assets in paragraph 21(b) of APB No. 29, and replaces it
with an exception for exchanges that do not have commercial substance. SFAS No.
153 is effective for fiscal periods beginning after June 15, 2005. The Company
does not expect SFAS No. 153 to have a material impact on the Company.

ACCOUNTING FOR STOCK BASED COMPENSATION

The FASB issued SFAS No. 123 (revised 2004), "Shared-Based Payment" ("SFAS No.
123R"). This statement revised SFAS No. 123, "Accounting for Stock-Based
Compensation," and requires companies to expense the value of employee stock
options and similar awards. The effective date of this standard is annual
periods beginning after June 15, 2005. Historically, the Company has elected to
follow the intrinsic value method in accounting for its employee stock options
and employee stock purchase plans. No stock option based compensation costs were
reflected in net income, as no options granted under those plans had an exercise
price less than the market value of the underlying common stock on the date of
grant.

          Upon the adoption of SFAS No. 123R, the Company will be required to
expense stock options over the vesting period in its statement of operations. In
addition, the Company will need to recognize this expense over the remaining
vesting period associated with unvested options outstanding for fiscal years
beginning after June 15, 2005. The Company is currently evaluating which
transition method to use and the effects on its financial statements in
connection with the adoption of SFAS No. 123R.

ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT OBLIGATIONS

In March 2005, the FASB issued FASB Interpretation No. 47 ("FIN 47"),
"Accounting for Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143." FIN 47 clarifies that conditional asset retirement
obligations meet the definition of liabilities and should be recognized when
incurred if their fair values can be reasonably estimated. FIN 47 is effective
no later than the end of fiscal years ending after December 15, 2005. The
Company is in the process of evaluating the expected effects of the adopting of
FIN 47 on its financial statements.

ACCOUNTING CHANGES AND ERROR CORRECTIONS

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154
("SFAS No. 154"), "Accounting Changes and Error Corrections, a replacement of
APB No. 20 and FASB Statement No. 3." SFAS No. 154 requires retrospective
application to prior periods' financial statements of a voluntary change in
accounting principle unless it is impracticable. APB Opinion No. 20 "Accounting
Changes," previously required that most voluntary changes in


                                       35



accounting principle be recognized by including in net income of the period of
the change the cumulative effect of changing to the new accounting principle.
SFAS No. 154 is effective for fiscal years beginning after December 15, 2005.

Transactions with Affiliates and Related Parties

          The Company offers health insurance coverage to the members of its
Board of Directors. The health insurance policy options and related policy cost
available to the Directors are similar to those available to the Company's
employees.

Accounting for Guarantees

          In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission
of FASB Interpretation No. 34." The Company has adopted the guidance of FIN 45
and has reflected the required disclosures in its financial statements
commencing with the financial statements for the year ended January 31, 2004.

          Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences while the officer or director is
serving, or was serving, at its request in such capacity. The maximum potential
amount of future payments the Company could be required to make pursuant to
these indemnification obligations is unlimited; however, the Company has a
directors and officer liability insurance policy that, under certain
circumstances, enables it to recover a portion of any future amounts paid. The
Company has no liabilities recorded for these obligations as of July 31, 2005,
however, reference should be made to Note 10 to the financial statements with
respect to legal contingencies.


                                       36



Risk Factors

          You should carefully consider each of the following risks and all of
the other information contained in this report. Our business, operating results
or financial condition or liquidity could be materially adversely affected by
any of these risks, and, as a result, the trading price of our common stock
could decline. The risks described below are not the only ones we face.
Additional risks not presently known to us or that we currently deem immaterial
may also impair our business operations.

WHITEHALL JEWELLERS SPECIFIC RISKS

          We have recorded substantial net losses and declines in comparable
store sales in recent periods, and there is no assurance that we will not
continue to incur substantial losses and declines in comparable store sales.

          We recorded net losses in fiscal year 2003, fiscal year 2004 and the
first six months of fiscal year 2005. Comparable store sales also have decreased
in fiscal year 2003, fiscal year 2004 and the first six months of fiscal year
2005. We expect to have declines in comparable store sales through at least the
balance of fiscal year 2005. It is likely that we will continue to have net
losses through at least fiscal year 2006. There is no assurance that we will not
continue to incur substantial losses and declines in comparable store sales in
the future.

     IF WE FAIL TO CONSUMMATE THE PRENTICE TRANSACTION, WE MAY BE UNABLE TO
CONTINUE AS A GOING CONCERN.

          We have entered into the Prentice Transaction, the closing of which is
subject to conditions including shareholder approval. We anticipate that a
shareholder meeting for this purpose will occur no later than January 2006. If
approved by our shareholders, the Prentice Transaction is expected to close
promptly thereafter. We believe that the financing provided by the Prentice
Transaction will provide sufficient funding for the next several months. If, for
any reason, the Prentice Transaction is not consummated, the Company's financial
position would be materially and adversely affected, which could result in a
default under the Bridge Loan and the Senior Credit Agreement and may force the
Company to consider the sale of assets or other strategic alternatives,
including a reorganization under Chapter 11 of the US Bankruptcy Code.

     OUR CURRENT LEVELS OF DEBT COULD IMPACT OUR OPERATIONS IN THE FUTURE.

