SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549

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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED AUGUST 31, 2000
COMMISSION FILE NUMBER 0-15247

REEDS JEWELERS, INC.
(Exact name of registrant as specified in its charter)

NORTH CAROLINA 56-1441702
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

2525 SOUTH SEVENTEENTH STREET
WILMINGTON, NORTH CAROLINA 28401
(Address of principal executive offices) (Zip code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(910) 350-3100

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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.

The number of outstanding shares of Common Stock, par value $0.10 per
share, as of October 9, 2000 was 8,476,372.

Part I

ITEM 1. FINANCIAL STATEMENTS

The consolidated financial statements included herein have been prepared by
Reeds Jewelers, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations; however, the Company believes
that the disclosures are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's latest annual report on Form 10-K for the fiscal year ended
February 29, 2000.

2
3

REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

FEBRUARY 29 AUGUST 31 AUGUST 31
2000 2000 1999
------------ ------------ ------------
ASSETS (UNAUDITED) (UNAUDITED)

Current assets:
Cash and cash equivalents .......................... $ 895,000 $ 768,000 $ 898,000
Accounts receivable:
Customers, less allowance for doubtful accounts
of $4,060,000, $3,800,000 and $3,638,000 ...... 48,897,000 45,879,000 43,919,000
Other ......................................... 758,000 1,759,000 629,000
Merchandise inventories ............................ 46,253,000 55,908,000 46,181,000
Deferred income taxes, net of valuation allowance of
$151,000, 141,000 and $139,000 .................. 2,249,000 1,971,000 2,045,000
Other............................................... 486,000 637,000 588,000
------------ ------------ ------------
Total current assets ........................ 99,538,000 106,922,000 94,260,000

Property, furniture and equipment:
Land and building .................................. 83,000 83,000 83,000
Furniture and equipment ............................ 22,691,000 26,170,000 21,353,000
Leasehold improvements ............................. 11,575,000 11,758,000 11,309,000
------------ ------------ ------------
34,349,000 38,011,000 32,745,000
Less accumulated depreciation and amortization ..... 19,305,000 20,337,000 19,151,000
------------ ------------ ------------
Net property, furniture and equipment ....... 15,044,000 17,674,000 13,594,000

Other assets:
Goodwill, net of accumulated amortization of
$2,547,000, $2,770,000 and $2,324,000 ............ 5,849,000 5,626,000 6,072,000
Deferred income taxes, net of valuation allowance of
$12,000, $13,000 and $11,000 ..................... 173,000 183,000 161,000
Restricted investments (Note C) .................... -- 2,539,000 --
Miscellaneous ...................................... 733,000 781,000 723,000
------------ ------------ ------------
6,755,000 9,129,000 6,956,000
------------ ------------ ------------
TOTAL ASSETS ........................................ $121,337,000 $133,725,000 $114,810,000
============ ============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 12,855,000 $ 19,357,000 $ 8,020,000
Accrued compensation ............................... 3,569,000 1,937,000 1,817,000
Accrued expenses ................................... 2,712,000 2,654,000 2,002,000
Deferred revenue (Note D) .......................... 314,000 81,000 607,000
Income taxes ....................................... 2,233,000 -- 113,000
------------ ------------ ------------
Total current liabilities .................... 21,683,000 24,029,000 12,559,000

Revolving credit note ............................... 52,359,000 64,570,000 59,342,000
Subordinated notes payable to shareholders .......... 845,000 845,000 845,000
Deferred income taxes ............................... 1,267,000 1,000,000 1,207,000
Deferred revenue (Note D) ........................... -- -- 81,000
Other long-term liabilities ......................... 213,000 213,000 135,000
------------ ------------ ------------
Total liabilities ............................ 76,367,000 90,657,000 74,169,000

Shareholders' equity:
Common stock, par value $0.10 per share;
25,000,000 shares authorized; 8,476,372 shares
issued and outstanding in 2000 and 1999 .......... 847,000 847,000 847,000
Additional paid-in capital .......................... 10,560,000 10,560,000 10,560,000
Retained earnings ................................... 33,563,000 31,661,000 29,234,000
------------ ------------ ------------
Total shareholders' equity ................... 44,970,000 43,068,000 40,641,000
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......... $121,337,000 $133,725,000 $114,810,000
============ ============ ============

