<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

                 ANNUAL REPORT PURSUANT to SECTION 13 or 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

     For the fiscal year ended May 31, 1997. Commission File Number 0-15017

                             BARRY'S JEWELERS, INC.
             (Exact name of registrant as specified in its charter)

California                                                    95-3746316
(State or other jurisdiction of                              (IRS Employer
incorporation or organization)                             Identification No.)

111 West Lemon Avenue, Monrovia, California                        91016
(Address of principal executive offices)                         (Zip Code)

Registrant's telephone number, including area code             (626) 303-4741

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

          Securities registered pursuant to Section 12(g) of the Act:
                              Title of each class
                                  Common Stock
                                    Warrants

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.          YES. [X]  NO. [ ]

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

As of September 17, 1997, the aggregate market value of the voting stock
held by non-affiliates of the issuer based on the average bid and ask
prices of $0.25 and $0.16, respectively, of such common stock was
$512,734 based upon an average price of $0.20 multiplied by 2,563,672
shares of common stock outstanding on such date held by non-affiliates.

As of September 17, 1997, the issuer had a total of 4,029,372 shares of
common stock outstanding.

        APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
                        DURING THE PRECEDING FIVE YEARS.

Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15 (d) of the
Securities Exchange Act of 1934 subsequent to the distribution under a
plan confirmed by a court. [X] Yes. [ ] No.



<PAGE>   2



PART I
ITEM 1. BUSINESS

                                  INTRODUCTION

INTRODUCTORY  NOTE. This Annual Report on Form 10-K contains certain  forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Securities 
Exchange Act of 1934, as amended (the "Exchange Act"), and the Company
intends that such forward-looking statements be subject to the safe harbors
created thereby. See "--Private Securities Litigation Reform Act."

THE COMPANY. Barry's Jewelers, Inc. (the "Company," including the operations of
its predecessor; see "Selected Financial Data") is a chain of specialty retail
jewelry stores generally located in regional shopping malls. The Company's
stores offer fine jewelry items in a wide range of styles and prices, with a
principal emphasis on diamond and gemstone jewelry. As of May 31, 1997, the
Company operated 130 retail jewelry stores, principally in California, Texas,
Arizona, North Carolina, Utah, Indiana, Ohio, Colorado, Idaho, and Montana. As
measured by the number of retail locations, the Company is one of the larger
specialty retailers of fine jewelry in the country. The Company's corporate
office is located at 111 West Lemon Avenue, Monrovia, California, 91016, and its
telephone number is (626) 303-4741.

EVENTS LEADING UP TO CHAPTER 11. Throughout fiscal 1997, the Company experienced
significant operating losses that necessitated the Company's renegotiation of
financial covenants and certain other terms contained in its Amended Revolving
Credit Agreement (as hereinafter defined in "Management's Discussion and 
Analysis of Financial Condition and Results of Operations ("MD&A") --
Liquidity and Capital Resources") during the second quarter of fiscal 1997.

        In January 1997, management announced its intent to implement a
Company-wide restructuring and other cost savings initiatives during the third
and fourth quarters of fiscal 1997. Those initiatives included a plan not to
renew leases on twelve stores and closing eighteen to twenty-four
under-performing stores with concurrent reductions in overhead at the Company's
remaining stores and reduction in corporate expenses. However, the management
team of the Company was replaced in February 1997 prior to the full execution of
the restructuring and cost savings initiatives. At the end of the third quarter,
the Company recorded restructuring charges of approximately $1.3 million
primarily related to severance and costs associated with eleven stores closed
during the quarter, impairment losses of approximately $2.0 million related
principally to impairment of leasehold improvements and fixtures at twenty-six
under performing stores and a $1.1 million charge to cost of goods sold to
hasten the liquidation of aged inventory in an effort to improve cash flow.

        At the end of the third quarter, due to continued operating losses, the
Company was not in compliance with certain financial covenants contained in the
Second Amended Revolving Credit Agreement. As a result, the Company was unable
to make interest payments to the holders of the Company's 11% Senior Secured
Notes due December 22, 2000 (the "Notes"). Additionally, most vendors were not
extending terms, and substantially all new merchandise purchases were on a cash
basis. Because of these restrictions on cash flow and an inability to
renegotiate existing bank debt or raise additional capital through other
sources, the Company decided to seek bankruptcy protection.

PROCEEDINGS UNDER CHAPTER 11. On May 11, 1997 (the "Petition Date"), the Company
commenced a reorganization case by filing a voluntary petition (the "Chapter 11
Petition") for relief under chapter 11 ("Chapter 11") of title 11 of the United
States Code (as amended from time to time, the "Bankruptcy Code") in the United
States Bankruptcy Court for the Central District of California, Los Angeles
Division (the "Bankruptcy Court"), case number 97-27988-VZ. Management
determined that filing of the Chapter 11 Petition would allow the needed time
and flexibility to restructure the Company's operations, help assure the
continued flow of merchandise to its stores, and provide the time and protection
necessary to restructure the Company's funding sources.

        Since the Petition Date, the Company has continued in possession of its
properties and, as debtor-in-possession, is authorized to operate and manage its
businesses and enter into all transactions (including obtaining services,
inventories, and supplies) in the ordinary course of business, or out of the
ordinary course of business subject to approval of the Bankruptcy Court, after
notice and hearing. A statutory Creditors' Committee and an official
Bondholders' Committee have been appointed in the Chapter 11 case, and as of
September 17, 1997, an unofficial equity committee was in the process of being
formed.



                                       1
<PAGE>   3

        Subsequent to the filing of the Chapter 11 Petition, the Company sought
and obtained several orders from the Bankruptcy Court which were intended to
stabilize its business. The most significant of these orders: (1) authorized and
extended use of the Company's cash collateral through February 28, 1998 (see
"MD&A -- Liquidity and Capital Resources -- Stipulation Authorizing Use of Cash
Collateral" for a discussion of the Cash Stipulation (as therein defined)); (2)
approved a trade debtor-in-possession ("DIP") financing agreement (the "Trade
DIP Financing Agreement"), which allows the Company to obtain its expected
merchandise orders of over $50 million on extended trade terms while providing
the trade vendors with substantial support for the payment of their accounts
receivable; (3) authorized the Company to return approximately $8 million of
merchandise to vendors as credit against the vendors' prepetition claims in
exchange for at least $11 million of new merchandise on extended trade terms
(the "Vendor Return Program"); (4) authorized the Company to obtain merchandise
on consignment (the "Consignment Agreement"); and (5) authorized payment of
certain prepetition liabilities, principally prepetition wages and employee
benefits, and payments for certain prepetition customer and related service
claims. See "MD&A" for additional discussion of the Cash Stipulation, the Trade
DIP Financing Agreement, the Vendor Return Program and Consignment Agreement.

        The Company's consolidated financial statements have been prepared on a
going concern basis, which contemplates realization of assets and satisfaction
of liabilities in the normal course of business. As a result of the Chapter 11
Petition filing and circumstances relating to this event, such realization of
assets and satisfaction of liabilities is subject to uncertainty. A plan of
reorganization could materially change the amounts reported in the accompanying
consolidated financial statements, which do not give effect to adjustments to
the carrying values of assets and liabilities, which may be necessary as a
consequence of a plan of reorganization. The Company's ability to continue as a
going concern is contingent upon, among other things, its ability to formulate a
plan of reorganization that will be confirmed by the Bankruptcy Court, to
achieve satisfactory levels of profitability and cash flow from operations, to
maintain compliance with the debtor-in-possession Trade DIP Financing Agreement
and terms of the Cash Stipulation, and the ability to obtain sufficient
financing sources to meet future obligations.

PRIOR RESTRUCTURING. During 1992, the Company effected a comprehensive
restructuring of its long-term debt obligations and capital structure. On
February 26, 1992, the Company voluntarily initiated a case under Chapter 11 of
the Bankruptcy Code and filed a pre-negotiated Plan of Reorganization in the
United States Bankruptcy Court for the Central District of California (the
"Court"). On June 19, 1992, the Court entered an order confirming the Company's
Amended Plan of Reorganization (the "Prior Reorganization Plan"). The effective
date of the Prior Reorganization Plan was June 30, 1992.

STRATEGY. The Company's operating strategy is to provide quality fine jewelry
displayed in attractive store locations at affordable prices. To enhance sales,
the Company makes credit financing available to qualified customers through its
own private label credit card and through various secondary credit sources. The
Company's sales capabilities are supported by a trained and knowledgeable sales
staff, an automated, centralized credit and collection system for the
authorization of credit sales and collection of accounts, and a centralized
distribution system to replenish merchandise to the stores.

MERCHANDISE STRATEGY. Under the leadership of the Company's new management team,
the Company's merchandising presentation is being expanded to include broader
diamond fashion and gold assortments. Management believes that through its
vendor partnerships that allow for a large amount of merchandise to be brought
in under exclusive consignment arrangements, it should be able to expand these
assortments and focus on key categories. As a result, the stores are expected to
offer dominant assortments of quality jewelry in the fashion areas, thereby
contributing to an enhancement of overall merchandise presentation and of the
Company's ability to capture a larger market share.

        On July 22, 1997, the Company reached an agreement with its vendors and
creditors regarding the terms of the Trade DIP Financing Agreement, Vendor
Return Program, and Consignment Agreement. See "-- Proceedings Under Chapter
11." These vendor programs, along with an increase in available borrowing under
the Company's Second Amended Revolving Credit Agreement pursuant to the terms of
the Cash Stipulation (see "MD&A -- Liquidity and Capital Resources"), are 
expected to help management to implement its new merchandise strategy.

MERCHANDISE MIX. The Company is repositioning its merchandising assortments to
provide an emphasis in the diamond fashion and gold departments. This is being
implemented in addition to the Company's prior focus on bridal product, which
accounted for 44% of the Company's sales for the fiscal year ended May 31, 1997.



                                       2
<PAGE>   4

INVENTORY PURCHASING. Buyers located in the Company's corporate offices purchase
most of the stores' merchandise. Each store's inventory is replenished weekly or
more often during peak selling seasons. Management believes that centralized
merchandise purchasing provides the Company with quality controls and price
advantages.

        Three vendors have accounted for 25%, 21%, and 17% of the Company's
merchandise purchases for fiscal 1997, 1996, and 1995, respectively. Management
believes that the Company's relationship with these three vendors, as well as
its other vendors, is good. These vendors, and all vendors key to the Company's
new merchandising strategy, have agreed to participate in the Trade DIP
Financing Agreement and the Vendor Return Program.

SUPPLY AND PRICE FLUCTUATIONS. The world supply and price of diamonds are
influenced considerably by the Central Selling Organization ("CSO"), which is
the marketing arm of DeBeers Consolidated Mines, Ltd. ("DeBeers"), a South
African company. Through the CSO, over the past several years, DeBeers has
supplied approximately 80% of the world demand for rough diamonds, selling to
gem cutters and polishers at controlled prices.

        The continued availability of diamonds to the Company's suppliers is
dependent, to some degree, upon the political and economic situation in South
Africa. While several other countries, including Australia, the Commonwealth of
Independent States, Zaire, Angola, Tanzania and Sierra Leone are suppliers of
diamonds, the Company cannot predict with any certainty the effect on the
overall supply or price of diamonds in the event of an interruption of supplies
from South Africa, the CSO or DeBeers.

        The Company is subject to other supply risks, including fluctuations in
the price of precious gems and metals. The Company presently does not engage in
any hedging activity with respect to possible fluctuations in the price of these
items. If such fluctuations should be unusually large or rapid and result in
prolonged higher or lower prices, there is no assurance that the necessary
retail price adjustments will be made quickly enough to prevent the Company from
being adversely affected.