          As of July 31, 2005, we had approximately $102 million of outstanding
debt constituting approximately 60% of our total debt and stockholders' equity.
Our debt levels fluctuate from time to time based on seasonal working capital
needs.

          Our bank credit facility includes negative covenants and financial
covenants, which could restrict or limit our operations. In addition, the degree
to which we are leveraged, as well as the restrictions contained in our bank
credit facility, could impair our ability to obtain additional financing for
working capital or other corporate purposes.

          We are more highly leveraged than many of our competitors, which may
place us at a competitive disadvantage, and our leverage could make us more
vulnerable to changes in general economic conditions or factors affecting the
jewelry business generally. In addition, a substantial portion of our
indebtedness bears interest at fluctuating rates and increases in interest rates
would adversely affect our results of operations or financial condition. Our
costs of borrowings are higher than many of our competitors.

     OUR QUARTERLY OPERATING RESULTS WILL FLUCTUATE DUE TO SEASONALITY AND OTHER
FACTORS, AND VARIATION IN QUARTERLY RESULTS COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE.


                                       37



          Our business is highly seasonal, with a significant portion of our
sales and most of our net income generated during the fourth fiscal quarter
ending January 31. Sales in the fourth quarter of fiscal 2004 accounted for 38%
of annual sales for such fiscal year and income from operations for the fourth
quarter of fiscal 2004 was $5.3 million as compared to a net loss of $15.2
million recorded in the previous three quarters. We have historically
experienced lower net sales and minimal net income in each of our first three
fiscal quarters and we expect this trend to continue for the foreseeable future.
We expect to continue to experience fluctuations in our net sales and net income
due to a variety of factors. A shortfall in results for the fourth quarter of
any fiscal year could have a material adverse effect on our annual results of
operations. Our quarterly results of operations also may fluctuate significantly
as a result of a variety of factors, including increases or decreases in
comparable store sales, the timing of new store openings, net sales contributed
by new stores, timing of certain holidays and special events initiated by us,
changes in our merchandise, inventory availability and our ability to fund
inventory purchases, general economic, industry, weather conditions and
disastrous national events that affect consumer spending and the pricing,
merchandising, marketing, credit and other programs of our competitors.

     OUR BUSINESS IS PARTICULARLY SUSCEPTIBLE TO ADVERSE ECONOMIC CONDITIONS.

          Jewelry purchases are discretionary for consumers and may be
particularly affected by adverse trends in the general economy. The success of
our operations depends to a significant extent upon a number of factors relating
to discretionary consumer spending, including economic conditions (and
perceptions of such conditions) affecting disposable consumer income such as
employment wages and salaries, business conditions, interest rates, availability
and cost of credit and taxation, for the economy as a whole and in regional and
local markets where we operate. In addition, we are dependent upon the continued
popularity of malls as a shopping destination and the ability of malls or
tenants and other attractions to generate customer traffic for our stores. The
recent substantial increases in gasoline prices may affect the popularity of
malls as shopping destinations and our customer traffic, as well as having a
depressing effect on discretionary consumer spending generally. There can be no
assurance that consumer spending will not be adversely affected by general
economic conditions or a decrease in mall traffic, thereby negatively impacting
our results of operations or financial condition.

     IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT ADDITIONAL QUALIFIED
PERSONNEL, OUR BUSINESS COULD BE ADVERSELY AFFECTED.

          We are highly dependent upon the ability and experience of our senior
executives and other key employees. It is likely that there will be changes to
our management team and other personnel as we focus on improving execution and
reducing costs. Our inability to retain highly qualified management personnel or
find suitable replacements could have a material adverse effect on our results
of operations or financial condition. We do not maintain "key executive" life
insurance on any of our executives.

          Moreover, our success depends on our ability to attract and retain
qualified personnel generally. We have experienced high turnover among our
marketing and field personnel, especially store managers, and other personnel in
recent periods, which has had an adverse impact on our results of operations. We
cannot assure you that we will be able to attract and retain qualified personnel
in the future, or that there will not be disruptions to our operations as a
result of personnel changes.

     WE FACE SIGNIFICANT COMPETITION.

          The retail jewelry business is fragmented and subject to increasingly
intense competition. We compete with national and regional jewelry chains and
local independently owned jewelry stores, especially those that operate in


                                       38



malls or off-mall superstores, as well as with department stores, discounters,
direct mail suppliers and televised home shopping networks. A number of our
competitors are substantially larger and have greater financial resources than
us. Some of our competitors, such as Signet Group plc, which owns Kay Jewelers,
Jareds and some regional chains, have substantially increased their number of
stores and marketing expenditures in recent years, which we believe has resulted
in increases in their market share and affected our results of operations. We
believe that the other primary competitive factors affecting our operations are
store location and atmosphere, quality of sales personnel and service, breadth
and depth of merchandise offered, pricing, credit and reputation. We also
believe that we compete for consumers' discretionary spending dollars with
retailers that offer merchandise other than jewelry. In addition, we compete
with jewelry and other retailers for desirable locations and qualified
personnel. The foregoing competitive conditions may adversely affect our results
of operations or financial condition.