3
4

REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(UNAUDITED)

THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31 AUGUST 31
2000 1999 2000 1999
------------ ----------- ------------ -----------

Net sales ............................. $ 24,309,000 $22,731,000 $ 48,448,000 $46,150,000
Cost of sales ......................... 12,225,000 11,055,000 23,951,000 22,565,000
------------ ----------- ------------ -----------
Gross profit ................ 12,084,000 11,676,000 24,497,000 23,585,000
Selling, general and administrative
expenses ............................ 11,563,000 9,559,000 22,873,000 19,325,000
Depreciation and amortization ......... 1,015,000 897,000 1,975,000 1,749,000
------------ ----------- ------------ -----------
Operating (loss) earnings ... (494,000) 1,220,000 (351,000) 2,511,000
Interest expense ...................... 1,349,000 1,008,000 2,487,000 1,805,000
------------ ----------- ------------ -----------
(Loss) income before income taxes ..... (1,843,000) 212,000 (2,838,000) 706,000
Income tax (benefit) expense .......... (608,000) 70,000 (936,000) 233,000
------------ ----------- ------------ -----------
Net (loss) income ..................... $ (1,235,000) $ 142,000 $ (1,902,000) $ 473,000
============ =========== ============ ===========

Basic and diluted net (loss) income per
common share ......................... $ (0.15) $ 0.02 $ (0.22) $ 0.06
============ =========== ============ ===========

Weighted average shares outstanding -
diluted ............................. 8,476,372 8,476,372 8,476,372 8,476,372
============ =========== ============ ===========

4
5

REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

SIX MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
2000 1999
------------ ------------

OPERATING ACTIVITIES
Net (loss) income ......................................... $ (1,902,000) $ 473,000
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Depreciation ..................................... 1,714,000 1,497,000
Amortization ..................................... 261,000 252,000
Loss on sale of property, furniture and equipment 130,000 --
Changes in operating assets and liabilities:
Accounts receivable .............................. 2,017,000 1,960,000
Merchandise inventories .......................... (9,655,000) (5,383,000)
Other current assets and other assets ............ (237,000) (257,000)
Accounts payable ................................. 6,502,000 (7,618,000)
Accrued compensation and expenses ................ (1,690,000) (2,471,000)
Deferred revenue ................................. (233,000) (534,000)
Income taxes ..................................... (2,232,000) (1,766,000)
------------ ------------
Net cash used in operating activities ..................... (5,325,000) (13,847,000)

INVESTING ACTIVITIES
Purchases of property, furniture and equipment ............ (4,474,000) (2,329,000)
Purchase of restricted investments ........................ (2,539,000) --
------------ ------------
Net cash used in investing activities ..................... (7,013,000) (2,329,000)

FINANCING ACTIVITIES
Net proceeds from revolving credit note ................... 12,211,000 15,994,000
------------ ------------
Net cash provided by financing activities ................. 12,211,000 15,994,000
------------ ------------

Net decrease in cash and cash equivalents ................. (127,000) (182,000)
Cash and cash equivalents at beginning of period .......... 895,000 1,080,000
------------ ------------
Cash and cash equivalents at end of period ................ $ 768,000 $ 898,000
============ ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .............................................. $ 2,348,000 $ 1,683,000
============ ============
Income taxes .......................................... $ 2,308,000 $ 1,981,000
============ ============

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6

REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. MANAGEMENT'S OPINION

These consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's Form 10-K for the fiscal year ended February 29, 2000.

Management of Reeds Jewelers, Inc. believes that the consolidated financial
statements contained herein contain all adjustments necessary to present fairly
the financial position, consolidated results of operations, and cash flows for
the interim period. Management also believes that all adjustments so made are of
a normal and recurring nature.

B. RECLASSIFICATIONS

Certain reclassifications were made to the 1999 financial statements to conform
to the classifications used in 2000. The reclassifications had no effect on net
income or shareholders' equity as previously reported.

C. RESTRICTED INVESTMENTS

08/31/00 08/31/99
---------- --------
Cash ........................... $ 545,000 $ --
Held-to-maturity investments ... 1,934,000 --
Equity investment .............. 60,000 --
---------- --------
Total Restricted Investments $2,539,000 $ --
========== ========

Restricted Investments in the accompanying balance sheet represent cash, bonds
and stock being held by the Company's subsidiary, First Retail Bank N.A., to
comply with the Federal Banking Regulations.