TRADE NAMES. The Company predominantly operates under four trade names
representing 124 of the 130 stores: Hatfield Jewelers, Mission Jewelers, Samuels
Jewelers, and Schubach Jewelers. Two other trade names make up the remaining
six stores: A. Hirsh & Son Jewelers and The Ringmaker. The Company believes that
except for the Samuels Jewelers, Schubach Jewelers, and Mission Jewelers
tradenames, the loss of any of the other tradenames would not have a material
effect on its business.



                                       3
<PAGE>   5




STORE PERFORMANCE. The following table sets forth selected data with respect to
the Company's operations for the five fiscal years ended May 31, 1997.

<TABLE>
<CAPTION>


                                       1997      1996    1995    1994    1993
------------------------------------------------------------------------------
<S>                                    <C>       <C>     <C>     <C>     <C>
Number of stores at
 beginning of year                      161      162      144      144     145
    Acquired during the year             --       --       15       --      --
    Opened during the year               17        7        8        1      --
    Closed during the year(1)           (48)      (8)      (5)      (1)     (1)
                                       ----      ----     ----    ----     ----
Total at year end                       130      161      162      144     144

Percentage increase (decrease)
 in sales of comparable stores(2)     (10.0)%    2.2%    11.0%     7.4%    9.1%

Average sales per comparable
 store (in thousands)(2)              $ 709    $ 905    $ 871    $ 792   $ 736
</TABLE>

----------
   (1) The 48 stores closed during fiscal 1997 are comprised of 33 stores closed
       on or about May 11, 1997, as part of the Company's Chapter 11 Petition 
       filing; 11 stores closed in connection with the restructuring, announced
       in January 1997, and 4 other stores closed during the year.
   (2) Comparable stores are stores that were open for the same period in both
       the current and preceding years.

CREDIT PROGRAM. The Company's credit policy is intended to complement its
overall sales strategy. The principal objective is the extension of credit to
those customers which will produce the most reasonable rate of return. The
Company also offers credit insurance to its customers. This insurance program,
underwritten by a major insurance company, generally provides coverage for life,
disability, unemployment and loss of property.

           Sales under the Company's credit program accounted for approximately
56% of fiscal 1997 sales, net of down payments. Payment periods for the credit
sales generally range from 24 to 36 months. Customers may also purchase jewelry
for cash and by using major national credit cards.

SEASONALITY. The level of success of the Company is heavily dependent each year
on the success of its Christmas selling season, which in turn depends on many
factors beyond the Company's control, including the general business environment
and competition in the industry. Sales during the Christmas season (which
includes the period from the day following Thanksgiving day to December 31)
generally account for approximately 25% of net sales and all or nearly all of
annual earnings. For the Christmas selling season during fiscal 1997, net sales
were $32.4 million.

           As previously discussed, the Company experienced significant
operating losses during fiscal 1997, including an operating loss of $6.8 million
for the third quarter ended February 28, 1997. Not since the Company's Prior
Reorganization has it failed to report net income for the third quarter, which
includes the Christmas selling season.

COMPETITION. The retail jewelry industry is highly competitive. It is estimated
that there are approximately 35,000 retail jewelry stores in the United States,
most of which are independently operated and not part of a major chain. Numerous
companies, including publicly and privately held independent stores and small
chains, department stores, catalog showrooms, direct mail suppliers, and TV
shopping networks, provide competition on a national and regional basis. The
malls and shopping centers where many of the Company's stores are located
typically contain several other national chain or independent jewelry stores as
well as one or more jewelry departments located in the "anchor" department
stores. Certain of the Company's competitors are substantially larger than the
Company and have greater financial resources.



                                       4
<PAGE>   6

           Management believes that the primary elements of competition in the
retail jewelry business are quality of personnel, level of customer service,
breadth, depth, price and quality of merchandise offered, credit terms and store
location and design. Management believes that the Company has been unable to
compete successfully in recent years because of its failed merchandising
programs, poor credit underwriting practices, cash flow constraints, excessive
collection costs, poor inventory controls and below-average percentage of
consignment inventory, executive turnover, restrictive financing arrangements,
ineffective investment in technology and the resultant excessive administrative
costs. In addition, the Company believes that, as the jewelry retailing industry
consolidates, the ability to compete effectively may become increasingly
dependent on volume purchasing capability, regional market focus, superior
management information systems, and the ability to provide customer service
through trained and knowledgeable sales staffs. However, the competitive
environment is often affected by factors beyond a particular retailer's control,
such as shifts in consumer preferences, economic conditions, population and
traffic patterns.

EMPLOYEES. At May 31, 1997, the Company had 1,171 full- and part-time employees.
Unions represented 26 employees, or 2% of the Company's employees, at such date.
Union contracts covering these employees expired on August 31, 1996; however,
negotiations to renew the contract are continuing. The Company believes it
provides working conditions and wages that compare favorably with those offered
by other retailers in the industry and that its employee relations are good. The
Company has never experienced any material labor unrest, disruption of
operations or strikes.

PRIVATE SECURITIES LITIGATION REFORM ACT. The Private Securities Litigation
Reform Act of 1995 provides a "safe harbor" for forward-looking statements.
Certain information included under the captions "Business -- Proceedings Under
Chapter 11" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in other parts of this Form 10-K and
other materials filed or to be filed by the Company with the Securities and
Exchange Commission contain statements that are forward-looking, such as
statements relating to the Company's Vendor Return Program, Consignment
Merchandise Agreement, Trade DIP Financing Agreement, among others. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future, and accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, the risk of continuing losses and cash flow constraints
despite the Company's efforts to improve operations, including: the Vendor
Return Program, the Consignment Merchandise Agreement, and Trade DIP Financing
Agreement such that the Company will be able to purchase inventory for the 1997
holiday season and thereafter, and attain credit support from its creditors and
vendors; failure to negotiate acceptable payment terms with creditors, vendors
and landlords; and failure to have its plan for reorganization confirmed.

ITEM 2.    PROPERTIES

           The Company leases all its retail stores. Stores range in size from
approximately 577 square feet to 3,690 square feet. Store leases generally have
an initial term of five to fifteen years and will expire at various dates
through 2007. Currently, leases at 11 stores have expired, the stores are
occupied on a month-to-month basis. Some leases contain renewal options for
periods ranging from five to ten years on substantially the same terms and
conditions as the initial lease. Under most of the store leases, the Company is
required to pay taxes, insurance, and its pro rata share of common area and
maintenance expenses. Most of the leases also require the Company to pay the
greater of a specified minimum rent or a contingent rent based on a percentage
of sales as defined.

           The Company leases approximately 38,000 square feet for its
headquarters location under a lease expiring in 2005. Certain shareholders and
former officers of the Company hold an interest in the Company's headquarters
property.

           Under section 365(d)(4) of the Bankruptcy Code, unless otherwise
ordered by a bankruptcy court, a Chapter 11 debtor must assume all leases of
non-residential property within 60 days of its Chapter 11 filing or such leases
will be deemed rejected. By order of the Bankruptcy Court, the Company obtained
an extension of time within which to assume or reject its non-residential real
property leases through and including November 7, 1997, for the headquarters'
lease and January 30, 1998, for the store leases, or such later date(s) as the
Bankruptcy Court may order.


                                       5
<PAGE>   7

           Consistent with its responsibility to its creditors, the Company
intends to continue to evaluate on an ongoing basis the terms of its
non-residential real estate leases to determine whether to take any further
actions with respect to the leases, including assuming or rejecting leases in
the Chapter 11 proceedings, terminating leases, allowing leases to expire,
renegotiating existing leases and entering into new leases. The Company is
continuing to focus on eliminating unproductive stores. See "MD&A." In
connection with such ongoing evaluation, since the commencement of the Company's
Chapter 11 case, the Company has rejected 36 retail store leases, including a
lease for a store the Company never opened and one lease which had expired. Two
of the 36 lease rejections occurred after May 31, 1997. As of September 17,
1997, the Company was operating 128 retail stores in the following states:

<TABLE>
<CAPTION>


                                        Number of
                    State               Stores
                    -----               ---------
                    <S>                 <C>
                    California             33
                    Texas                  32
                    Arizona                 7
                    North Carolina          7
                    Utah                    7
                    Indiana                 6
                    Ohio                    6
                    Colorado                5
                    Idaho                   5
                    Montana                 5
                    Others                 15
                                        --------
                    TOTAL                 128
                                        ========
</TABLE>





ITEM 3.    LEGAL PROCEEDINGS

           Pursuant to section 362 of the Bankruptcy Code, during the Chapter 11
case, creditors and other parties in interest may not, without court approval,
(i) commence or continue a judicial, administrative or other proceeding against
the Company which was or could have been commenced prior to the commencement of
the Chapter 11 case, or recover a claim that arose prior to the commencement of
the Chapter 11 case; (ii) enforce any pre-petition judgment against the Company;
(iii) take any action to obtain possession of property of the Company or to
exercise control over property of the Company or its estate; (iv) create,
perfect or enforce any lien against property of the Company; (v) collect,
assess, or recover claims against the Company that arose before the commencement
of the Chapter 11 case; or (vi) offset any debt owing to the Company that arose
prior to the commencement of the Chapter 11 case against a claim of such
creditor or party in interest against the Company that arose before the
commencement of the Chapter 11 case.

           As a result of the foregoing, all pre-petition claims asserted or
assertable against the Company have been automatically stayed.

           The nature of a Chapter 11 case is to have all claims against and
interest in the Company resolved. Accordingly, the Bankruptcy Court ordered that
any entity desiring to participate in any distribution in the Chapter 11 case
must either have been previously properly scheduled by the Company or file a
proof of claim with the Bankruptcy Court on or before October 31, 1997. The
Company will evaluate proofs of claims filed during the Chapter 11 case.

           The Company filed a motion requesting that the Bankruptcy Court
extend the exclusive periods during which only the Company may file a plan of
reorganization and solicit acceptances thereto on such plan to February 27, 1998
and April 27, 1998. On September 24, 1997, the Bankruptcy Court granted the
Company's motion.

           In addition, the Company filed a motion with the Bankruptcy Court
requesting that the Bankruptcy Court approve employment agreements entered into
between the Company and its new management team. On September 24, 1997, the
Bankruptcy Court granted the Company's motion.



                                       6
<PAGE>   8

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

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

           Not applicable.

PART II
ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION. As a result of the Company's bankruptcy proceedings and its
failure to maintain certain minimum listing requirements, the Company's Common
Stock was delisted from NASDAQ on July 14, 1997 and is currently traded on the
pink sheets. In November 1994, a one-for-five reverse stock split of the
Company's Common Stock was effected; all share and per share data in this Form
10-K have been restated to reflect such reverse stock split. For each quarter of
the fiscal years ended May 31, 1997 and 1996, the high and low bid prices per
share were:

<TABLE>
<CAPTION>

     FISCAL 1997              HIGH              LOW
     -----------            --------          --------
     <S>                    <C>               <C>
     First                  $  4.875          $  2.750
     Second                 $  3.875          $  2.188
     Third                  $  2.625          $  1.125
     Fourth                 $  2.188          $  0.219

     FISCAL 1996
     -----------
     First                  $  4.625          $  2.875
     Second                 $  5.875          $  3.750
     Third                  $  4.125          $  3.125
     Fourth                 $  4.875          $  3.000
</TABLE>


WARRANTS. Beginning in July 1992, the Company's warrants commenced trading in
the over-the-counter market on NASDAQ. Since then, the trading volume has
been very low, and the reported high and low bid prices for the fiscal year
ended May 31, 1997 were $0.375 and $0.0625, respectively. The Company's warrants
were also delisted from NASDAQ on July 14, 1997.

