For important information regarding forward-looking statements made in this Management's Discussion and Analysis of Financial Condition and Results of Operations see "Item 1A-Risk Factors."

Overview of Fiscal Year 2012

We are a leading specialty retailer of fine jewelry in North America. At July 31, 2012, we operated 1,124 fine jewelry stores and 654 kiosks located primarily in shopping malls throughout the United States, Canada and Puerto Rico.

We report our business under three operating segments: Fine Jewelry, Kiosk Jewelry and All Other. Fine Jewelry is comprised of five brands, Zales Jewelers®, Zales Outlet®, Gordon's Jewelers®, Peoples Jewellers® and Mappins Jewellers®, and is predominantly focused on the value-oriented consumer. Each brand specializes in fine jewelry and watches, with merchandise and marketing emphasis focused on diamond products. These five brands have been aggregated into one reportable segment. Kiosk Jewelry operates under the brand names Piercing Pagoda®, Plumb Gold™, and Silver and Gold Connection® through mall-based kiosks and is focused on the opening price point guest. Kiosk Jewelry specializes in gold, silver and non-precious metal products that capitalize on the latest fashion trends. All Other includes our insurance and reinsurance operations, which offer insurance coverage primarily to our private label credit card guests.

Comparable store sales increased by 6.9 percent during fiscal year 2012. At constant exchange rates, which excludes the effect of translating Canadian currency denominated sales into U.S. dollars, comparable store sales increased by 7.1 percent for the fiscal year. Gross margin increased by 100 basis points to 51.5 percent for the fiscal year ended July 31, 2012. Gross margin compared to the same period in the prior year was impacted by a 90 basis point improvement resulting from a change in warranty revenue recognition and a 30 basis point last-in, first-out ("LIFO") inventory charge. Excluding these items, gross margin improved by 40 basis points as a result of an increase in retail prices and lower merchandise discounts, partially offset by an increase in the cost of merchandise. Operating earnings for the fiscal year 2012 were $19.1 million compared to an operating loss of $27.9 million in the same period in the prior year, an increase of $47.0 million. Operating earnings improved by 260 basis points to 1.0 percent compared to negative 1.6 percent in the prior year. The increase in operating earnings as a percent of revenue is primarily the result of an increase in gross margin and greater operating leverage.

In fiscal year 2012, we reached several milestones that underscore the progress we made in executing our turnaround plan we announced in January 2010. During the year, we:

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º achieved revenue growth of 7.1 percent, reaching $1.9 billion in annual revenues;

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º delivered a 6.9 percent increase in comparable store sales, following an 8.1 percent rise in fiscal year 2011, marking seven consecutive quarters of positive results;

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º generated operating earnings of $19 million, a $47 million improvement over the prior year and the first time we reported operating earnings since fiscal year 2008;

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º improved the capital structure by refinancing our revolving credit agreement and senior secured term loan which increased our borrowing availability by approximately $50 million as of July 31, 2012, decreased borrowing costs which will result in estimated interest expense savings of approximately $17 million in fiscal year 2013 and eliminated the store contribution covenants contained in the prior term loan;

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º continued to build and strengthen our core merchandise assortment reaching our goal of returning the core to approximately 85 percent of our inventory mix, while beginning to introduce proprietary brands, including the Vera Wang LOVE and Persona bead collections;

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º expanded our omnichannel business model to provide guests access to our brands wherever and whenever they choose through webstores, mobile devices, social media and traditional stores;

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º implemented a program to provide alternative financing options to our U.S. Fine Jewelry customers who do not qualify for financing through our primary Citi credit program; and

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º increased organizational effectiveness by making deliberate, thoughtful investments in people, functions and training.

Warranties

Net earnings associated with warranties totaled $120.8 million for the year ended July 31, 2012, compared to $75.2 million for the same period in the prior year. The increase is primarily the result of improved sales and a $34.9 million increase resulting from a change in revenue recognition related to lifetime warranties. Accounting Standards Codification 605-20, Revenue Recognition-Services, requires recognition of warranty revenue on a straight-line basis until sufficient cost history exists. Once sufficient cost history is obtained, revenue is required to be recognized in proportion to when costs are expected to be incurred. Prior to fiscal year 2012, the Company recognized revenue from lifetime warranties on a straight-line basis over a five-year period because sufficient evidence of the pattern of costs incurred was not available. During the first quarter of fiscal year 2012, we began recognizing revenue in proportion to when the expected costs will be incurred, which we estimate will be over an eight-year period. The deferred revenue balance as of July 31, 2011 related to lifetime warranties is recognized prospectively in proportion to the remaining estimated warranty costs. The change in estimate related to the pattern of revenue recognition and the life of the warranties is the result of accumulating additional historical evidence over the five-year period that we have been selling the lifetime warranties.