          We also face significant new competition from Internet jewelry
retailers. Over the past several years a number of businesses began marketing
fine jewelry via the Internet. Large scale consumer acceptance of Internet fine
jewelry retailing is impacting the jewelry retailing business, resulting in
additional competition for sales and lower margins, and has adversely affected
our results of operations and financial condition. We do not transact Internet
sales of jewelry.

     A DECREASE IN THE AVAILABILITY OF OR AN INCREASE IN THE COST OF CONSUMER
CREDIT COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS.

          The third party credit we offer to our customers is supplied to us
primarily through a "private label" credit card arrangement with G.E.C.C. During
fiscal 2004, private label credit card sales accounted for approximately 41% of
our net sales while total non-private label credit sales, including major credit
cards such as Visa, MasterCard, American Express and others, generally
constituted approximately 46% of our net sales. The loss or any substantial
modification of any of these arrangements could have a material adverse effect
on our results of operations or financial condition. During periods of
increasing consumer credit delinquencies in the retail industry generally,
financial institutions may reexamine their lending practices and procedures.
There can be no assurance that increased delinquencies being experienced by
providers of consumer credit generally would not cause providers of third party
credit offered by us to decrease the availability or increase the cost of such
credit.

     WE DEPEND ON OUR MAJOR SUPPLIERS AND ON THE AVAILABILITY OF MERCHANDISE,
INCLUDING CONSIGNED MERCHANDISE, AND WE WILL NEED THEIR SUPPORT TO MAINTAIN OUR
LIQUIDITY.

          We do not manufacture our own merchandise but instead work closely
with a number of suppliers. During fiscal 2004, our largest supplier accounted
for approximately 12% of our total purchases, and our largest five suppliers
accounted for approximately 38% of such purchases. Our relationships with our
primary suppliers are generally not pursuant to long-term agreements. We depend
on our suppliers to ship merchandise on time and within our quality standards.
Although we believe that there are a number of suppliers of fine jewelry, the
loss of one or more of our major suppliers, particularly at critical times
during the year, could have a material adverse effect on our results of
operations or financial condition.

          In recent periods, we have requested temporary extensions of payment
terms from some of our key suppliers in order to manage liquidity needs and have
also slowed our accounts payable schedules generally. Our liquidity depends on
continued vendor support, and changes in the extensions of credit or other terms
by vendors could have a material adverse effect on us. Our current financial
condition may cause vendors to delay or suspend shipments of our orders for the
holiday season which could materially adversely affect our results.


                                       39



          A substantial portion of the merchandise we sell is carried on a
consignment basis prior to sale or is otherwise financed by vendors, thereby
reducing our direct capital investment in inventory. The weighted average
percentage of our total inventory that was carried on consignment for fiscal
2002, 2003 and 2004 and the first six months of 2005 (based on the inventory
levels at the end of each fiscal quarter) was 28.7%, 27.5%, 29.1% and 28.2%,
respectively. The willingness of vendors to enter into such arrangements may
vary substantially from time to time based on a number of factors, including the
merchandise involved, the financial resources of vendors, interest rates,
availability of financing, fluctuations in gem and gold prices, inflation, our
financial condition and a number of economic or competitive conditions in the
jewelry business or the economy generally or their perception of the
desireability of doing business with us. Any change in these relationships could
have a material adverse effect on our results of operations or financial
condition.

     OUR BUSINESS IS PARTICULARLY SUSCEPTIBLE TO FLUCTUATIONS IN GEM AND GOLD
PRICES.

          Our Company and the jewelry industry in general are affected by
fluctuations in the prices of diamonds and gold and, to a lesser extent, other
precious and semi-precious metals and stones. During fiscal 2004, diamonds,
gold, precious and semi-precious jewelry accounted for approximately 94.3% of
our net merchandise sales. A significant change in prices or in the availability
of diamonds, gold or other precious and semi-precious metals and stones could
have a material adverse effect on our results of operations or financial
condition. In recent periods, we have experienced large increases in diamond
prices which we expect to continue to increase our overall costs, adversely
affecting our results of operations. There appears to be increasing consumer
acceptance of diamond substitutes and, as a result, there may be less consumer
willingness to pay higher diamond prices. The supply and price of diamonds in
the principal world markets are significantly influenced by a single entity, the
Central Selling Organization, a marketing arm of DeBeers Consolidated Mines Ltd.
of South Africa (the "CSO"). The CSO has traditionally controlled the marketing
of substantial majority of the world's supply of diamonds and sells rough
diamonds to worldwide diamond cutters from its London office in quantities and
at prices determined in its sole discretion. The availability of diamonds to the
CSO and our suppliers is to some extent dependent on the political situation in
diamond producing countries, such as South Africa, Botswana, Zaire, republics of
the former Soviet Union and Australia, and on continuation of the prevailing
supply and marketing arrangements for raw diamonds. Until alternate sources
could be developed, any sustained interruption in the supply of diamonds or any
oversupply from the producing countries could adversely affect us and the retail
jewelry industry as a whole. Higher priced jewelry items, such as the higher
price point merchandise that we have emphasized in recent periods, tend to have
a slower rate of turnover, thereby increasing the risks to us associated with
price fluctuations and changes in fashion trends.