HOLDERS. Management believes that there are approximately 200 beneficial owners
of Common Stock as of September 17, 1997.

DIVIDENDS. The Company has paid no cash dividends on its Common Stock during the
past three fiscal years and management does not anticipate that it will do so in
the foreseeable future. Currently, the Company is prohibited from paying any
cash dividends under the terms of its Second Amended Revolving Credit Agreement
and the indenture governing the Notes.


                                       7
<PAGE>   9
ITEM 6.    SELECTED FINANCIAL DATA

           The following tables set forth selected financial data of the Company
(through the effective date of the Prior Reorganization Plan, referred to as
"Predecessor") as of and for the month ended June 30, 1992, and the Company
(referred to as such following the effective date of the Prior Reorganization
Plan) as of and for the years ended May 31, 1997, 1996, 1995, and 1994 and the
eleven months ended May 31, 1993. The data should be read in conjunction with
the financial statements, related notes and other financial information included
herein.

                  SELECTED CONSOLIDATED FINANCIAL DATA
                (in thousands, except for per share data)
<TABLE>
<CAPTION>
                                                                                    ELEVEN
                                                                                    MONTHS   PREDECESSOR(1)
                                                FOR THE YEARS ENDED MAY 31,         ENDED    --------------
                                           --------------------------------------   MAY 31,    MONTH ENDED
                                              1997    1996       1995      1994      1993     JUNE 30, 1992
                                           --------  --------  --------  --------  --------  --------------
<S>                                        <C>       <C>       <C>       <C>       <C>       <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
  Net Sales                                $130,446  $140,145  $136,055  $114,023  $ 99,270     $ 7,070
  Finance and credit insurance fees          13,900    16,008    15,681    14,487    13,037       1,229
                                           --------  --------  --------  --------  --------     -------
                                            144,346   156,153   151,736   128,510   112,307       8,299   
                                           --------  --------  --------  --------  --------     -------
    Operating (loss) income(2)(3)           (29,741)    8,651    11,670    10,294     5,764        (541)
                                           --------  --------  --------  --------  --------     -------
  Interest expense, net                      12,745    11,146     9,764     7,746     6,401         644
  Reorganization costs                        2,322       --        --        --        --          --    
  Provision for income taxes                    284       288       --      1,009       --          --
                                           --------  --------  --------  --------  --------     -------
    (Loss) income before extraordinary
      item                                  (45,092)   (2,783)    1,906     1,539      (637)     (1,185)
                                           --------  --------  --------  --------  --------     -------
  Extraordinary items(4)(5)                    (876)      --        --        --        --       49,229
                                           --------  --------  --------  --------  --------     -------
    Net (loss) income                      $(45,968) $ (2,783) $  1,906  $  1,539  $   (637)    $48,044
                                           ========  ========  ========  ========  ========     =======
PER SHARE DATA:(6)
  (Loss) income before extraordinary
    item                                   $ (11.25) $  (0.70) $   0.48  $   0.53  $  (0.32)    $ (1.19)
                                           ========  ========  ========  ========  ========     =======
  Extraordinary items(4)(5)                $  (0.22) $    --   $    --   $    --   $    --      $ 49.21
                                           ========  ========  ========  ========  ========     =======
  Net (loss) income                        $ (11.47) $  (0.70) $   0.48  $   0.53  $  (0.32)    $ 48.02
                                           ========  ========  ========  ========  ========     =======
  Weighted average number of common
    and common equivalent shares
    outstanding                               4,007     3,978     3,969     2,902     2,008       1,000
                                           ========  ========  ========  ========  ========      ======
</TABLE>

<TABLE>
<CAPTION>
                                                               MAY 31,
                                           ------------------------------------------------
                                             1997      1996      1995      1994      1993
                                           --------  --------  --------  --------  --------
<S>                                        <C>       <C>       <C>       <C>       <C> 
CONSOLIDATED BALANCE SHEET DATA:
  Current assets                           $105,390  $127,075  $127,208  $107,876  $106,816
  Working capital                            99,482   117,819   109,873    94,660    89,470
  Total assets                              123,483   145,875   144,959   122,252   119,200
  Total debt(7)                             130,271   103,579    92,368    75,935    90,251

</TABLE>
----------

(1)   "Predecessor" includes the consolidated results of the Company and its
      subsidiaries for the month of June 1992, and reflects the settlement of
      liabilities in accordance with the Prior Reorganization Plan.

(2)   Operating (loss) income for the fiscal year ended May 31, 1997, eleven
      months ended May 31, 1993, and the month ended June 30, 1992, include
      $1,336, $100, and $450, respectively, of restructuring expenses.

(3)   Operating (loss) income for the fiscal year ended May 31, 1997, includes
      $3,947 for impairment loss, and $3,033 for inventory valuation.

(4)   The year ended May 31, 1997, includes an extraordinary loss of $876 or
      $0.22 per share, incurred in connection with the early extinguishment of
      the Company's Securitization Facility. See "MD&A -- Liquidity and Capital
      Resources."

(5)   The month ended June 30, 1992, includes an extraordinary gain of $49,229
      ($49.21 per share), which represents the gain on cancellation of
      Predecessor 12-5/8% Subordinated Notes and related accrued interest, net
      of write-off of deferred debt expenses, in connection with the Prior
      Reorganization Plan. 

(6)   In November 1994, a one-for-five reverse stock split of the Common Stock
      was effected; share and per share data have been restated to reflect such
      reverse stock split.
   
(7)   As of May 31, 1997, total debt includes liabilities subject to compromise
      under reorganization proceedings.

                                       8
<PAGE>   10
ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

PRIVATE SECURITIES LITIGATION REFORM ACT. This Annual Report on Form 10-K
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act, and the Company intends
that such forward-looking statements be subject to the safe harbors created
thereby. See "Business -- Private Securities Litigation Reform Act."

OVERVIEW. The following discussion presents information about the financial
condition, liquidity and capital resources, and results of operations of the
Company as of and for the fiscal years ended May 31, 1997, 1996, and 1995. This
information should be read in conjunction with the audited consolidated
financial statements of the Company and the notes thereto.

           Throughout fiscal 1997, the Company experienced significant operating
losses that necessitated the Company's renegotiation of financial covenants and
certain other terms contained in its Amended Revolving Credit Agreement (see
"--Liquidity and Capital Resources") during the second quarter of fiscal 1997.

           In January 1997, management announced its intent to implement a
Company-wide restructuring and other cost savings initiatives during the third
and fourth quarters of fiscal 1997. Those initiatives included a plan not to
renew leases on twelve stores and closing eighteen to twenty-four
under-performing stores with concurrent reductions in overhead at the Company's
remaining stores and reduction in corporate expenses. However, the management
team of the Company was replaced in February 1997 prior to the full execution of
the restructuring and cost savings initiatives. At the end of the third quarter,
the Company recorded restructuring charges of approximately $1.3 million
primarily related to severance and costs associated with eleven stores closed
during the quarter, impairment losses of approximately $2.0 million related
principally to impairment of leasehold improvements and fixtures at twenty-six
under performing stores, and a $1.1 million cost of goods sold charge to hasten
the liquidation of aged inventory in an effort to improve cash flow.

           At the end of the third quarter, due to continued operating losses,
the Company was again not in compliance with certain financial covenants
contained in the Second Amended Revolving Credit Agreement (see "-- Liquidity
and Capital Resources"). As a result, the Company was unable to make interest
payments to the holders of the Notes. Additionally, most vendors were not
extending terms and substantially all new merchandise purchases were on a cash
basis. Because of these restrictions on cash flow and an inability to
renegotiate existing bank debt or raise additional capital through other
sources, the Company decided to seek bankruptcy protection. See "Business --
Proceedings Under Chapter 11."

FISCAL YEAR ENDED MAY 31, 1997 ("FISCAL 1997") COMPARED WITH FISCAL YEAR ENDED
MAY 31, 1996 ("FISCAL 1996")

           Net sales in fiscal 1997 were $130.4 million, a decrease of $9.7
million, or 7%, from net sales of $140.1 million in fiscal 1996. The decrease
was the combined result of the closure of the 48 stores and a decrease of 10% in
sales of comparable stores (those open for the same period in both the current
and preceding years) versus the prior year. The comparable store sales decrease
was due in part to implementation of a value-pricing strategy commenced earlier
in the fiscal year. Additionally, net sales were adversely impacted by late
receipt of merchandise in the stores for the Christmas selling season, which
resulted in excessive stock outs as well as an increase in the sales mix of
promotionally priced merchandise and competitive discounts.

           Finance and credit insurance charges on credit sales in fiscal 1997
were $13.9 million, a decrease of $2.1 million, or 13%, from the prior year
primarily due to a decrease in the average total outstanding customer
receivables.

           Cost of goods sold, buying and occupancy expenses were 71% of net
sales for fiscal 1997 compared to 60% for the prior year. The gross margin
percentage declined in fiscal 1997 primarily as a result of the Company's
value-pricing strategy, and the sales mix of promotionally priced merchandise
and competitive discounts. In connection with the change in merchandising
strategy as developed by the Company's new management team, an inventory
valuation allowance of approximately $3.0 million was established as of May 31,
1997. The allowance reduces the carrying value of ending inventory to its
estimated net realizable value.

           Selling, general and administrative expenses were $57.0 million, an
increase of $5.1 million, or 10%, from the prior year, primarily due to
increases in the costs of advertising, professional services, and shipping.
Selling, general and administrative expenses increased as a percentage of net
sales to 44% in fiscal 1997 from 37% for the fiscal 1996. The increase as a
percentage of net sales is attributable to a combination of the decline in net
sales and the increase in total expense.

                                       9
<PAGE>   11
           The provision for doubtful accounts was $18.8 million, an increase of
$7.0 million from the prior year. The provision was approximately 14% and 8% of
net sales for fiscal 1997 and 1996, respectively. The increase of such provision
was primarily due to an additional provision for customer receivables from
closed stores, and a general provision increase as a result of an overall
analysis of portfolio performance.

           The Company recorded approximately $1.3 million of restructuring
expenses during fiscal 1997. The restructuring expenses consist primarily of
severance and store closing costs at 11 stores.

           The Company recognized an impairment loss of approximately $3.9
million as a result of impaired leasehold improvements and fixtures at 37 closed
stores, as well as impaired computer equipment and software related to the
Company's merchandise management and point-of-sale systems.

           Interest expense was $12.7 million, an increase of $1.6 million from
the prior year. Such increase was a result of higher average interest rates on
the Company's long-term debt, and $325,000 of additional interest expense
charged during the third quarter of fiscal 1997 in connection with obtaining an
amendment to the Company's Amended Revolving Credit Agreement as discussed in
"-- Liquidity and Capital Resources." The Company also recorded $876,000 of
extraordinary charges due to the write-off deferred finance fees in connection
with the early extinguishment of its Securitization Facility during the first
quarter of fiscal 1997.

FISCAL 1996 COMPARED WITH FISCAL YEAR ENDED MAY 31, 1995 ("FISCAL 1995")

           Net sales in fiscal 1996 were $140.1 million, an increase of $4.1
million, or 3%, from net sales of $136.1 million in fiscal 1995. The increase
was the combined result of the full operation of the 23 new stores opened in the
prior year and an increase of 2% in sales of comparable stores (those open for
the same period in both the current and preceding years) versus the prior year.

           Finance and credit insurance charges on credit sales in fiscal 1996
were $16.0 million, an increase of $327,000, or 2%, from the prior year
primarily due to an increase in the average total outstanding customer
receivables.