The Held-to-maturity investments consist of Federal Home Loan Bank bonds that
mature in June 2001. These bonds are stated at cost, as it is the intent of the
Company to hold these securities until maturity.

The Company's equity investment, carried at cost, consists of 1,200 shares of
Federal Reserve Bank stock with a $50 par value at August 31, 2000.

D. DEFERRED REVENUE

For the fiscal years ended prior to February 28, 1999, in accordance with FASB
Technical Bulletin 90-1, "Accounting for Separately Priced Extended Warranty and
Product Maintenance Contracts," revenue from these contracts was deferred and
recognized in income on a straight-line basis over the contract period. This
deferred revenue has been separated into its current and long-term portions on
the balance sheet. Commission costs that were directly related to the
acquisition of these contracts were deferred and charged to expense in
proportion to the revenue recognized. All other costs, such as costs of services
performed under the contracts, general and administrative expenses, and
advertising expenses, were charged to expense as incurred. Previously deferred
extended service contract revenue recognized for the quarters ended August 31,
2000 and 1999 of $93,000 and $228,000, respectively, has been reflected as a
reduction of selling, general, and administrative expenses.

6
7

During the first quarter of the fiscal year ended February 28, 1999, the Company
stopped selling its own extended service contracts and began selling such
contracts on behalf of unrelated third parties only. These contracts provided
for warranty periods of 24 to 36 months. As a result of this change, the Company
will continue to recognize existing deferred revenues from previously sold
contracts through January 31, 2001 and now recognizes commission revenue for the
unrelated third-party extended warranty plans at the time of sale.

E. OPERATING SEGMENT INFORMATION

In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued effective for fiscal years ending after
December 15, 1998. The Company now reports two segments, retail operations and
credit operations. Separate financial information is produced internally and is
regularly reviewed by the chief operating decision-maker ("CODM"). The retail
operations segment consists of all store locations and corporate headquarters.
The stores have all been combined into one segment because they have similar
basic characteristics, such as the nature of products, and the class of
customers for their products. Corporate headquarters is included in this same
segment due to the fact that its revenues earned are incidental to the Company's
activities and it serves as a support system to the stores. The credit
operations segment is primarily engaged in providing and maintaining financing
for the Company's customers. This operation is aggregated since the CODM
evaluates it separately. It also meets one of the three quantitative thresholds,
the asset test, since it represents 10.0% or more of the combined assets of all
operating segments.

The following table summarizes the net sales, revenues, operating earnings,
interest expense, assets, depreciation, and capital expenditures for each
reportable segment for the quarters and six-months ended August 31, 2000 and
1999. In the financial statements, other revenues are reflected as a reduction
of selling, general, and administrative expenses and inter-segment revenue
eliminates in consolidation.

RETAIL CREDIT
OPERATIONS OPERATIONS TOTAL
----------- ----------- -------------

For the quarter ended August 31, 2000

NET SALES ....................... $ 24,309,000 $ -- $ 24,309,000
OTHER REVENUES .................. 625,000 3,173,000 3,798,000
INTER-SEGMENT REVENUE ........... -- 234,000 234,000
OPERATING (LOSS) EARNINGS ....... (1,670,000) 1,176,000 (494,000)
INTEREST EXPENSE ................ 530,000 819,000 1,349,000
IDENTIFIABLE ASSETS ............. 84,928,000 48,797,000 133,725,000
DEPRECIATION AND AMORTIZATION ... 967,000 48,000 1,015,000
CAPITAL EXPENDITURES ............ 2,383,000 33,000 2,416,000
----------- ----------- -------------
For the quarter ended August 31, 1999

Net Sales ....................... $ 22,731,000 $ -- $ 22,731,000
Other revenues .................. 710,000 2,905,000 3,615,000
Inter-segment revenue ........... -- 226,000 226,000
Operating (loss) earnings ....... (179,000) 1,399,000 1,220,000
Interest expense ................ 339,000 669,000 1,008,000
Identifiable assets ............. 70,343,000 44,467,000 114,810,000
Depreciation and amortization ... 843,000 54,000 897,000
Capital expenditures ............ 1,330,000 33,000 1,363,000