     WE ARE FACED WITH SECURITIES LITIGATION, SHAREHOLDER DERIVATIVE LITIGATION
AND OTHER PROCEEDINGS WHICH COULD BE MATERIAL AND WE ARE SUBJECT TO RESTRICTIONS
SET FORTH IN A NON-PROSECUTION AGREEMENT.

          We are defendants in securities litigation, shareholder derivative
litigation and other proceedings. See Note 10 to the financial statements. There
is no assurance that these proceedings will not result in material expense to us
and the handling of these actions requires significant attention from our
management team. In addition, in connection with the Capital Factors litigation,
we entered into a non-prosecution agreement with the United States Attorney's
Office for the Eastern District of New York. The non-prosecution agreement
contains certain conditions, including our continued compliance with applicable
laws. If we were to fail to meet the conditions contained in the non-prosecution
agreement we could face criminal prosecution.


                                       40



     WE MAY HAVE TO TAKE ADDITIONAL ACCOUNTING CHARGES ON OUR FINANCIAL
STATEMENTS.

          We include as assets on our financial statements leasehold
improvements, furniture, fixtures, inventory, and other items that are subject
to impairment charges under generally accepted accounting principles if the net
book values of such items on our financial statements exceed their fair market
values. For the quarter ended July 31, 2005, we recorded a non-cash impairment
charge of $3.1 million relating to long-lived assets, primarily furniture,
fixtures and leasehold improvements at thirty-one of the Company's retail
stores. This impairment charge had the effect of reducing our earnings for the
second fiscal quarter of 2005. There can be no assurance that we will not take
additional impairment charges in the future as a result of additional store
closings, other restructurings, other impairments or the valuation of other
assets.

     THE COSTS ASSOCIATED WITH OUR STORE-CLOSING PROGRAM MAY BE MATERIAL.

          On November 1, 2005, the Company announced that it plans to close 77
of its retail stores. The Company will record an impairment charge of
approximately $5.4 million during the third quarter of fiscal year 2005. The
Company plans to liquidate inventory through store closure sales, and such sales
will require additional inventory allowances. It is currently anticipated that
such inventory allowances will be no less than $14.0 million. The Company
currently expects to close these stores by February 2006. In connection with the
store-closing program, the Company will incur disposal costs, including lease
terminations, personnel costs and other expenses. Such expenses will be recorded
in the period in which the liability is incurred, and may be material to the
financial statements.

     WE NEED TO ALTER THE COMPOSITION OF OUR INVENTORY TO SUCCESSFULLY EXECUTE
OUR BUSINESS STRATEGY.

          A substantial portion of our inventory consists of items that we do
not plan to incorporate into our merchandising strategies on a long-term basis.
In recent periods, we have emphasized higher price point merchandise. We are in
the process of modifying our merchandising strategy, however, and may increase
our emphasis on popularly priced merchandise in future periods. Much of our
inventory may not fit this new strategy. In addition, our inventory contains a
number of styles that we do not plan to reorder going forward. In recent periods
we have sought to reduce the amount of inventory that would no longer be a part
of the Company's future merchandise presentation through price reductions and
special promotional programs. The success of our business strategy will depend
to a substantial extent on our ability to sell such merchandise that would no
longer be a part of the Company's future merchandise presentation effectively as
well as to sell a substantial amount of other inventory that has been
slow-moving historically or does not fit with our ongoing merchandising
strategies.

     WE ARE SUBJECT TO SUBSTANTIAL REGULATION.

          Our operations are affected by numerous federal and state laws that
impose disclosure and other requirements upon the origination, servicing and
enforcement of credit accounts, and limitations on the maximum amount of finance
charges that may be charged by a credit provider. Although credit to our
customers is provided by third parties without recourse to us based upon a
customer's failure to pay, any restrictive change in the regulation of credit,
including the imposition of, or changes in, interest rate ceilings, could
adversely affect the cost or availability of credit to our customers and,
consequently, our results of operations or financial condition.

          Our operations are also affected by federal and state laws relating to
marketing practices in the retail jewelry industry. In marketing to our
customers, we compare most of our prices to "reference prices." Our literature
indicates to customers that our reference price for an item is either the
manufacturer's suggested retail price or our determination of the non-discounted
price at which comparable merchandise of like grade or quality is advertised or
offered for sale by competitive retailers and is not our current selling price
or the price at which we formerly sold such item. We are, from


                                       41



time to time, subject to regulatory investigation relating to our use of
"reference prices" in marketing to our customers. Although we believe that
pricing comparisons are common in the jewelry business, there can be no
assurance that this practice would be upheld.

     WE MAY INCUR COSTS AND DISRUPTIONS IN CONNECTION WITH MOVING TO A NEW
FACILITY.

          The lease at the office building housing our corporate headquarters,
distribution functions and quality assurance operations expires on December 31,
2005. We are currently negotiating a lease extension; however, the landlord has
indicated that it ultimately intends to replace the building with a new
structure. If this occurs, we will need to find a new location for these
operations, which may be at a higher lease rate than the rent we pay currently.
In addition, moving these functions to a new location may result in substantial
disruptions to our operations.