Outlook for Fiscal Year 2013

We expect to generate positive net income in fiscal year 2013. We believe this will be achieved as a result of continued positive comparable store sales, maintaining gross margin rates consistent with fiscal year 2012, realizing leverage on selling, general and administrative expenses based on top line growth, while making selective investments in the business, and interest expense savings estimated at approximately $17 million as a result of the debt refinancing transactions completed on July 24, 2012. Total interest expense is expected to be between $23 million and $25 million in fiscal year 2013 compared to $44.6 million in fiscal year 2012, which includes $5 million of costs associated with the debt refinancing

transactions. In addition, we expect the effective tax rate to be approximately 15 percent and store closures to be in-line with fiscal year 2012.

Comparable Store Sales

Comparable store sales include internet sales and repair sales and exclude revenue recognized from warranties and insurance premiums related to credit insurance policies sold to guests who purchase merchandise under our customer credit programs. The sales results of new stores are included beginning with their thirteenth full month of operation. The results of stores that have been relocated, renovated or refurbished are included in the calculation of comparable store sales on the same basis as other stores. However, stores closed for more than 90 days due to unforeseen events (e.g., hurricanes, etc.) are excluded from the calculation of comparable store sales.

Non-GAAP Financial Measure

We report our consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"). However, the non-GAAP performance measure of EBITDA (defined as earnings before interest, income taxes and depreciation and amortization) is presented to enhance investors' ability to analyze trends in our business and evaluate our performance relative to other companies. We use the non-GAAP performance measure to assist us in explaining underlying performance trends in our business.

EBITDA is a non-GAAP financial measure and should not be considered in isolation of, or as a substitute for, net loss or other GAAP measures as an indicator of operating performance. In addition, EBITDA should not be considered as an alternative to operating earnings (loss) or net loss as a measure of operating performance. Our calculation of EBITDA may differ from others in our industry and is not necessarily comparable with similar titles used by other companies.

The following table reconciles EBITDA to loss from continuing operations as presented in our consolidated statements of operations:

                                                   Year Ended July 31,
                                              2012         2011        2010
          Loss from continuing operations   $ (26,896 ) $ (112,042 ) $ (95,790 )
          Depreciation and amortization        37,887       41,326      50,005
          Interest expense                     44,649       82,619      15,657
          Income tax expense (benefit)          1,365        1,557     (28,750 )

          EBITDA                            $  57,005   $   13,460   $ (58,878 )

Results of Operations

The following table sets forth certain financial information from our audited consolidated statements of operations expressed as a percentage of revenues and should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Form 10-K.

                                                               Year Ended July 31,
                                                           2012       2011       2010
Revenues                                                    100.0 %    100.0 %    100.0 %
Cost of sales                                                48.5       49.5       49.6

Gross margin                                                 51.5       50.5       50.4
Selling, general and administrative                          48.3       49.3       52.4
Depreciation and amortization                                 2.0        2.4        3.1
Other charges                                                 0.1        0.4        2.1

Operating earnings (loss)                                     1.0       (1.6 )     (7.1 )
Interest expense                                              2.4        4.7        1.0
Other gains                                                     -          -       (0.4 )

Loss before income taxes                                     (1.4 )     (6.3 )     (7.7 )
Income tax expense (benefit)                                  0.1        0.1       (1.8 )

Loss from continuing operations                              (1.5 )     (6.4 )     (5.9 )
(Loss) earnings from discontinued operations, net of
taxes                                                           -          -        0.1

Net loss                                                     (1.5 )%    (6.4 )%    (5.8 )%

Year Ended July 31, 2012 Compared to Year Ended July 31, 2011

Revenues. Revenues for fiscal year 2012 were $1,866.9 million, an increase of 7.1 percent compared to revenues of $1,742.6 million for the same period in the prior fiscal year. Comparable store sales increased 6.9 percent as compared to the same period in the prior year. The increase in comparable store sales was attributable to an 8.4 percent increase in the number of units sold in our fine jewelry stores, partially offset by a 0.5 percent decrease in the average price per unit. The change in the number of units sold and the average price per unit includes the impact of an increase in sales related to our bead product lines, which are sold at a lower price point. The increase in revenue was also due to a $49.9 million increase in revenues related to warranties, of which $34.9 million is the result of a change in revenue recognition related to lifetime warranties. The increase was partially offset by a decrease in revenues related to 51 store closures (net of store openings) during fiscal year 2012.