7
8

FOR THE SIX MONTHS ENDED AUGUST 31, 2000

NET SALES .......................... $ 48,448,000 $ -- $ 48,448,000
OTHER REVENUES ..................... 1,275,000 6,151,000 7,426,000
INTER-SEGMENT REVENUE .............. -- 453,000 453,000
OPERATING (LOSS) EARNINGS .......... (2,979,000) 2,628,000 (351,000)
INTEREST EXPENSE ................... 863,000 1,624,000 2,487,000
IDENTIFIABLE ASSETS ................ 84,928,000 48,797,000 133,725,000
DEPRECIATION AND AMORTIZATION ...... 1,914,000 61,000 1,975,000
CAPITAL EXPENDITURES ............... 4,409,000 65,000 4,474,000
------------ ----------- -------------
For the six months ended August 31, 1999

Net Sales .......................... $ 46,150,000 $ -- $ 46,150,000
Other revenues ..................... 1,505,000 5,794,000 7,299,000
Inter-segment revenue .............. -- 450,000 450,000
Operating (loss) earnings .......... (604,000) 3,115,000 2,511,000
Interest expense ................... 445,000 1,360,000 1,805,000
Identifiable assets ................ 70,343,000 44,467,000 114,810,000
Depreciation and amortization ...... 1,650,000 99,000 1,749,000
Capital expenditures ............... 2,167,000 162,000 2,329,000

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

Net Sales

At August 31, 2000, the Company operated 115 stores in 19 states compared to 107
stores in 15 states at August 31, 1999. Total net sales for the second quarter
ended August 31, 2000 were up 6.9% to $24,309,000 from $22,731,000 at the end of
the second quarter last year. Same store sales, or stores open in comparable
periods, rose 2.2% in the second quarter this year. For the six months ended
August 31, 2000, net sales increased 5.0% to $48,448,000 from $46,150,000 for
the same period a year earlier. Comparable store sales rose 0.7% during the
six-month period. During the second quarter of fiscal 2001, the Company opened
four stores, closed one store, and has commitments to open five more stores
during the current year.

The sales of a retail jeweler depend upon having the right mixture of
merchandise available in its stores. The Company has identified those inventory
items that have the most favorable turnover and are the most profitable as core
inventory items. The Company averaged 96.1% in-stock on its core items during
second quarter fiscal 2001, compared to 97.4% last year; it averaged 94.4%
in-stock on its entire basic merchandise mix compared to 85.0% during the same
quarter a year ago. For the quarter ended August 31, 2000, core merchandise
accounted for 56.7% of net sales, 85.8% of the items offered in the Company's
basic merchandise mix, and 41.3% of its inventory investment. During the same
quarter last year, core merchandise accounted for 51.9% of net sales, 54.7% of
the items offered in the Company's basic merchandise mix, and 37.7% of its
inventory investment. The average price of each piece of merchandise sold in
second quarter 2001 was $249, up from $247 a year earlier.

Credit sales for the second quarter of fiscal 2001 accounted for 50.4% of net
sales compared to 51.5% a year earlier. Although the total transactions during
the quarter were down 0.7% compared to last year same quarter, the average
transaction size increased 13.6% for credit sales and 8.3% for cash sales.
Management believes that its proprietary financing program is a strategic
competitive strength and seeks to optimize its risk-reward ratio by financing up
to 55.0% of net sales.

8
9

Gross Profit

Gross margins were 49.7% of net sales for second quarter of fiscal 2001, down
from 51.4% for the same period a year earlier. Year-to-date, gross margins were
50.6%, down from 51.1% in the first half of the prior year. The decline is
attributable to increased promotional activity. The Company has also been
impacted by an increase in the volume of higher priced special order
transactions. Management plans to incorporate this merchandise into its basic
inventory mix in order to mitigate the effect on its margins. The Company plans
to continue its aggressive advertising and promotion into the holiday season in
an effort to increase the traffic in its stores.