THE ISSUANCE OF COMMON STOCK UNDERLYING THE NOTES AND THE WARRANTS AS
CONTEMPLATED BY THE PRENTICE TRANSACTION WILL HAVE A SEVERE DILUTIVE EFFECT ON
THE INTERESTS OF OUR EXISTING STOCKHOLDERS AND OPTION HOLDERS.

          The issuance of the shares of our common stock underlying the notes
and the warrants contemplated by the Prentice Transaction will have a severe
dilutive effect on the interests of our existing stockholders and option
holders.

          The shares of common stock underlying the warrants represent
approximately 19.99% of our common stock currently outstanding. The shares of
common stock issuable (i) upon exercise of the warrants, (ii) upon conversion of
the notes and (iii) as payment of interest under the notes, in each case as
contemplated by the Prentice Transaction, will represent approximately 87% of
the issued and outstanding shares of our common stock (assuming no anti-dilution
adjustment to the conversion price or the exercise price and no issuance of
common stock or securities convertible, exercisable or exchangeable for common
stock prior to the closing of the Prentice Transaction, other than pursuant to
the notes and warrants).

          The Prentice Transaction will also have a dilutive effect on the
voting rights of existing stockholders. If the notes are converted into shares
of common stock, Prentice will be able to control the vote on almost all matters
submitted to our stockholders. In addition, conflicts of interest may arise as a
consequence of the control relationship between us and Prentice, such as
conflicts with respect to corporate opportunities, contractual relationships or
the strategic direction of the Company.

THE SIGNIFICANT OWNERSHIP INTEREST IN THE COMPANY BY PRENTICE COULD ADVERSELY
AFFECT OUR OTHER STOCKHOLDERS.

          As a result of the Prentice Transaction, Prentice will have the
ability to control substantially all matters submitted to our stockholders for
approval, including the election and removal of directors and any merger,
consolidation, or sale of our assets. Prentice also will have the ability to
exert a controlling influence on our management and affairs. This concentration
of ownership may delay or prevent a change in control; impede a merger,
consolidation, takeover, or other business combination involving us; discourage
a potential acquirer from making a tender offer or otherwise attempting to
obtain control of us; or result in actions that may be opposed by other
stockholders.

          Prentice's ownership of our common stock and ability to direct the
election of our directors could create, or appear to create, potential conflicts
of interest when Prentice is faced with decisions that could have different
implications for Prentice and the Company. In addition, Prentice may from time
to time in the future enter into transactions with us. As a result, it may have
interests that are different from, or in addition to, its


                                       42



interest as a stockholder in our Company. Such transactions may adversely affect
our results of operations or financial condition.

     OUR COMMON STOCK HAS BEEN DELISTED FROM THE NEW YORK STOCK EXCHANGE, WHICH
MAY MAKE IT MORE DIFFICULT FOR TRADING IN OUR COMMON STOCK TO OCCUR.

          On October 28, 2005, our common stock was delisted from the NYSE.
Trading in our common stock is now conducted in the over-the-counter market. As
such, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, our common stock. It is also
possible that trading in our common stock could be subject to requirements under
the Securities Exchange Act of 1934 that require additional disclosures by
broker-dealers in connection with any trades involving a stock defined as a
"penny stock" (generally, any equity security that has a market price of less
than $5.00 per share and that is not listed for trading on a national securities
exchange, subject to certain exceptions). The additional burdens imposed upon
broker-dealers by these requirements could discourage broker-dealers from
facilitating trades in our common stock, which could significantly limit the
market liquidity of the stock and the ability of investors to trade our common
stock.

     THE PRICE OF OUR COMMON STOCK COULD CONTINUE TO BE VOLATILE.

          There has been in recent years and may continue to be significant
volatility in the market price for our common stock, and there can be no
assurance that an active market for our common stock can be sustained. Our stock
price may rise and fall in a manner which is not related to our performance.
Factors such as quarterly fluctuations in our financial results, whether or not
our quarterly results meet or exceed analysts' or investors' expectations, our
comparable store sales results, announcements by us and other jewelry retailers,
the overall economy and the condition of the financial markets and general
events and circumstances beyond our control could have a significant impact on
the future market price of our common stock and the relative volatility of such
market price.

     ANTI-TAKEOVER PROVISIONS IN DELAWARE LAW AND OUR CHARTER AND BY-LAWS COULD
DELAY OR DETER A CHANGE IN CONTROL.

          Certain provisions of our certificate of incorporation and by-laws and
certain sections of the Delaware General Corporation Law, including those which
authorize our Board of Directors to issue shares of preferred stock and to
establish the voting rights, preferences and other terms of preferred stock
without further action by stockholders, may be deemed to have an anti-takeover
effect and may discourage takeover attempts not first approved by our Board of
Directors (including takeovers which some stockholders may deem to be in their
best interests). These provisions could delay or frustrate the removal of
incumbent directors or the assumption of control by an acquiror, even if such
removal or assumption of control would be beneficial to our stockholders. These
provisions also could discourage or make more difficult a merger, tender offer
or proxy contest, even if they would be beneficial, in the short term, to the
interests of our stockholders.