           Cost of goods sold, buying and occupancy expenses were 60% of net
sales for fiscal 1996, compared to 58% for the prior year. The gross margin
percentage declined in fiscal 1996 primarily due to increased competitive
pressure in the retail jewelry industry.

           Selling, general and administrative expenses were $52.0 million, an
increase of $1.0 million, or 2%, from the prior year, primarily due to
approximately $972,000 of expenses related to the settlement of legal actions
and fees related to the sale of 1.5 million shares of the Company's stock by
Wells Fargo Bank to private investors. Such increases were more than offset by
the increase in net sales. Selling, general and administrative expenses declined
as a percentage of net sales to 37% in fiscal 1996 from 38% for fiscal 1995.

           The provision for doubtful accounts was $11.8 million, an increase of
$1.6 million from the prior year. The provision was approximately 8% of net
sales for fiscal 1996 and 1995.

           Interest expense was $11.1 million, an increase of $1.4 million, or
14%, from the prior year. Such increase was a result of a higher average
interest rate on the Company's long-term debt, higher average borrowings to
finance the higher inventory per store, and the write-off of $232,000 of
deferred financing fees relating to redemption of the Notes as discussed in "--
Liquidity and Capital Resources."

           The Company's provision for income taxes was $288,000. The provision
primarily reflects the increase in the valuation allowance against certain
deferred income tax assets based on management's estimates of the realization of
these net deferred income tax assets.


                                       10
<PAGE>   12
                               FINANCIAL CONDITION

CREDIT PROGRAM. The Company offers its merchandise sales on credit terms to
qualified customers. The Company's policy is to attempt to obtain a cash down
payment on all credit sales, with monthly payments established such that the
payment of the credit balance will occur, generally, over a period ranging from
24 to 36 months. The Company's customer receivables are revolving charge
accounts. The Company currently collects (and has historically collected)
approximately 10% of its customer receivable balances each month. Sales under
the Company's credit program accounted for approximately 56% of fiscal 1997
sales, net of down payments. As of May 31, 1997 and May 31, 1996, the aggregate
customer receivables balances were $64.9 million and $79.7 million,
respectively. Aggregate credit collections during the twelve months ended May
31, 1997 were $84.7 million.

           During the third quarter of fiscal 1997, the Company changed its
customer receivable write-off policy. Previously, the Company would fully
reserve for accounts that fell within certain aged parameters but would continue
internal collection efforts until such time as a determination was made that the
accounts should be written off against the allowance for doubtful accounts,
generally when the account was more than 29 months contractually delinquent.
With the change in policy, the internal collection efforts for these fully
reserved accounts has been discontinued and the accounts are being sent to
outside collection agencies, generally within 6 months of becoming delinquent,
at which time the account balances are written off against the allowance for
doubtful accounts. The Company adopted this change as a result of its cost
savings initiatives in an effort to reduce internal collection and other
expenses. Concurrent with this change, the Company accelerated the write-off of
approximately $6.8 million of customer accounts against the allowance for
doubtful accounts.


INVENTORY. At May 31, 1997, inventory was approximately $44.4 million, gross of
a valuation allowance of $3.0 million, a decrease of approximately $10.2 million
from May 31, 1996. This decrease is primarily due to fewer stores at May 31,
1997 compared to last year together with the inability of the Company to obtain
adequate levels of inventory as a result of cash flow constraints.

LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS. As discussed
previously, the Company filed a voluntary petition for relief under Chapter 11.
Under Chapter 11, actions to enforce certain claims against the Company are
stayed if the claims arose or are based on events that occurred on or before the
Petition Date. The ultimate terms of settlement of these claims will be
determined in accordance with a plan of reorganization that requires approval of
the impaired prepetition creditors and shareholders and confirmation by the
Bankruptcy Court.

           Until a plan of reorganization is confirmed by the Bankruptcy Court,
only such payments on prepetition obligations that are approved or required by
the Bankruptcy Court will be made. Pursuant to the Cash Stipulation, the Company
is making contractual interest payments to its lenders. At May 31, 1997, $130.3
million was the amount established as liabilities subject to compromise under
reorganization proceedings. Other liabilities may arise or be subject to
settlement as a result of rejection of executory contracts and unexpired leases,
or the Bankruptcy Court's resolution of claims for contingencies and other
disputed amounts.

                         LIQUIDITY AND CAPITAL RESOURCES

GENERAL. The Company's operations require working capital to fund the purchase
of inventory, lease payments, and the funding of normal operating expenses. The
seasonality of the Company's business requires a significant build-up of
inventory for the Christmas holiday selling period. These seasonal inventory
needs generally must be funded during the late summer and fall months because of
the necessary lead-time to obtain additional inventory. Additionally, the heavy
holiday selling period leads to a seasonal build-up of customer receivables that
must be funded during the winter and spring months.

           The Company reported cash flow from operating activities of
approximately $8.3 million for the fiscal year ended May 31, 1997, as compared
to cash flows used by operating activities of approximately $6.0 million and
$9.6 million for the fiscal years ended May 31, 1996 and 1995, respectively. The
Company's positive cash flow for fiscal 1997 resulted primarily from several
large non-cash charges recorded in connection with impaired assets, inventory
valuation allowance, and additional provision for bad debts at the Company's
closed stores. Additionally, the Company's inventory decreased by approximately
$10.2 million, and accounts payable and accrued liabilities increased by
approximately $6.7 million and $9.7 million, respectively, for the fiscal year
ended May 31, 1997.

                                       11
<PAGE>   13
           In addition, the Company requires working capital to fund capital
expenditures. Capital expenditures for fiscal 1997, 1996 and 1995 were $7.2
million, $4.5 million, and $6.5 million, respectively. Such expenditures were
made primarily in connection the opening of seventeen new stores and the
remodeling of twelve stores during fiscal 1997, and the opening of seven new
stores and remodeling of fourteen stores during fiscal 1996, and opening of
eight new stores and the acquisition of fifteen stores during fiscal 1995.

           As of May 31, 1997, the Company had $7.3 million of cash and cash
equivalents as a result of the Chapter 11 filing and the prohibition on payments
of prepetition debt. Approximately $1.3 million of the Company's cash and cash
equivalents at May 31, 1997 was restricted pursuant to the terms of the Cash
Stipulation.

           Inherent in a successful plan of reorganization is a capital
structure that permits the Company to generate sufficient cash flow after
reorganization to meet its restructured obligations and to fund the current
obligations of the reorganized Company. Under the Bankruptcy Code, the rights of
and ultimate payment to prepetition creditors may be substantially altered and
eliminated as to some classes of creditors. At this time, it is not possible to
predict the outcome of the Chapter 11 filing or its effects on the business of
the Company, or on the interests of the creditors or shareholders.

FINANCING TRANSACTIONS. On December 21, 1995, the Company entered into an
accounts receivable securitization facility (the "Securitization Facility"). In
connection with the Securitization Facility, the Company also entered into an
amended and restated revolving credit facility (the "Revolving Credit
Agreement"), which amended the original December 1993 agreement. In addition,
proceeds of the initial loan under the Securitization Facility were used in part
to repay at par $20 million of the Company's $70 million in outstanding Notes.

           On July 26, 1996, the agent under the Securitization Facility advised
the Company that it wished to terminate the commitment under the Securitization
Facility. On August 30, 1996, the Company entered into an amended and restated
revolving credit agreement with First National Bank of Boston ("FNBB", the
"Amended Revolving Credit Agreement"), which has a term of three years and
contains various restrictive and financial covenants.

           Proceeds of the initial funding under the Amended Revolving Credit
Agreement in the amount of approximately $41.2 million were used to refinance
the Company's obligations under the Securitization Facility, following which the
Securitization Facility was terminated. In addition, upon consummation of the
Amended Revolving Credit Agreement, the Company paid fees of approximately $2.3
million, which were deferred and are being amortized. On August 30, 1996, the
indenture governing the Notes was also amended to the extent required to permit
the consummation of the Amended Revolving Credit Agreement and the termination
of the Securitization Facility.

           On January 27, 1997, the Company's Amended Revolving Credit Agreement
was amended again (the "Second Amended Revolving Credit Agreement"), and the
bank waived the Company's non-compliance with certain financial covenants
therein for the quarter ended November 30, 1996 and reduced its commitment to
lend to the Company from $85 million to $70 million as of January 27, 1997.
Outstanding borrowings bear interest at the agent bank's reference rate plus
1.5% unless an Event of Default (as defined in the Second Amended Revolving
Credit Agreement) has occurred and is continuing, or is not waived, in which
case such outstanding borrowings bear interest at 2.0% above the rate otherwise
payable.

           The Second Amended Revolving Credit Agreement required the Company to
comply with certain customary financial covenants and restrictions, some of
which were adjusted in the January amendment to take into account the various
charges incurred in connection with the Company's restructuring and cost savings
initiatives implemented during the third and fourth quarters of fiscal 1997. The
Company failed to meet certain financial covenants contained in the Second
Amended Revolving Credit Agreement as of February 28, 1997, which constituted an
Event of Default under the Second Amended Revolving Credit Agreement. The Event
of Default prohibited the Company from paying the interest due on April 30, 1997
on the Notes.

           Commencement of the Chapter 11 case has automatically stayed any
actions to enforce collection of amounts owed by the Company to the holders of
the Second Amended Revolving Credit Agreement and Notes. Concurrent with the
Chapter 11 proceedings, the commitment to lend under the Second Amended
Revolving Credit Agreement was terminated. The Company had $57.9 million
outstanding on the Petition Date and at May 31, 1997.

                                       12
<PAGE>   14
           As of May 31, 1997, the Company had approximately $57.9 million of
borrowings outstanding under its Second Amended Revolving Credit Agreement and
$50 million outstanding on the Notes. The Company had $3.2 million of interest
payable on the Notes. This amount represented the semi-annual interest payment
that was due on April 30, 1997, but was not paid, plus accrued interest through
May 31, 1997. The Company's average interest rates on its borrowings under the
Second Amended Revolving Credit Agreement and Notes were 13.3% and 11.0%,
respectively, for the fiscal year ended May 31, 1997.

STIPULATION AUTHORIZING USE OF CASH COLLATERAL. On May 14, 1997, the Company
received interim approval of the Bankruptcy Court of an Agreement to Use Cash
Collateral. The Company operated under that agreement until July 22, 1997, at
which time it received final court approval of an Amended and Restated
Stipulation Pursuant to Sections 361 and 363 of the Bankruptcy Code Authorizing
Debtor's Use of Cash Collateral and Granting Adequate Protection to Collateral
Agent, Lenders and Bondholders (the "Cash Stipulation"). Pursuant to the terms
of the Cash Stipulation, through February 28, 1998, the lenders agreed to allow
the Company to utilize the cash collateral generated by operations rather than
paying down any of the $57.9 million outstanding balance. This cash collateral
agreement requires the Company to, among other things, comply with a modified
borrowing base. The modified borrowing base increased the cash collateral
availability under the Company's Second Amended Revolving Credit Agreement by
increasing the advance rate to 82% of eligible accounts receivable, as defined,
and to 45% of eligible inventory, as defined, subject to various reductions
stipulated in the Cash Stipulation.

DEBTOR-IN-POSSESSION TRADE FINANCING AGREEMENT AND VENDOR RETURN PROGRAM. On
July 22, 1997, the Company reached an agreement with its vendors and creditors
regarding the terms of the Trade DIP Financing Agreement. Pursuant to such
agreement, the Company should be able to obtain its expected orders for over $50
million of new merchandise on extended trade terms, without having to pay the
high fees and interest charges that normally accompany a DIP loan. The vendors
are protected from credit exposure through a $2 million trade trust and a $4
million subordination provided by certain holders of the Company's Notes.