Selling, General, and Administrative Expenses (SG&A)

Selling, general, and administrative expenses as a percentage of net sales were
47.6% and 42.1% for the quarters ended August 31, 2000 and 1999, respectively.
Significant expense categories are reflected on a normalized basis for the
second quarters of the last two fiscal years in the following table:

Quarter Ended Six Months Ended
08/31/00 08/31/99 08/31/00 08/31/99
-------- -------- -------- --------

Compensation - salaries & hourly wages ........ 21.4 % 21.1 % 20.9 % 20.3 %
Compensation - bonuses & commissions .......... 3.9 % 3.9 % 3.8 % 4.2 %
Compensation - benefits & other personnel costs 5.9 % 4.8 % 5.8 % 4.3 %
Rents for space ............................... 11.6 % 10.8 % 11.5 % 10.7 %
Advertising ................................... 2.5 % 1.8 % 3.9 % 3.9 %
Bad debt ...................................... 5.6 % 4.8 % 5.2 % 4.2 %
Finance charges ............................... (9.1)% (9.5)% (9.2)% (9.3)%

Compensation from salaries and hourly wages increased at a faster rate than net
sales. The increase was due to a yearly raise of approximately 5%. The increase
in compensation from benefits and other personnel costs results from increased
expenses from the Company's self-insured health insurance plan. The Company is
also experiencing an increase in the negotiated base rents for new and remodeled
stores.

Bad debt increased to $1,355,000 from $1,091,000 and rose to 5.6% of net sales
for the quarter compared to 4.8% a year earlier. Gross write-offs for bad debts
were $1,645,000 versus $1,334,000 in the same quarter last year. Net write-offs,
after recovery of amounts previously written off, were $1,400,000 and $1,112,000
for the second quarter of the current and prior fiscal year, respectively. At
the end of the second quarter of fiscal 2001 and 2000 the allowance for doubtful
accounts was approximately 7.65% of customer receivables (prior to the allowance
for doubtful accounts). The average delinquent account (accounts more than 90
days past due) represented 10.5% and 9.4% of the Company's accounts receivable
portfolio for the second quarter of fiscal 2001 and 2000, respectively. The
Company's policies and procedures regarding credit authorization, collection,
and write-offs have not changed significantly during each of the two periods.
However, during the first quarter ended May 31, 1999, the Company changed its
portfolio mix to include young adults in a test program. The approval rate on
applications was 58.3% for the second quarter last year and 47.8% for the second
quarter of the current year. Management made the decision in the third quarter
of fiscal 2000 to end the test program. Although bad debt has increased quarter
to quarter, management believes that over the next year the portfolio will
return to historical levels of mix and approval rate.

The Company opened First Retail Bank N.A., a nationally chartered credit card
bank, during the second quarter. The Bank, whose offices are located in Flowery
Branch, GA, is able to export the interest rate and terms from the state of
Georgia to all states in which the Company has customers. During the second
quarter, the Company expensed $186,000 on the start up of First Retail Bank,
N.A. As a result of opening the Bank, the Company expects to see an annualized
average increase of 200 basis points in finance charge yield, late charge
income, and other revenues.

9
10

In the first quarter of fiscal 1999 the Company began selling extended service
agreements on behalf of an unrelated third party versus selling them in-house.
The Company will continue to recognize deferred revenue from extended service
agreements previously sold by the Company through January 31, 2001. The Company
will now recognize commission revenue for the unrelated third-party extended
service agreements at the time of sale. Previously deferred extended service
agreements revenue recognized for the quarters ended August 31, 2000 and 1999 of
$93,000 and $228,000, respectively, as well as commission revenues of $532,000
and $482,000, respectively, have been reflected as a reduction of selling,
general, and administrative expenses. Extended service agreements equaled 2.6%
and 3.1% of net sales during the quarters ended August 31, 2000 and 1999,
respectively.

Interest Expense

Interest expense was 5.5% of net sales for the quarter ended August 31, 2000 as
compared to 4.4% in 1999. Three-quarters of the additional interest resulted
from a higher market rate of interest. The company's effective pre-tax interest
rate for the second quarter increased to 8.4% compared to 6.8% for the same
period in the previous year. The remaining additional interest related to an
8.1% increase in average borrowings.

Income Taxes

The benefit for income taxes was $608,000 during the second quarter ended August
31, 2000, compared to an expense of $70,000 for the same period a year earlier.
The Company's anticipated tax rate was 33.0% in the second quarter of both
years.

LIQUIDITY AND CAPITAL RESOURCES

The Company requires cash for purchasing inventory, opening new stores, making
leasehold improvements, and acquiring equipment. Working capital needs normally
peak in the fall as the Company increases inventories to meet anticipated demand
during the all-important Christmas selling season. The Company's long-term
growth strategy will require increasing working capital to fund capital
expenditures, receivables, and inventories for new stores. Working capital
requirements will be financed by funds generated from operations and bank lines
described below. Cash used in operations for the six months ending August 31,
2000 was $5,325,000 compared to $13,847,000 for the six months ending August 31,
1999.