Fine Jewelry contributed $1,617.7 million of revenues in the fiscal year ended July 31, 2012, an increase of 8.3 percent as compared to $1,493.3 million for the same period in the prior year.

Kiosk Jewelry contributed $238.7 million of revenues in the fiscal year ended July 31, 2012 as compared to $239.2 million in the prior year, representing a decrease of 0.2 percent. The decrease in revenues is due to a 6.1 percent decrease in the number of units sold, partially offset by a 5.5 percent increase in average price per unit.

All Other contributed $10.5 million in revenues for the fiscal year ended July 31, 2012, an increase of 4.6 percent compared to $10.0 million for the same period in the prior year.

During the fiscal year ended July 31, 2012, we converted nine Gordon's stores to the Zales nameplate and one Zales store to the Zales Outlet nameplate in Fine Jewelry. We opened two locations in Kiosk Jewelry. In addition, we closed 49 stores in Fine Jewelry and 14 locations in Kiosk Jewelry.

Gross Margin. Gross margin represents net sales less cost of sales. Cost of sales includes cost related to merchandise sold, receiving and distribution, guest repairs and repairs associated with warranties. Gross margin increased by 100 basis points to 51.5 percent during fiscal year 2012. Gross margin compared to the same period in the prior year was impacted by a 90 basis point improvement resulting from a change in warranty revenue recognition and a 30 basis point LIFO inventory charge. Excluding these items, gross margin improved by 40 basis points as a result of an increase in retail prices and lower merchandise discounts, partially offset by an increase in the cost of merchandise.

Selling, General and Administrative. Included in selling, general and administrative ("SG&A") are store operating, advertising, buying, cost of insurance operations and general corporate overhead expenses. SG&A was 48.3 percent of revenues for the year ended July 31, 2012, compared to 49.3 percent for the same period in the prior year. SG&A increased by $42.7 million to $902.3 million for the year ended July 31, 2012. The increase is primarily the result of an $18.0 million increase in promotional costs, including production costs and marketing for the launch of proprietary products during the second quarter, an $11.1 million increase in labor costs to support increased sales, an $11.4 million increase in proprietary credit fees and a $3.1 million increase in professional fees. The increase was partially offset by a $3.6 million decrease in occupancy costs primarily related to 51 stores closed (net of store openings) during fiscal year 2012.

Depreciation and Amortization. Depreciation and amortization as a percent of revenues for the year ended July 31, 2012 and 2011 was 2.0 percent and 2.4 percent, respectively. The decrease is primarily related to 51 stores closed (net of store openings) during fiscal year 2012.

Other Charges. Other charges for the year ended July 31, 2012 includes a $1.8 million charge related to the impairment of long-lived assets associated with underperforming stores and a $0.2 million charge associated with store closures. Other charges for the year ended July 31, 2011 includes a $6.8 million charge related to the impairment of long-lived assets associated with underperforming stores and a $0.3 million charge associated with store closures.

Interest Expense. Interest expense as a percent of revenues for the years ended July 31, 2012 and 2011 was 2.4 percent and 4.7 percent, respectively. Interest expense decreased by $38.0 million to $44.6 million for the year ended July 31, 2012. The decrease is the result of a $45.8 million charge recorded in the first quarter of fiscal year 2011 related to an amendment to the term loan on September 24, 2010, partially offset by a $5.0 million charge recorded in the fourth quarter of fiscal year 2012 as a result of an amendment to the term loan on July 24, 2012. Excluding these charges, interest expense increased $2.9 million due primarily to an increase in the average borrowings compared to the same period in the prior year.

Income Tax Expense. Income tax expense totaled $1.4 million for the year ended July 31, 2012, compared to $1.6 million for the same period in the prior year. Income tax expense for the year ended July 31, 2012 is primarily associated with earnings of our Canadian subsidiaries, partially offset by the release of certain state tax reserves totaling $1.7 million. Income tax expense for the year ended July 31, 2011 is primarily associated with earnings of our Canadian subsidiaries, partially offset by the recognition of a $4.6 million tax refund associated with the Worker, Homeownership and Business Assistance Act of 2009 (the "Business Assistance Act").