     The specific provisions of our certificate of incorporation which may be
deemed to have an anti-takeover effect include, among others, the following:

     -    a classified Board of Directors serving staggered three-year terms;

     -    the elimination of stockholder voting by written consent;

     -    a provision providing that only the Chairman of the Board of
          Directors, the Chief Executive Officer, the President or the Board of
          Directors may call special meetings of stockholders;

     -    the removal of directors only for cause, and then only by the holders
          of at least a majority of the outstanding shares entitled to vote for
          such removal;

     -    a provision permitting the Board of Directors to take into account
          factors in addition to potential economic benefits to stockholders;
          and

     -    advance notice requirements for stockholder proposals and nominations
          for election to the Board of Directors.

          We are also subject to Section 203 of the Delaware General Corporation
Law which, in general, imposes restrictions upon certain acquirors (including
their affiliates and associates) of 15% or more of our common stock. In
connection with the rights offering, our board of directors took action to
provide that shareholders who exceed the 15% threshold solely as a result of
their acquisition of shares of common stock in the rights offering are not
deemed to be "interested stockholders" for purposes of Section 203. We also have
entered into severance agreements with our senior executives which could
increase the cost of any potential acquisition of us.

          In addition, our Board of Directors has adopted a stockholders rights
plan pursuant to which each share of our common stock has associated with it


                                       43



one right entitling our stockholders, upon the occurrence of a triggering event,
to purchase shares of our preferred stock or shares of the acquiror at a
discount from the prevailing market price. Triggering events generally include
events or transactions that relate to a potential acquisition, merger or
consolidation involving Whitehall Jewellers that has not been approved by our
Board of Directors. In connection with the Prentice Transaction, we have amended
the stockholders rights plan to provide that to the extent that Prentice exceed
the applicable ownership thresholds set forth in the stockholder rights plan,
such occurrence will not be a triggering event under the stockholder rights
plan. The stockholders rights plan may be deemed to have an anti-takeover effect
and may discourage or prevent takeover attempts not first approved by our Board
of Directors (including takeovers which certain stockholders may deem to be in
their best interests). See "Description of Capital Stock - Anti-Takeover Effects
of Delaware Law and Certain Charter and By-law Provisions" and "Description of
Capital Stock - Preferred Stock Purchase Rights."


                                       44



Item 3. - Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk

          The Company's exposure to changes in interest rates relates primarily
to its borrowing activities to fund business operations. The Company principally
uses floating rate borrowings under its revolving credit facility. The Company's
private label credit card provider charges the Company varying discount rates
for its customers' credit program purchases. These discount rates are sensitive
to changes in interest rates. The Company currently does not use derivative
financial instruments to protect itself from fluctuations in interest rates.

Gold Price Risk

          The Company does not hedge gold price changes. Current increases in
gold prices have had and may have a future negative impact on gross margin to
the extent sales prices do not increase commensurately.

Diamond Price Risk

          Recent increases in diamond prices may have a future negative impact
on gross margin to the extent that sales prices for such items do not increase
commensurately.

Item 4. - Controls and Procedures

          The Company's management, with the participation of our Chief
Executive Officer and our Chief Financial Officer, have carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d - 15(e)
promulgated under the Securities Exchange Act of 1934, as amended). Based upon
this evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective as of July 31, 2005. There were no changes in the Company's internal
control over financial reporting that occurred during the Company's fiscal
quarter ended July 31, 2005 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.


                                       45



PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Class Action Lawsuits

          On February 12, 2004, a putative class action complaint captioned
Greater Pennsylvania Carpenters Pension Fund v. Whitehall Jewellers, Inc., Case
No. 04 C 1107, was filed in the U.S. District Court for the Northern District of
Illinois against the Company and certain of the Company's current and former
officers. The complaint makes reference to the litigation filed by Capital
Factors, Inc. ("Capital Factors") and settled as disclosed in the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2004 and
to the Company's November 21, 2003 announcement that it had discovered
violations of Company policy by the Company's Executive Vice President,
Merchandising, with respect to Company documentation regarding the age of
certain store inventory. The complaint further makes reference to the Company's
December 22, 2003 announcement that it would restate results for certain prior
periods. The complaint purports to allege that the Company and its officers made
false and misleading statements and falsely accounted for revenue and inventory
during the putative class period of November 19, 2001 to December 10, 2003. The
complaint purports to allege violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 ("1934 Act") and Rule 10b-5 promulgated
thereunder.

          On February 17, 2004, a putative class action complaint captioned
Michael Radigan v. Whitehall Jewellers, Inc., Case No. 04 C 1196, was filed in
the U.S. District Court for the Northern District of Illinois against the
Company and certain of the Company's current and former officers. The factual
allegations and claims of this complaint are similar to those made in the
Greater Pennsylvania Carpenters Pension Fund complaint discussed above.

          On February 19, 2004, a putative class action complaint captioned
Milton Pfeiffer, v. Whitehall Jewellers, Inc., Case No. 04 C 1285, was filed in
the U.S. District Court for the Northern District of Illinois against the
Company and certain of the Company's current and former officers. The factual
allegations and claims of this complaint are similar to those made in the
Greater Pennsylvania Carpenters Pension Fund complaint discussed above.