Working Capital

Working capital increased 1.5% at August 31, 2000 to $82,893,000 from
$81,701,000 at August 31, 1999. The resulting ratio of current assets to current
liabilities as of August 31, 2000 was 4.4 to 1, compared to 7.5 to 1 at August
31, 1999. Capital expenditures totaled $4,474,000 and $2,329,000 for the
quarters ended August 31, 2000 and 1999, respectively. The Company opened three
stores during the quarter ended May 31, 2000 and four stores in the quarter
ended August 31, 2000. The Company plans to open five additional stores by the
end of the fiscal year. The Company has a budget of approximately $6,600,000 for
capital expenditures in the fiscal year ending February 28, 2001 for new store
openings, major and minor remodels, and other equipment. The Company, with
capital expenditures of $837,000, opened an e-commerce site, Reeds.com, on
December 22, 1999. The Company intends to incur additional capital expenditures
this year related to the Internet site of approximately $400,000. These capital
expenditures will be financed by funds generated from operations and bank lines
described below. The Internet site offers consumers the opportunity to buy
diamond jewelry, gold jewelry and giftware online. Customers can also apply for
credit online.

Debt

Borrowings under the Company's revolving credit facility averaged $63.1 million
during the second quarter of fiscal 2001 and $58.2 million during the same
quarter a year ago. The maximum borrowings outstanding under the facility at any
time during each of the quarters were $65.0 million and $60.6 million,
respectively.

10
11

In April 1999, the Company, its existing banks, and two additional banks entered
into an amended revolving credit agreement whereby the Company may borrow up to
$65,000,000 through June 30, 2002 on terms similar to those of the previous
agreement. Under the new agreement, the Company pays interest monthly at an
interest rate ranging from the 30-day LIBOR rate (6.63% at August 31, 2000) plus
125 basis points to 185 basis points or prime (9.50% at August 31, 2000) plus 25
basis points, depending upon the Company's debt-to-worth ratio.

The Company had $64,570,000 outstanding on this revolver at August 31, 2000,
which is classified as a long-term liability based on its expiration date. The
revolving credit agreement is collateralized by substantially all of the
Company's assets. The various loan agreements contain financial covenants
including those that limit dividend payments and additional borrowings and
prohibit new store openings if an event of default exists.

The Company also has subordinated notes totaling $845,000 with three related
parties, with interest payable monthly at the prime rate (9.50% at August 31,
2000) quoted in The Wall Street Journal. The notes are unsecured and are
subordinate to the revolving bank note, which is collateralized by substantially
all of the Company's assets.

Disclosure Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information about their companies without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in the statement. Various
forward-looking statements have been made throughout this discussion, including
comments about:

(i) planned store openings;

(ii) goals for the mix of credit and cash sales;

(iii) expected increases in gross margins; and

(iv) expected increases in finance charge yields.

Accordingly, the Company hereby identifies the following important factors that
could cause the Company's actual financial results to differ materially from
those projected by the Company in forward-looking statements:

(i) lack of available locations on terms acceptable to the
Company;

(ii) unexpected changes in the marketing and pricing strategies of
competitors;

(iii) adverse changes in the political environments of countries
providing raw materials for the jewelry industry;

(iv) adverse changes in consumer spending or consumer
credit-worthiness;

(v) significant changes in interest rates; or

(vi) the loss of key executives.

Impact of Inflation

In management's opinion, changes in net sales and net earnings that have
resulted from inflation and changing prices have not been material during the
periods presented. There is no assurance, however, that inflation will not
materially affect the Company in the future.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is from time to time involved in routine litigation
incidental to the conduct of its business. The Company believes that no
currently pending litigation to which it is a party will have a
material adverse effect on its consolidated financial condition or
results of operations.

Item 2. Changes in Securities.

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

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

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits.

27 Financial Data Schedule

(b) Reports on Form 8-K.

Not applicable.

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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.

REEDS JEWELERS, INC.

October 9, 2000 /s/ James R. Rouse
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James R. Rouse
Treasurer and
Chief Financial Officer