Year Ended July 31, 2011 Compared to Year Ended July 31, 2010

Revenues. Revenues for fiscal year 2011 were $1,742.6 million, an increase of 7.8 percent compared to revenues of $1,616.3 million for the same period in the prior fiscal year. Comparable store sales increased 8.1 percent as compared to the same period in the prior year. The increase in comparable store sales was attributable to an 8.1 percent increase in the average price per unit in our fine jewelry stores and a 0.5 percent increase in the number of units sold. The increase in revenue was also due to a $25.1 million

increase in revenues recognized related to warranties, partially offset by a decrease in revenues related to 61 store closures (net of store openings) during fiscal year 2011.

Fine Jewelry contributed $1,493.3 million of revenues in the fiscal year ended July 31, 2011, an increase of 8.2 percent as compared to $1,379.7 million for the same period in the prior year.

Kiosk Jewelry contributed $239.2 million of revenues in the fiscal year ended July 31, 2011 as compared to $226.2 million in the prior year, representing an increase of 5.8 percent. The increase in revenue is primarily the result of a 1.6 percent increase in average price per unit and a 2.0 percent increase in the number of units sold.

All Other contributed $10.0 million in revenues for the fiscal year ended July 31, 2011 as compared to $10.4 million for the same period in the prior year, representing a decrease of 3.7 percent.

During the fiscal year ended July 31, 2011, we opened four stores in Fine Jewelry and seven locations in Kiosk Jewelry. In addition, we closed 59 stores in Fine Jewelry and 13 locations in Kiosk Jewelry.

Gross Margin. Gross margin represents net sales less cost of sales. Cost of sales includes cost related to merchandise sold, receiving and distribution, guest repairs and repairs associated with warranties. Gross margin increased by 10 basis points to 50.5 percent for the fiscal year ended July 31, 2011 compared to the same period in the prior year. The increase in gross margin was due to a 100 basis point increase in revenues recognized related to warranties, a 110 basis point decrease in inventory impairment charges as a result of improved sales and lower merchandise discounts. The increase was partially offset by an increase in the cost of merchandise, including an $11.3 million increase in the LIFO inventory charge.

Selling, General and Administrative. Included in SG&A are store operating, advertising, buying, cost of insurance operations and general corporate overhead expenses. SG&A was 49.3 percent of revenues for the year ended July 31, 2011, compared to 52.4 percent for the same period in the prior year. SG&A increased by $13.4 million to $859.6 million for the year ended July 31, 2011. The increase is primarily the result of a $23.4 million increase in labor costs and store and corporate performance-based compensation associated with improved sales and a $5.7 million increase in credit card fees primarily due to increased sales in the U.S. The increase was partially offset by a $7.6 million decrease in professional fees and severance costs, a $5.8 million decrease related to fees paid to Citibank in fiscal year 2010 and a $3.2 million decrease in occupancy costs.

Depreciation and Amortization. Depreciation and amortization as a percent of revenues for the year ended July 31, 2011 and 2010 was 2.4 percent and 3.1 percent, respectively. The decrease is primarily the result of store closures and impairment charges recorded during fiscal years 2011 and 2010.

Other Charges. Other charges for the year ended July 31, 2011 includes a $6.8 million charge related to the impairment of long-lived assets associated with underperforming stores and a $0.3 million charge associated with store closures. Other charges for the year ended July 31, 2010 includes a $29.9 million charge related to the impairment of long-lived assets associated with underperforming stores and a $3.4 million charge associated with store closures.

Interest Expense. Interest expense as a percent of revenues for the years ended July 31, 2011 and 2010 was 4.7 percent and 1.0 percent, respectively. Interest expense increased by $67.0 million to $82.6 million for the year ended July 31, 2011. The increase is primarily the result of a $45.8 million charge associated with an amendment to the term loan on September 24, 2010. The remaining $21.2 million increase is due primarily to a $16.2 million increase in interest related to the term loan executed in May 2010 and an increase in the weighted-average effective interest rate associated with the revolving credit agreement to 3.7 percent as compared to 1.8 percent for the same period in the prior year.

Other Gains. Other gains for the year ended July 31, 2010 includes an $8.3 million gain related to a decrease in the fair value of the warrants issued in connection with the term loan executed in May 2010 and a $1.7 million charge related to debt issuance costs attributable to the warrants.