          On April 6, 2004, the District Court in the Greater Pennsylvania
Carpenters case, No. 04 C 1107 consolidated the Pfeiffer and Radigan complaints
with the Greater Pennsylvania Carpenters action, and dismissed the Radigan and
Pfeiffer actions as separate actions. On April 14, 2004, the court designated
the Greater Pennsylvania Carpenters Pension Fund as the lead plaintiff in the
action and designated Greater Pennsylvania's counsel as lead counsel.

          On June 10, 2004, a putative class action complaint captioned Joshua
Kaplan v. Whitehall Jewellers, Inc., Case No. 04 C 3971, was filed in the U.S.
District Court for the Northern District of Illinois against the Company and
certain of the Company's current and former officers. The factual allegations
and claims of this complaint are similar to those made in the Greater
Pennsylvania Carpenters Pension Fund complaint discussed above.

          On June 14, 2004, lead plaintiff Greater Pennsylvania Carpenters
Pension Fund in Case No. 04C 1107 filed a consolidated amended complaint. On
July 14, 2004, the District Court in the Greater Pennsylvania Carpenters action
consolidated the Kaplan complaint with the Greater Pennsylvania Carpenters
action, and dismissed the Kaplan action as a separate action. On August 2, 2004,
the Company filed a motion to dismiss the consolidated amended complaint. On
January 7, 2005, the motion to dismiss was granted in part and denied in part,
with plaintiffs granted leave to file an amended complaint by February 10, 2005.
On February 10, 2005, the lead plaintiff filed a first amended consolidated
complaint. On March 2, 2005, the Company filed a motion to dismiss the amended
complaint. On June 30, 2005, the Court denied


                                       46



Defendants' motions to dismiss. On July 28, 2005, Defendants filed their Answers
to the First Amended Consolidated Complaint. Written discovery has commenced and
document production is ongoing. On September 23, 2005, lead plaintiff filed its
motion for class certification. Briefing on this motion is not yet completed.
The parties have scheduled a mediation for November 8, 2005 in an attempt to
resolve the 10(b)-5 claims and the below described state and federal derivative
claims.

State Derivative Complaints

          On June 17, 2004, a shareholder derivative action complaint captioned
Richard Cusack v. Hugh Patinkin, Case No. 04 CH 09705, was filed in the Circuit
Court of Cook County, Illinois, for the alleged benefit of the Company against
certain of the Company's officers and directors. The complaint asserts claims
for breach of fiduciary duty, abuse of control, gross mismanagement, waste of
corporate assets, unjust enrichment, breach of fiduciary duties for insider
selling and misappropriation of information, and contribution and
indemnification. The factual allegations of the complaint are similar to those
made in the Greater Pennsylvania Carpenters Pension Fund complaint discussed
above.

          On April 19, 2005, a shareholder derivative action complaint captioned
Marilyn Perles v. Executor of the Estate of Hugh M. Patinkin, Case No. 05 CH
06926, was filed in the Circuit Court of Cook County, Illinois, for the alleged
benefit of the Company against, inter alia, certain of the Company's officers
and directors. The complaint asserts claims for breach of fiduciary duty, abuse
of control, gross mismanagement, waste of corporate assets, unjust enrichment,
breach of fiduciary duties for insider selling and misappropriation of
information, and contribution and indemnification. The factual allegations of
the complaint are similar to those made in the Cusack complaint discussed above.
The Perles complaint also purports to assert claims on behalf of the Company
against PricewaterhouseCoopers LLP, the Company's outside auditor.

          On June 13, 2005, a shareholder derivative action complaint captioned
Carey Lynch v. Berkowitz, Case No. 05CH09913, was filed in the Circuit Court of
Cook County, Illinois, for the alleged benefit of the Company against certain of
the Company's officers and directors. The complaint asserts, inter alia, a claim
for breach of fiduciary duty. The factual allegations of the complaint are
similar to those made in the Cusack and Perles complaints discussed above.

          On July 18, 2005, the Circuit Court of Cook County consolidated the
Cusack, Perles and, Lynch actions. On August 26, 2005, plaintiffs filed a
consolidated amended derivative complaint against certain of the Company's
current and former officers and directors and PricewaterhouseCoopers LLP, the
Company's outside auditor. On October 3, 2005, defendants, other than
PricewaterhouseCoopers LLP, filed their motion to dismiss the consolidated
amended derivative complaint based, inter alia, on the failure of plaintiffs to
make a pre-suit demand upon the Company's Board of Directors and failure to
state a claim.

Federal Derivative Complaints

          On February 22, 2005, a verified derivative complaint captioned Myra
Cureton v. Richard K. Berkowitz, Case No. 05 C 1050, was filed in the United
States District Court, Northern District of Illinois, Eastern Division, for the
alleged benefit of the Company against certain of the Company's officers and
directors. The complaint asserts a claim for breach of fiduciary duty. The
factual allegations of the complaint are similar to those made in the Cusack and
Greater Pennsylvania Carpenters Pension Fund complaints discussed above.