           In addition, the agreement allows the Company to exchange up to
approximately $8 million of slow-moving merchandise for at least $11 million of
fresh inventory on extended trade terms.

CONSIGNEE AGREEMENT. As part of the Company's plan of reorganization, management
has sought to increase the level of consigned merchandise. Toward this end, the
Company received Bankruptcy Court approval of its Consignment Agreement on July
22, 1997. Pursuant to the terms of the Consignment Agreement, the Company's
vendors will commit to maintain a specified minimum amount of consigned
merchandise. The Company shall hold such merchandise for sale in the ordinary
course of its business and is responsible for insuring the consignment
merchandise for its full value and against all risks of loss. The Company is
required to report all consignment merchandise sales on a weekly basis, and to
pay all invoices within specified trade payment terms, generally 30 days from
receipt of invoice, as set forth in the Consignment Agreement.

TAX LOSS CARRYOVERS. At May 31, 1997, the Company had a net operating loss
carryforward for federal income tax purposes of $61.7 million, which is
scheduled to expire in the years May 31, 2006 through May 31, 2012. Of this
$61.7 million, approximately $14 million is scheduled to expire in the years May
31, 2006 through May 31, 2008, and is subject to the limitations imposed under
Section 382 of the Internal Revenue Code of 1986, as amended (the "IRC").

           Section 382 of the IRC provides a limitation ("Section 382
limitation") on the use of net operating loss carryovers, net operating losses,
and certain built-in losses and deduction items of a loss corporation that has
an ownership change. For financial statement purposes, utilization of a net
operating loss, under Section 382 of the IRC, is recorded as a credit to common
stock.

           The balance of the net operating losses, approximately $47.7 million,
is not subject to the limitations imposed under Section 382 of the IRC, and is
scheduled to expire through May 31, 2012.

           At May 31, 1997 and 1996, the Company has recorded a noncurrent
deferred tax asset of $72,000 and $122,000, respectively, representing
alternative minimum tax ("AMT") credit carryforwards. Unlike net operating loss
carryforwards, the AMT credit has an indefinite carryforward period, as it will
be available to reduce the Company's regular tax liability in any future year.

                                       13
<PAGE>   15
QUARTERLY RESULTS OF OPERATIONS. The following is a summary of the unaudited
quarterly results of operations for the years ended May 31, 1997 and 1996:


                             QUARTERLY INFORMATION
                (Unaudited, in thousands, except per share data)

<TABLE>
<CAPTION>
                                            May 31,         February 28,       November 30,       August 31,
Quarter Ended                                1997               1997               1996              1996
-------------------------------------------------------------------------------------------------------------
<S>                                      <C>                <C>                <C>               <C>
1997
Net sales, finance and credit
  insurance fees                          $ 28,886            $52,829             $32,797            $29,834
Cost of goods sold, buying and
  occupancy                                 24,237             32,022              19,349             17,394
Restructuring expense                           --              1,336                  --                --
Impairment loss                              1,977              1,970                  --                 --
Loss before reorganization costs,
  income taxes and extraordinary loss      (24,142)            (6,818)             (6,655)            (4,871)
Reorganization costs                         2,322                 --                  --                 --
Net loss before extraordinary item              --                 --                  --             (4,871) 
Extraordinary item                              --                 --                  --               (876)
Net loss                                  $(26,748)           $(6,818)            $(6,655)           $(5,747)
-------------------------------------------------------------------------------------------------------------
Loss per share before extraordinary item        --                 --                  --            $ (1.22)    
Loss per share                            $  (6.64)           $ (1.70)            $ (1.66)           $ (1.44)
-------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding          4,029              4,001               3,999              3,999
-------------------------------------------------------------------------------------------------------------
Common stock price per share:   High      $   2.19            $  2.63             $  3.88            $  4.88
                                Low       $   0.22            $  1.13             $  2.19            $  2.75
</TABLE>


<TABLE>
<CAPTION>
                                            May 31,         February 29,       November 30,       August 31,
                                             1996               1996               1995              1995
-------------------------------------------------------------------------------------------------------------
<S>                                      <C>                <C>                <C>               <C>
1996
Net sales, finance and credit
  insurance fees                          $ 33,370            $54,872             $36,995           $30,916
Cost of goods sold, buying and
  occupancy                                 20,210             27,865              19,305            16,389
Net (loss) income                         $ (4,489)           $ 3,159             $  (447)          $(1,006)
-------------------------------------------------------------------------------------------------------------
(Loss) income per share                   $  (1.12)           $  0.79             $ (0.11)          $ (0.25)
-------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding          3,999              3,974               3,969             3,969
-------------------------------------------------------------------------------------------------------------
Common stock price per share:   High      $   4.88            $  4.13             $  5.88           $  4.63
                                Low       $   3.00            $  3.13             $  3.75           $  2.88
</TABLE>



INFLATION. The impact of inflation on the cost of merchandise (including gems
and metals), labor, occupancy and other operating costs can affect the Company's
results. For example, most of the Company's leases require the Company to pay
rent, taxes, maintenance, insurance, repairs and utility costs, all of which are
subject to inflationary pressures. To the extent permitted by competition, in
general the Company passes increased costs to the customer by increasing sales
prices over time.

                                       14
<PAGE>   16
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.         

           Not applicable.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

           The Financial Statements and Financial Statement Schedule of the
Company and the reports of independent auditors are listed at Item 14 and are
included beginning on page F-1.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
           AND FINANCIAL DISCLOSURE

           None.

PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

BOARD OF DIRECTORS
 
     Set forth below is biographical information for each of the nominees to
the Board of Directors of the Company.
 
           David W. Cochran, 51, has been a director of the Company since June
1992. From December 1978 to November 1994, Mr. Cochran was President, Chief
Executive Officer and a Principal of R.F. Simmons Company, Inc., a jewelry
manufacturer. From November 1994 to October 1995, Mr. Cochran was President and
Chief Executive Officer of Simmons & Company, Inc., a jewelry manufacturer. Mr.
Cochran is currently the President and Chief Executive Officer of Riverbank
Associates, Inc., a real estate investment company, which position he has held
since December 1995, and the Chairman of Page Walker & Co., a jewelry
manufacturer, which position he has held since January 1993. Mr. Cochran is a
consultant to G. Austin Young Co., dba Attleboro Jewelry Makers, a retail outlet
representing 20 jewelry and gift manufacturers.
 
           William D. Eberle, 74, has been Chairman of the Company since August
1996. Mr. Eberle has been Chairman of Manchester Associates, Ltd., a venture
capital and international consulting firm since 1977, and of counsel to the law
firm of Kaye, Scholer, Fierman, Hays & Handler since 1993. From 1989 to 1993,
Mr. Eberle was of counsel to the law firm of Donovan, Leisure, Newton & Irvine.
Mr. Eberle is presently Chairman of America Service Group, Inc. and of Showscan
Entertainment, Inc., Deputy Chairman of Mid-States Plc, and a director for Ampco
Pittsburgh Corp., FAC Realty, Inc., Horace Small Apparel Company Plc, Mitchell
Energy and Development Corp. and Sirrom Capital Corporation.
 
           John W. Gildea, 54, has been a director of the Company since August
1996. Since September 1990, Mr. Gildea has been an advisor to The Network Funds,
a series of investment funds. From 1986 to 1990, Mr. Gildea was the manager of
the Corporate Services Group of Donaldson, Lufkin & Jenrette Securities
Corporation. Mr. Gildea is presently a Managing Director of Gildea Management
Company, an investment management company, which position he has held since
1990, and a director of America Service Group, Inc., FAC Realty, Inc., UNC,
Inc., and General Chemical.
 
           Carol R. Goldberg, 66, has been a director of the Company since
November 1996. Ms. Goldberg is currently President of the Avcar Group, Ltd., an
investment and management consulting firm, which position she has held since
December 1989. Ms. Goldberg previously served as Chief Operating Officer of The
Stop & Shop Companies, Inc., a retailing company, from 1982 to November 1989, as
its President from October 1985 to November 1989, as its Executive Vice
President from 1982 to 1985, and as its Senior Vice President -- Manufacturing
from 1979 to 1982. Ms. Goldberg is currently a director of The Gillette Company,
America Service Group, Inc., and SelfCare, Inc. and is Senior Advisor of New
England for America International Group, Inc.
 
           Samuel J. Merksamer, 56, has been the Company's President and Chief
Executive Officer, and a director, since February 1997. Before joining the
Company, Mr. Merksamer was the President and Chief Executive Officer of
Merksamer Jewelers, Inc. from 1992 to June 1996. Merksamer Jewelers, Inc. was
previously involved as a debtor-in-possession in reorganization proceedings
under Chapter 11 of the Bankruptcy Code, emerging from such proceedings in 1992.
 
           Cleaveland D. Miller, 58, has been a director of the Company since
June 1992. Mr. Miller is presently a partner with the law firm of Semmes, Bowen
& Semmes. Mr. Miller is a director of EA Engineering, Science, and Technology,
Inc. Since 1988, Mr. Miller has been Chairman of Legal Mutual Liability
Insurance Society of Maryland. Mr. Miller served as President of the Maryland
State Bar Association from 1987 to 1988.
 
           William P. O'Donnell, 43, has been a director of the Company since
August 1996. Since 1992, Mr. O'Donnell has been an advisor to The Network Funds,
a series of investment funds. From 1990 to 1992, Mr. O'Donnell was a Vice
President in the Corporate Finance Group of Chrysler Capital Corporation, a
finance company. Mr. O'Donnell is presently a Managing Director of Gildea
Management Company, a position he has held since 1992.
 

           

EXECUTIVE OFFICERS

     The following individuals currently serve as the Company's executive
officers.

            Samuel J. Merksamer, 56, has been the Company's President and Chief
Executive Officer, and a director, since February 1997. Additional biographical
information regarding Mr. Merksamer is set forth under the caption "Directors 
and Executive Officers of the Registrant -- Board of Directors."

           E. Peter Healey, 44, has been the Company's Executive Vice President,
Chief Financial Officer and Secretary since February 1997. From 1994 to 1996,
Mr. Healey was the Vice President, Chief Financial Officer, Secretary and
Treasurer of MS Financial, Inc. From 1985 to 1993, Mr. Healey was Vice President
and Treasurer of Zale Corporation. Zale Corporation was previously involved as a
debtor-in-possession in reorganization proceedings under Chapter 11 of the
Bankruptcy Code, emerging from such proceedings in 1993.

           Randy N. McCullough, 45, has been the Company's Senior Vice President
-- Merchandise since April 1997. Prior to joining the Company, Mr. McCullough
served as President of Silverman's Factory Jewelers from 1991 to March 1997.

           Bill R. Edgel, 31, has been the Company's Vice President -- Marketing
since February 1997. Prior to joining the Company, Mr. Edgel served as Director
of Credit Marketing of Macy's West, a division of Federated Department Stores,
from 1996 to 1997. From 1995 to 1996, Mr. Edgel served as Director of Marketing
for Merksamer Jewelers, Inc. Merksamer Jewelers, Inc. was previously involved as
a debtor-in-possession in reorganization proceedings under Chapter 11 of the
Bankruptcy Code, emerging from such proceedings in 1992. From 1993 to 1995, Mr.
Edgel served as Advertising Manager/Creative Director for Troutman's Emporium,
Inc. From 1992 to 1993, Mr. Edgel served as Partner/Creative Director of Vaki
Advertising, Inc.