Income Tax Expense (Benefit). Income tax expense totaled $1.6 million for the year ended July 31, 2011, compared to a $28.8 million income tax benefit for the year ended July 31, 2010. Income tax expense for the year ended July 31, 2011 is primarily associated with earnings of our Canadian subsidiaries, partially offset by the recognition of a $4.6 million tax refund associated with the Business Assistance Act. The income tax benefit for the year ended July 31, 2010 is primarily the result of the recognition of a $33.4 million refund associated with the Business Assistance Act, partially offset by tax expense primarily associated with our Canadian subsidiaries.

Liquidity and Capital Resources

Our cash requirements consist primarily of funding ongoing operations, including inventory requirements, capital expenditures for new stores, renovation of existing stores, upgrades to our information technology systems and distribution facilities, and debt service. For fiscal year 2012, our cash requirements were funded through cash flows from operations and our revolving credit agreement with a syndicate of lenders led by Bank of America, N.A. We manage availability under the revolving credit agreement by monitoring the timing of merchandise receipts and vendor payments. At July 31, 2012, we had borrowing availability under the revolving credit agreement of approximately $149 million. The average vendor payment terms during the year ended July 31, 2012 and 2011 was approximately 52 days and 46 days, respectively. As of July 31, 2012, we had cash and cash equivalents totaling $24.6 million. We believe that our operating cash flows and available credit facility are sufficient to finance our cash requirements for at least the next twelve months.

Net cash used in operating activities improved from $46.9 million for the year ended July 31, 2011 to $36.9 million for the year ended July 31, 2012. The $10.0 million improvement is primarily the result of an increase in operating earnings compared to the same period in the prior year and a $15.2 million payment in the prior year related to an amendment to the term loan, partially offset by an increase in inventory and costs incurred related to the debt refinancing transactions completed in the fourth quarter of fiscal year 2012 totaling $5.0 million. The increase in inventory and refinancing costs represented approximately $33 million of the $36.9 million net usage of cash from operating activities as of July 31, 2012.

Our business is highly seasonal, with a disproportionate amount of sales (approximately 30 percent) occurring in the Holiday season, which encompasses November and December of each year. Other important selling periods include Valentine's Day and Mother's Day. We purchase inventory in anticipation of these periods and, as a result, have higher inventory and inventory financing needs immediately prior to these periods. Inventory owned at July 31, 2012 was $741.8 million, an increase of $21.0 million compared to July 31, 2011. The increase is primarily the result of additional merchandise purchased as a result of increased sales and higher merchandise cost.

On July 24, 2012, we amended and restated our revolving credit agreement (the "Amended Credit Agreement") with Bank of America, N.A. and certain other lenders. The Amended Credit Agreement totals $665 million, including a new $15 million first-in, last-out facility (the "FILO Facility"), and matures in July 2017. Borrowings under the Amended Credit Agreement (excluding the FILO Facility) are limited to a borrowing base equal to 90 percent of the appraised liquidation value of eligible inventory (less certain reserves that may be established under the agreement), plus 90 percent of eligible credit card receivables. The rate applied to the appraised liquidation value of eligible inventory was 87.5 percent in the prior agreement. Borrowings under the FILO Facility are limited to a borrowing base equal to the lesser of: (i) 2.5 percent of the appraised liquidation value of eligible inventory or (ii) $15 million. The Amended

Credit Agreement is secured by a first priority security interest and lien on merchandise inventory, credit card receivables and certain other assets and a second priority security interest and lien on all other assets.

Based on the most recent inventory appraisal, the monthly borrowing rates calculated from the cost of eligible inventory range from 68 to 70 percent for the period of August through September 2012, 80 to 83 percent for the period of October through December 2012, and 67 to 72 percent for the period of January through July 2013.

Borrowings under the Amended Credit Agreement (excluding the FILO Facility) bear interest at either: (i) LIBOR plus the applicable margin (ranging from 175 to 225 basis points) or (ii) the base rate (as defined in the Amended Credit Agreement) plus the applicable margin (ranging from 75 to 125 basis points). Borrowings under the FILO Facility bear interest at either: (i) LIBOR plus the applicable margin (ranging from 350 to 400 basis points) or (ii) the base rate plus the applicable margin (ranging from 250 to 300 basis points). We are also . . .