                                       47



          On April 13, 2005, a verified derivative complaint captioned Tai Vu v.
Richard Berkowitz, Case No. 05 C 2197, was filed in the United States District
Court, Northern District of Illinois, Eastern Division, for the alleged benefit
of the Company against certain of the Company's officers and directors. The
complaint asserts a claim for breach of fiduciary duty. The factual allegations
of the complaint are similar to those made in the Cusack and Greater
Pennsylvania Carpenters Pension Fund complaints discussed above. On May 11,
2005, plaintiffs in the Cureton and Vu actions filed an unopposed motion to
consolidate those two actions, and these cases were consolidated on May 25,
2005. On June 20, 2005, plaintiffs filed a consolidated amended derivative
complaint asserting claims for breach of fiduciary duty of good faith, breach of
duty of loyalty, unjust enrichment, a derivative Rule 10b-5 claim, and a claim
against Browne for reimbursement of compensation under Section 304 of the
Sarbanes-Oxley Act. On July 15, 2005, defendants moved to stay the consolidated
action under the Colorado River doctrine pending the outcome of the state
derivative actions. The motion is fully briefed and awaiting decision from the
court.

          The Company intends to contest vigorously these putative class actions
and the shareholder derivative suits and exercise all of its available rights
and remedies. Given that these cases are in their early stages and may not be
resolved for some time, it is not possible to evaluate the likelihood of an
unfavorable outcome in any of these matters, or to estimate the amount or range
of potential loss, if any. While there are many potential outcomes, an adverse
outcome in any of these actions could have a material adverse effect on the
Company's results of operations, financial condition and/or liquidity.

Other

          As previously disclosed, in September 2003 the Securities and Exchange
Commission (the "SEC") initiated a formal inquiry of the Company with respect to
matters that were the subject of the consolidated Capital Factors actions. The
Company has fully cooperated with the SEC in connection with this formal
investigation.

          By letter from counsel dated October 26, 2004, A.L.A. Casting Company,
Inc. ("ALA"), a supplier and creditor of Cosmopolitan Gem Corporation
("Cosmopolitan"), informed the Company that it had been defrauded by
Cosmopolitan and was owed $506,081.55 for goods shipped to Cosmopolitan for
which payment was never received. ALA claimed that the Company is jointly and
severally liable for the full amount of $506,081.55 owed by Cosmopolitan because
the Company aided and abetted Cosmopolitan's fraud and participated in, induced
or aided and abetted breaches of fiduciary duty owed to ALA by Cosmopolitan. ALA
has indicated its intention to pursue its claim, but the Company has not
received notice that litigation has been filed. The Company intends to
vigorously contest this claim and exercise all of its available rights and
remedies.

          On September 27, 2005, the Company filed an arbitration proceeding, as
required under the Beryl Raff employment agreement, seeking damages and to
enforce the non-competition provision. See note 13 to the financial statements
regarding the employment matters involving Ms. Raff. Ms. Raff's response has not
yet been filed. In addition, on October 21, 2005, the Company was served with a
declaratory judgment action, filed by J.C. Penney (Ms. Raff's employer), in the
380th Judicial District in Collin County, Texas seeking a declaration of rights,
that among other things, J.C. Penney has not violated any of the rights of the
Company with respect to Ms. Raff's employment. The Company's answer is due on or
about November 14, 2005.

          The Company is also involved from time to time in certain other legal
actions and regulatory investigations arising in the ordinary course of
business. Although there can be no certainty, it is the opinion of management
that none of these other actions or investigations will have a material adverse
effect on the Company's results of operations or financial condition.


                                       48



Item 4. Submission of Matters to a Vote of Security Holders

          (a)  The Company held its annual meeting of stockholders on July 12,
               2005.

          (b)  No answer required.

          (c)  Proposal 1 involved the election of two Class III Directors of
               the Company's to serve until the 2008 annual meeting of
               stockholders. The director and the voting results were as
               follows:



                      NOMINEE             FOR      AUTHORITY WITHHELD
               --------------------   ----------   ------------------
                                             
               Richard K. Berkowitz   12,414,180         169,631
               Norman J. Patinkin     12,403,101         180,710


               Proposal 2 involved the ratification of the selection of
               PricewaterhouseCoopers LLP as the Company's independent
               registered public accounting firm for the fiscal year ending
               January 31, 2006:



                   FOR      AGAINST   ABSTAIN
               ----------   -------   -------
                                
               12,327,425   200,727    55,660


          (d)  Not applicable.


                                       49



Item 6. - Exhibits



Exhibit Number   Description
- --------------   -----------
              
     31.1        Certification of the Chief Executive Officer pursuant to Rule
                 13a-14(a) of the Securities Exchange Act of 1934

     31.2        Certification of the Chief Financial Officer pursuant to Rule
                 13a-14(a) of the Securities Exchange Act of 1934

     32.1        Certification of Chief Executive Officer pursuant to 18 United
                 States Code Section 1350, as adopted pursuant to Section 906 of
                 the Sarbanes-Oxley Act of 2002

     32.2        Certification of Chief Financial Officer pursuant to 18 United
                 States Code Section 1350, as adopted pursuant to Section 906 of
                 the Sarbanes-Oxley Act of 2002



                                       50



                                   SIGNATURES

Pursuant to the requirements 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.

                                       WHITEHALL JEWELLERS, INC.
                                       (Registrant)


Date: November 1, 2005                 By: /s/ John R. Desjardins
                                           -------------------------------------
                                           John R. Desjardins
                                           Executive Vice President -
                                           Chief Financial Officer and Treasurer
                                           (duly authorized officer and
                                           principal financial officer)


                                       51