           Daniel L. Felsenthal, 40, has been the Company's Vice President --
Finance since October 1996 and its Vice President -- Finance, Treasurer and
Assistant Secretary since April 1997. Prior to joining the Company, Mr.
Felsenthal served as the Controller for Quarterdeck Corporation during 1996.
From 1990 to 1996, Mr. Felsenthal was employed by Mac Frugal's Bargains --
Close-outs Inc., serving as its Controller from 1991 to 1994, and as its Vice
President -- Finance from 1994 to 1996.

           Chad C. Haggar, 34, has been the Company's Vice President --
Operations since February 1997. Prior to joining the Company, Mr. Haggar served
as Director of Stores of Fred Meyer, Inc. from 1996 to 1997. From before 1992 to
1996, Mr. Haggar served as Regional Manager of Merksamer Jewelers, Inc.
Merksamer Jewelers, Inc. was previously involved as a debtor-in-possession in
reorganization proceedings under Chapter 11 of the Bankruptcy Code, emerging
from such proceedings in 1992.


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

        Under Section 16(a) of the Exchange Act, the officers and directors of
the Company and certain shareholders beneficially owning more than 10% of the
Company's Common Stock ("Ten Percent Shareholders") are required to file with
the Securities and Exchange Commission and the Company reports of ownership,
and changes in ownership, of Company Common Stock.  During fiscal 1997, Ms.
Goldberg did not file, as of the required date, a report on Form 4 regarding her
purchase of 10,000 shares of the Company's Common Stock in November 1996.  Such
report was subsequently filed in compliance with Section 16(a).  Except for the
foregoing, based solely on a review of the reports received by it, the Company
believes that, during fiscal 1997, all of its offers and directors and Ten
Percent Shareholders complied with all applicable filing requirements under
Section 16(a).

                                       15
<PAGE>   17
 
ITEM 11. EXECUTIVE COMPENSATION
 
         The following table sets forth certain information concerning
compensation for services during each of the Company's last three fiscal years
to (i) those persons serving as chief executive officer of the Company during
fiscal 1997 and (ii) two additional executive officers of the Company during
fiscal 1997 who would have been among the four most highly compensated executive
officers during fiscal 1997 but who were not serving as such at the end of
fiscal 1997 (none of the Company's executive officers during fiscal 1997 serving
as such at the end of fiscal 1997 earned an annual salary and bonus exceeding
$100,000).
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                                          LONG-TERM
                                                                                     COMPENSATION AWARDS
                                                  ANNUAL COMPENSATION             -------------------------
                                          -----------------------------------                    SECURITIES
                                                                 OTHER ANNUAL      RESTRICTED    UNDERLYING    ALL OTHER
          NAME AND                        SALARY      BONUS      COMPENSATION        STOCK        OPTIONS/    COMPENSATION
     PRINCIPAL POSITION       YEAR(1)       ($)        ($)          ($)(2)        AWARDS(S)($)    SARS(#)         ($)
----------------------------  -------     -------     ------     ------------     ------------   ----------   ------------
<S>                           <C>         <C>         <C>        <C>              <C>            <C>          <C>
Samuel J. Merksamer             1997(3)    98,462         --          --                 --                           --
  President and Chief           1996           --         --          --                 --             --            --
  Executive Officer             1995           --         --          --                 --             --            --

Robert W. Bridel                1997      231,250      8,231(4)       --                 --             --       113,511(5)
  Former President              1996      261,126     31,386(6)       --             34,375(7)     110,000         2,795(8)
  and Chief Executive           1995      200,000     51,343(6)       --                 --         15,000            --
  Officer                      
Thomas S. Liston                1997      213,462      8,231(4)       --                 --             --        80,721(5)
  Former Chief Financial        1996      279,396     31,386(6)       --             34,375(7)     100,000         2,795(8)
  Officer, Secretary and        1995      225,000     62,513(6)       --                 --         15,000            --
  Treasurer
Joseph M. Maisano               1997      124,308         --          --                 --             --        16,833(6)
  Former Senior Vice            1996      155,369         --          --                 --         15,000            --
  President -- Operations       1995           --         --          --                 --          4,000            --
</TABLE>
 
---------------
 
(1) "1997," "1996," and "1995" represent fiscal years ended May 31, 1997, 1996
    and 1995, respectively.
 
(2) Excludes perquisites, other personal benefits, securities and property,
    which, in the aggregate, did not exceed in any year shown the lesser of
    $50,000 or 10% of the total annual salary and bonus reported for such
    individual for such year.
 
(3) All compensation shown for Mr. Merksamer dates from February 13, 1997.
 
(4) Represents bonus payments paid to Messrs. Bridel and Liston during fiscal
    1997, in connection with their resignations from the Company, for payments
    made with respect to taxes due upon vesting of 5,000 of their respective
    10,000 shares of restricted stock. See "-- Employment Agreements and
    Change-in-Control Arrangements."
 
(5) Represents (i) with respect to Mr. Bridel, $60,580 in vacation pay, $50,000
    in severance pay, auto lease payments of $1,155, and $1,776 of group
    insurance benefits, (ii) with respect to Mr. Liston, $32,463 in vacation
    pay, $46,154 in severance pay, auto lease payments of $595, and $1,509 of
    group insurance benefits, and (iii) with respect to Mr. Maisano, $16,338 in
    vacation pay and auto lease payments of $495.
 
(6) Represents bonus payments pursuant to the Company's cash bonus plans for
    fiscal 1996 (the "1996 Plan") and fiscal 1995 (the "1995 Plan"). The 1996
    Plan provided for the payment of bonuses to participants from a pool of up
    to 15% of the Company's pre-tax, pre-bonus earnings (the "Pre-Bonus
    Earnings") for the fiscal year ending May 31, 1996, except that no awards
    were to be made if the amount of Pre-Bonus Earnings was less than
    $3,000,000. The 1995 Plan provided for the payment of bonuses to
    participants from a pool of up to 15% of the Company's Pre-Bonus Earnings
    for the fiscal year ending May 31, 1995, except that no awards were to be
    made if the amount of Pre-Bonus Earnings was less than




                                       16
<PAGE>   18
    $2,000,000. With respect to the 1996 Plan and the 1995 Plan, 90% of the pool
    amount was awarded based on the participation weight assigned in such plan
    to each participant and 10% was awarded to participants in the discretion of
    the Compensation Committee of the Board of Directors after consultation 
    with the Chief Executive Officer.
 
(7) Reflects the value of a 10,000 share restricted stock grant made as of April
    8, 1996 to each of Messrs. Bridel and Liston based on the market value of
    such stock as of the date of issuance (without giving effect to the
    diminution in value attributed to restrictions on such shares). See
    "-- Employment Contracts and Change-in-Control Arrangements."
 
(8) Represents Company contributions on behalf of Messrs. Bridel and Liston
    under the Company's Deferred Compensation Plan.
 
                        OPTION/SAR GRANTS IN FISCAL 1997
 
          None of those persons serving as chief executive officer of the
Company during fiscal 1997 or any other executive officer of the Company named
in the Summary Compensation Table under the caption "Executive Compensation" was
issued any option to acquire the Company's Common Stock during fiscal 1997.
 
                      AGGREGATED 1997 OPTION/SAR EXERCISES
                           AND YEAR-END OPTION VALUES
 
          No stock options were exercised during or held at the end of fiscal
1997 by any of those persons serving as chief executive officers of the Company
during fiscal 1997 or any other executive officer of the Company named in the
Summary Compensation Table under the caption "Executive Compensation."
 
            EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS
 
          During fiscal 1997 until their resignations on February 13, 1997,
Robert W. Bridel served as the Company's President and Chief Executive Officer
and Thomas S. Liston served as the Company's Chief Financial Officer, Secretary
and Treasurer. Both Messrs. Bridel and Liston served in such capacities under
employment agreements with the Company (the "Agreements") dated April 8, 1996,
the initial terms of which extended through April 8, 1998. The Agreements
provided for annual salaries of $325,000 and $300,000 to Messrs. Bridel and
Liston, respectively. Under the Agreements, Mr. Bridel and Mr. Liston received
options to purchase 35,000 shares and 25,000 shares, respectively, of the
Company's Common Stock, and restricted stock awards of 10,000 shares each, the
vesting of such options and stock awards to occur one-half on each of the first
and second anniversary dates of such Agreements (provided, with respect to the
stock awards, that such executive officer remained employed by the Company on
each such anniversary date). The Agreements contained certain severance
provisions, and in connection with the resignations from the Company of Messrs.
Bridel and Liston, the Company and each of Messrs. Bridel and Liston entered
into severance agreements, under which the following benefits are payable to or
on behalf of Messrs. Bridel and Liston: (i) $371,250.00 and $342,692.33,
respectively, representing salary from February 17, 1997 through April 8, 1998,
(ii) $8,230.63 to each representing bonuses in respect of tax obligations with
respect to 5,000 shares of restricted stock that vested as to each on February
13, 1997 (the "Resignation Date"), (iii) $3,082.50 and $2,464.62, respectively,
representing accrued vacation, (iv) reimbursement of the cost of their electing
to continue to be included in the Company's medical insurance plan from the
Resignation Date through April 8, 1998 (totaling $5,769.69 and $4,519.48,
respectively), (v) payment of fees of an outplacement services firm up to
$25,000 each, (vi) inclusion in the Company's life insurance and disability
plans from the Resignation Date through April 8, 1998 and (vii) continuation of
automobile-related benefits from the Resignation Date through April 8, 1998
(totaling $8,086.54 and $8,321.32, respectively).
 
          Simultaneously with the resignation of Mr. Bridel as President and
Chief Executive Officer of the Company, the Company retained Samuel J. Merksamer
as its President and Chief Executive Officer. Effective February 13, 1997, the
Company and Mr. Merksamer entered into a non-binding letter of intent
 
                                       17
<PAGE>   19
under which they agreed, among other things, to negotiate a definitive
employment contract by May 15, 1997. The Bankruptcy Court has authorized the
Company to enter into employment agreements with Mr. Merksamer and with certain
other executive officers of the Company, a summary description of certain terms
of which is set forth under the caption "-- Compensation Committee Report --
Implementation of Philosophy."
 
COMPENSATION COMMITTEE REPORT
 
COMPENSATION PHILOSOPHY
 
        The Compensation Committee of the Board of Directors (the "Compensation
Committee") is responsible for developing and implementing the Company's
executive compensation policies. The Compensation Committee's philosophy of
executive compensation is to enhance the profitability of the Company, and thus
shareholder value, by closely aligning the financial interests of the executive
officers with those of the shareholders.
 
IMPLEMENTATION OF PHILOSOPHY
 
        Generally, the Compensation Committee seeks to realize this objective by
the use of short term incentives in the form of salary and cash bonuses, and
long term incentives in the form of stock option and restricted stock grants.
Salaries initially are set based on the executive officer's experience and
competitive conditions. Thereafter, salaries may be adjusted based on various
factors, including the executive's performance. In setting and making
adjustments to salaries, the Compensation Committee also considers salaries paid
to similarly situated executive officers in comparable companies.
 
        Consistent with the foregoing, in February 1997, after a nationwide
search for a management team capable of analyzing the reasons for the Company's
poor performance and developing and executing a plan to improve such
performance, the Compensation Committee approved compensation terms for each of
Messrs. Merksamer and Healey. Effective February 13, 1997, the Company entered
into a non-binding letter of intent with each of Mr. Merksamer and Mr. Healey to
employ Mr. Merksamer as President and Chief Executive Officer of the Company and
Mr. Healey as Executive Vice President, Chief Financial Officer and Secretary of
the Company.
 
        Prior to the Bankruptcy Filing, the Compensation Committee began to
re-evaluate the Company's executive employment needs in the context of potential
formal or informal reorganization proceedings. As a result of such reevaluation,
and recognizing the decline in the value of non-cash compensation in the form of
equity in the Company, the difficulties to be faced by its executives in an
attempt to lead the Company out of any such proceedings and the importance of
retaining key executives during such proceedings, the Compensation Committee
determined that it was in the best interests of the Company to enter into
employment agreements with such executives. At a hearing of the Bankruptcy Court
held on September 24, 1997, the Bankruptcy Court authorized the Company to enter
into employment agreements (the "Employment Agreements") with Mr. Merksamer and
each of Messrs. Healey, McCullough, Haggar and Edgel (each an "Executive"). Upon
entry of the related Bankruptcy Court order, the Company will enter into such
Employment Agreements, which extend through confirmation of a plan of
reorganization of the Company. Set forth below is a summary of certain other
terms of such Employment Agreements.
 
                                       18
<PAGE>   20
 
                     CERTAIN TERMS OF EMPLOYMENT AGREEMENTS
 
<TABLE>
<CAPTION>
                                                                    PLAN OF REORGANIZATION CONFIRMATION BONUS
                                                                   (AS A PERCENTAGE OF ANNUAL BASE SALARY)(2)
                                                                -------------------------------------------------
                                               MAXIMUM ANNUAL                      IF CONFIRMA-     IF CONFIRMA-
                                               CASH BONUS (AS                     TION OCCURS ON   TION OCCURS ON
                                                     A                               OR AFTER         OR AFTER
                                               PERCENTAGE OF                       MAY 1, 1998      JULY 1, 1998
                                                   ANNUAL       IF CONFIRMATION    THROUGH AND      AND PRIOR TO
                                 ANNUAL BASE        BASE        OCCURS PRIOR TO     INCLUDING      SEPTEMBER 30,
        EXECUTIVE/TITLE            SALARY        SALARY)(1)       MAY 1, 1998     JUNE 30, 1998         1998
-------------------------------- -----------   --------------   ---------------   --------------   --------------
<S>                              <C>           <C>              <C>               <C>              <C>
Samuel J. Merksamer.............  $ 400,000          100%             125%              100%             75%
  President and Chief Executive
  Officer
E. Peter Healey.................  $ 275,000           75%             125%              100%             75%
  Executive Vice President,
  Chief Financial Officer and
  Secretary
Randy N. McCullough.............  $ 225,000           60%             125%              100%             75%
  Senior Vice President --
  Merchandising
Chad C. Haggar..................  $ 165,000           50%             125%              100%             75%
  Vice President -- Operations
Bill R. Edgel...................  $ 120,000           33%             125%              100%             75%
  Vice President -- Marketing
</TABLE>
 
---------------
 
(1) Such bonuses are payable as follows: (i) 50% thereof are payable if the
    Company achieves projected earnings before interest, taxes, depreciation and
    amortization for its 1998 fiscal year, (ii) 10% thereof are payable if the
    Company meets or exceeds its November 30, 1997 projected inventory levels,
    (iii) 10% thereof are payable if the Company meets or exceeds its December
    31, 1997 projected cash deposit, receivable and inventory levels, (iv) 10%
    thereof are payable if the Company meets its December 31, 1997 projected
    general and administrative expenses, (v) 10% thereof are payable if, as of
    February 1998, there is total availability under the borrowing base in the
    Company's revolving credit facility (as modified by the Cash Stipulation
    filed with the Bankruptcy Court) plus total cash balances of at least $4.1
    million, and payables are maintained within agreed upon vendor terms, and
    (vi) the remaining 10% are payable upon receipt from vendors of 1.4 times
    the amount of inventory returned by November 1997 and at the end of February
    1998.
 
(2) A condition to the payment of such bonus will require that the Company have
    an asset-based, working capital credit facility on market terms on the
    confirmation date of a plan of reorganization.
 
        Under the Employment Agreements, if an Executive's employment is
terminated by the Company without cause, by the Executive with good reason
(including a sale of the Company under the Bankruptcy Code), due to an
Executive's death or disability, or as a result of the confirmation of a plan of
reorganization, such Executive is entitled to receive (i) accrued annual base
salary and vacation, (ii) his maximum annual cash bonus if (A) the fiscal year
end 1998 performance targets have been achieved (provided that such target will
be prospectively applicable with respect to termination resulting from
confirmation of a plan prior to the end of such fiscal year) or (B) in the event
of a Change-in-Control (as defined below) of the Company at a time when the
Company is a going concern or the death or disability of an Executive if any
applicable performance conditions have been met, and (iii) if such termination
without cause or with good reason occurs prior to confirmation of a plan of
reorganization of the Company, his confirmation bonus. If the Executive's
employment is terminated by the Company for cause (i.e., malfeasance or
misfeasance) or by the Executive without good reason, such Executive is entitled
to receive accrued annual base salary and vacation, but no annual cash bonus or
confirmation bonus (if such termination occurs prior to confirmation). Under the
Employment Agreements, a "Change-in-Control" includes the dissolution or
liquidation of the Company, a reorganization, merger or consolidation of the
Company with one or more corporations in which the Company is not the surviving
entity or as a result of which the Company's outstanding voting securities are
converted to
 
                                       19
<PAGE>   21
 
or reclassified as cash, securities of another corporation or other property, a
sale of assets of the Company or its subsidiaries having a fair market value
equal to more than 50% of the total fair market value of the Company's assets to
a nonaffiliate of the Company, or the acquisition of more than 30% of the
then-outstanding voting securities of the Company by a nonaffiliate.
 
1997 COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
 
        The base salary of the Company's Chief Executive Officer is established
through negotiations between the Compensation Committee and such Chief Executive
Officer. Until his resignation on February 13, 1997, Robert W. Bridel was the
Company's Chief Executive Officer. In setting Mr. Bridel's annual salary and
incentive compensation for Fiscal 1997, the Compensation Committee considered
numerous factors, including Mr. Bridel's previous salary level, his experience
and his overall performance. Samuel J. Merksamer succeeded Mr. Bridel as the
Company's President and Chief Executive Officer. In setting Mr. Merksamer's
annual salary and incentive compensation for Fiscal 1997, the Compensation
Committee considered numerous factors, including Mr. Merksamer's extensive
experience in the jewelry industry, his prior success in turning around troubled
companies and the market rate for presidents and chief executive officers with
knowledge and experience commensurate to that of Mr. Merksamer. Based on these
factors, and after negotiations between the Compensation Committee and Mr.
Merksamer, the Compensation Committee established Mr. Merksamer's compensation
terms in the non-binding letter of intent referred to above. After the
Compensation Committee's re-evaluation of the Company's executive employment
needs in the context of potential formal or informal reorganization proceedings,
and after additional negotiations between the Compensation Committee and Mr.
Merksamer, the Compensation Committee established Mr. Merksamer's compensation
terms as reflected in his Employment Agreement described above.
 
                                          THE COMPENSATION COMMITTEE
 
                                          Carol R. Goldberg, Chairman
                                          David W. Cochran
                                          John W. Gildea
                                          Cleaveland D. Miller
                                          William P. O'Donnell
 
                                       20
<PAGE>   22
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
         The following table sets forth, as of October 3, 1997, information as
to the beneficial ownership of the Company's Common Stock by (i) each person who
is known by the Company to own beneficially more than 5% of its outstanding
shares of Common Stock, (ii) each of the Company's directors and director
nominees, (iii) each of the officers named in the Summary Compensation Table
under the caption "Executive Compensation," and (iv) all executive officers and
directors of the Company as a group. In each instance, information as to the
number of shares owned and the nature of ownership has been provided by the
person or entity identified or described and is not within the direct knowledge
of the Company.
 
<TABLE>
<CAPTION>
                                                                      AMOUNT        PERCENT
                                                                   BENEFICIALLY       OF
                  NAME AND ADDRESS OF BENEFICIAL OWNER              OWNED (1)        CLASS
        ---------------------------------------------------------  ------------     -------
        <S>                                                        <C>              <C>
        Robert W. Bridel.........................................      22,000           **
          500 W. Harbor Drive, Apt. 124
          San Diego, CA 92101
        Thomas S. Liston.........................................          --           **
          14518 Las Brizas Lane
          Sun City, AZ 85375
        Samuel J. Merksamer*.....................................          --           **
        Joseph M. Maisano........................................          --           **
          14 Creekview Street
          Sanger, TX 76266
        William D. Eberle*.......................................      82,600(3)       2.0%
        David W. Cochran*........................................       3,600(2)        **
        Carol R. Goldberg*.......................................         400(2)        **
        Cleaveland D. Miller*....................................       3,600(2)        **
        John W. Gildea...........................................     595,600(4)      14.8%
          115 East Putnam Avenue
          Greenwich, CT 06830
        William P. O'Donnell.....................................     535,600(5)      13.3%
          115 East Putnam Avenue
          Greenwich, CT 06830
        Network Fund III, Ltd....................................     525,000(6)      13.0%
          P.O. Box 219, Butterfield House
          Grand Cayman, Cayman Islands, B.W.I.
        Gary Gelman..............................................     456,700(7)      11.3%
          One Jerico Plaza
          Jerico, NY 11753
        J. Ezra Merkin...........................................     325,000(8)       8.1%
          450 Park Avenue
          New York, NY 10022
        All executive officers and directors as a group (12
          persons)...............................................     697,400         17.1%
</TABLE>
 
---------------
 
(1) To the Company's knowledge, except as otherwise set forth in this table, the
    persons and entities in this table have sole voting, investment and
    dispositive power with respect to all shares of Common Stock shown as
    beneficially owned by them, subject to community property laws where
    applicable.
 
(2) All of such shares are issuable upon the exercise of currently-exercisable
    options outstanding under the Company's 1994 Stock Option Plan (the "1994
    Stock Option Plan"), which is administered by the Compensation Committee of
    the Board of Directors.
 
(3) 15,000 of such shares are issued and outstanding. 35,000 of such shares are
    issuable upon the exercise of currently-exercisable options. 32,000 of such
    shares are restricted shares, as to which Mr. Eberle has sole voting power.
    600 of such shares are issuable upon the exercise of currently-exercisable
    options
 
                                       21
<PAGE>   23
 
    outstanding under the Company's 1994 Stock Option Plan, which is
    administered by the Compensation Committee of the Board of Directors. See
    "Executive Compensation -- Directors."
 
(4) 600 of such shares are issuable upon the exercise of currently-exercisable
    options outstanding under the Company's 1994 Stock Option Plan, which is
    administered by the Compensation Committee of the Board of Directors. With
    respect to the remaining 595,000 of such shares, pursuant to an amended
    Schedule 13D filed by Mr. Gildea under the Exchange Act, dated June 11,
    1996, as of such date Mr. Gildea had sole voting and dispositive power as to
    70,000 of such shares and shared dispositive power with Network Fund III,
    Ltd. as to 525,000 of such shares.
 
(5) 600 of such shares are issuable upon the exercise of currently-exercisable
    options outstanding under the Company's 1994 Stock Option Plan, which is
    administered by the Compensation Committee of the Board of Directors. With
    respect to the remaining 535,000 of such shares, pursuant to a Form 3 filed
    by Mr. O'Donnell under the 1934 Act dated September 10, 1996, as of such
    date Mr. O'Donnell had sole voting and dispositive power as to 10,000 of
    such shares and shared dispositive power with Network Fund III, Ltd. as to
    525,000 of such shares.
 
(6) The Network Fund III, Ltd. has shared dispositive power with Mr. Gildea and
    Mr. O'Donnell as to such shares. See footnotes 4 and 5 above.
 
(7) As set forth in an amended Schedule 13D filed by Mr. Gelman under the 1934
    Act dated January 15, 1997, as of such date Mr. Gelman had sole voting and
    dispositive power with respect to all such shares.
 
(8) As set forth in a Schedule 13D filed by Mr. Merkin under the 1934 Act dated
    May 22, 1996, as of such date Mr. Merkin had sole voting and dispositive
    power as to 20,475 of such shares, shared voting and dispositive power with
    Gabriel Capital, L.P. as to 126,425 of such shares, and shared voting and
    dispositive power with Ariel Management Corp. as to 178,100 of such shares.
 
  * Address is c/o Barry's Jewelers, Inc., 111 West Lemon Avenue, Monrovia,
    California 91016.
 
 ** Less than one percent.



                                       22
<PAGE>   24
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
          David Blum and Gerson I. Fox, each a current shareholder and former
officer and director of the Company, presently own and lease to the Company,
through a partnership, the Company's headquarters building. In May 1990, the
Company moved into the new headquarters office building that allowed the Company
to consolidate all corporate credit, collection, merchandising and
administrative functions into a single location for more efficient management
and to allow future growth. The building is a special-purpose building built to
the Company's specifications. The base annual rent for the first five years was
$574,284. Currently, the base annual rent is $643,476. On the 121st month, the
rent may be increased based on a cost-of-living index. The Company is
responsible for leasehold improvements, insurance, property taxes, maintenance
and repairs. The lease has a 15-year term, but the Company has the right to
terminate the lease earlier (the "Early Termination Right"), provided that the
Company gives six months' notice and pays $15,000 for each month remaining in
the 15-year term after the effective date of such termination. In connection
with certain consulting agreements between the Company and each of Messrs. Blum
and Fox (each of which expired on May 31, 1995) and a financing secured by the
leased premises, and at the request of the lessor, the Company agreed in 1995 to
waive such Early Termination Right. The Company believes that the terms of the
foregoing lease are presently above market, and is currently negotiating with
the lessor so as to revise such terms to more closely reflect current market
conditions (although no assurances can be given that the Company will be
successful in such negotiations).
 
          William D. Eberle, the Company's Chairman, is of counsel to the law
firm of Kaye, Scholer, Fierman, Hays & Handler LLP, which firm provided certain
legal services to the Company during Fiscal 1997.

                                       23
<PAGE>   25

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

           (a)  Financial Statements, Financial Statement Schedules and
                Exhibits 

               1. CONSOLIDATED FINANCIAL STATEMENTS
                     The following are included herein under Item 8:
                        Financial Statements, Financial Statement Schedules
                          and Exhibits
                        Independent Auditors' Report - Deloitte & Touche LLP
                        Consolidated Balance Sheets as of May 31, 1997 and 1996
                        Consolidated Statements of Operations for the three
                          years ended May 31, 1997.
                        Consolidated Statements of Stockholders' (Deficiency)
                          Equity for the three years ended May 31, 1997.
                        Consolidated Statements of Cash Flows for the three
                          years ended May 31, 1997.
                        Notes to Consolidated Financial Statements

               2.  FINANCIAL STATEMENT SCHEDULES:
                     II.  Valuation and Qualifying Accounts

                        All other schedules are omitted because they are not
                          applicable or the required information is included in
                          the Consolidated Financial Statements or notes
                          thereto.

               3.  EXHIBITS



                                       24
<PAGE>   26
EXHIBIT
   NO.         DESCRIPTION
   ---         -----------

   3.1    Restated Articles of Incorporation filed November 16, 1994 in
          connection with the Reverse Stock Split (5).

   3.2    Bylaws (10).

   4.1(a) Indenture, dated as of December 22, 1993, between Barry's Jewelers,
          Inc. and First Trust National Association, as trustee ( the
          "Trustee"), with respect to the 11% Senior Secured Notes due December
          22, 2000, including the form of Note certificate (4).

   4.1(b) Amendment No. 1 to Indenture, dated as of February 14, 1994,
          between Barry's Jewelers, Inc. and the Trustee (5).

   4.1(c) Amendment No. 2 to Indenture, dated as of March 18, 1994, between
          Barry's Jewelers, Inc. and the Trustee (6).

   4.1(d) Amendment No. 3 to Indenture, dated as of December 21, 1995, 
          between Barry's Jewelers, Inc. and the Trustee (6).

   4.1(e) Amendment No. 4 to Indenture, dated as of August 30, 1996, between
          Barry's Jewelers, Inc. and the Trustee (9).

   4.2    Exchange Agreement, dated as of December 22, 1993, by and among the
          Company and the holders signatories thereto (1).

   4.3    Senior Secured Notes Registration Rights Agreement, dated as of
          December 22, 1993, by and among the Company and the holders
          signatories thereto (1).

   4.4    Common Stock Registration Rights Agreement, dated as of December 22,
          1993, by and among the Company and the holders signatories thereto
          (1).

   4.5    Second Amended and Restated Revolving Credit Agreement, dated as of
          August 30, 1996, by and among the Company, The First National Bank of
          Boston ("FNBB"), as lender and agent thereunder (9).

   4.6(a) Collateral Agency and Intercreditor Agreement, dated as of December
          22, 1993, among FNBB, as collateral agent for the secured parties and
          as agent for the lenders (under the New Revolving Credit Agreement),
          the Trustee, on behalf of the holders of the Notes and the Company
          (1).

   4.6(b) Amendment Agreement No. 1, dated as of December 21, 1995, to
          Collateral Agency and Intercreditor Agreement, dated as of December
          22, 1993, among FNBB, the Trustee, and the Company (6).

   4.6(c) Amendment Agreement No. 2, dated as of August 30, 1996, to
          Collateral Agency and Intercreditor Agreement, dated as of December
          22, 1993, among FNBB, the Trustee, and the Company (5).

   4.7    Second Amended and Restated Security Agreement, dated as of August 30,
          1996, between the Company and FNBB, as collateral agent for the
          secured parties (9).

   4.8    Second Amended and Restated Trademark Collateral Security and Pledge
          Agreement, dated as of August 30, 1996, between the Company and FNBB
          (9).

  10.1    Lease dated February 1, 1990 between the El Monte Partnership as
          Landlord and Barry's Jewelers, Inc. as Tenant (8).

  10.2    Executive Incentive Bonus Plan for the year ended May 31, 1994 (2).*

  10.3    Executive Incentive Bonus Plan for the year ended May 31, 1995 (5).*


                                       25
<PAGE>   27
EXHIBIT
  NO.          DESCRIPTION
  ---          -----------

 10.4     Lease dated December 1, 1990, between Gerson I. Fox and David Blum, as
          Lessors, and BBF Jewelers Management, Inc., as Lessee (2).

 10.5     Deferred Compensation Plan (4).*

 10.6     Executive Deferral Plan (6).*

 10.7     Executive Bonus Plan - Master Plan Document (4).*

 10.8     Executive Bonus Plan - Trust Agreement (4).*

 10.9     Employee Stock Purchase Plan (5).*

 10.10    Employment Agreement dated April 8, 1996, between the Company and
          Thomas S. Liston (9).*

 10.11    Employment Agreement dated April 8, 1996, between the Company and
          Robert Bridel (9).*

 10.12    Agreement dated March 19, 1997, between the Company and Thomas S.
          Liston (10).*

 10.13    Agreement dated March 19, 1997, between the Company and Robert Bridel
          (10).*

 10.14(a) Form of Employment Agreement to be entered into between the Company
          and each of Samuel J. Merksamer, as President and Chief Executive
          Officer, E. Peter Healey, as Executive Vice President, Chief
          Financial Officer and Secretary, Randy N. McCullough, as Senior Vice
          President - Merchandising, Chad C. Haggar, as Vice President -
          Operations, and Bill R. Edgel, as Vice President - Marketing (10).* 

 10.14(b) Term Sheet between the Company and certain of the Company's creditors
          evidencing their compromise regarding the terms of such employment
          agreements (10).*

 10.14(c) Schedule of Certain Terms of such employment agreements (10).*

 10.15(a) Form of Trade Financing Agreement Term Sheet (10).

 10.15(b) Form of Trade Financing Agreement (10).

 10.15(c) Exhibit B to Form of Trade Financing Agreement (10).

 10.15(d) Form of Consignment Agreement (10).

 23       Consent of Independent Auditors (10).

 27       Financial Data Schedule (10).

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

(1)    Incorporated herein by reference to the Company's Current Report on 
       Form 8-K filed December 22, 1993.
(2)    Incorporated herein by reference to the indicated exhibits filed in
       response to Item 14, "Exhibits," of the Company's Annual Report on Form
       10-K for the year ended May 31, 1993.
(3)    Incorporated herein by reference to the indicated exhibits filed in
       response to Item 6, "Exhibits," of the Company's Quarterly Report on Form
       10-Q for the quarter ended November 30, 1993.
(4)    Incorporated herein by reference to the indicated exhibits filed in
       response to Item 14, "Exhibits," of the Company's Annual Report on Form
       10-K for the year ended May 31, 1994.
(5)    Incorporated herein by reference to the indicated exhibits filed in
       response to Item 14, "Exhibits," of the Company's Annual Report on Form
       10-K for the year ended May 31, 1995.
(6)    Incorporated herein by reference to the Company's Current Report on 
       Form 8-K filed December 21, 1995.
(7)    Incorporated herein by reference to the indicated exhibits filed in
       response to Item 14, "Exhibits," of the Company's Annual Report on Form
       10-K/A for the year ended May 31, 1995.
(8)    Incorporated herein by reference to the indicated exhibits filed in
       response to Item 14, "Exhibits," of the Company's Annual Report on Form
       10-K for the year ended May 31, 1990.
(9)    Incorporated herein by reference to the indicated exhibits filed in
       response to Item 14, "Exhibits," of the Company's Annual Report on Form
       10-K for the year ended May 31, 1996.
(10)   Filed herewith.

*      Management contract or compensatory plan or arrangement.

(b)    Reports on Form 8-K

       On May 20, 1997, the Company filed a Current Report on Form 8-K with
       respect to Item 3 under Form 8-K.       


                                       26
<PAGE>   28


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                                                 BARRY'S JEWELERS, INC.



October 14, 1997                                 By:  /s/ SAMUEL J. MERKSAMER
                                                      -----------------------
                                                        Samuel J. Merksamer
                                                        President and Chief
                                                         Executive Officer



October 14, 1997                                 By:  /s/ E. PETER HEALEY
                                                        -------------------
                                                        E. Peter Healey
                                                    Executive Vice President
                                                  and Chief Financial Officer
                                                 (Principal Financial Officer)



October 14, 1997                                  By:  /s/ DANIEL L. FELSENTHAL
                                                      ------------------------
                                                        Daniel L. Felsenthal
                                                      Vice President Finance
                                                  (Principal Accounting Officer)



                                       27
<PAGE>   29
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on October 14, 1997:


<TABLE>
<CAPTION>

          Signature                  Title                      Date
          ---------                  -----                      ----
          <S>                        <C>                        <C>

          /s/ WILLIAM EBERLE         Chairman of the Board      October 14, 1997
          ---------------------      of Directors
          William Eberle


          /s/ SAMUEL J. MERKSAMER    Chief Executive Officer    October 14, 1997
          ------------------------   and Director
          Samuel J. Merksamer


          /s/ DAVID COCHRAN          Director                   October 14, 1997
          ------------------------
          David Cochran


          /s/ JOHN W. GILDEA         Director                   October 14, 1997
          ------------------------
          John W. Gildea


          /s/ CAROL R. GOLDBERG      Director                   October 14, 1997
          ------------------------
          Carol R. Goldberg


          /s/ CLEAVELAND D. MILLER   Director                   October 14, 1997
          ------------------------
          Cleaveland D. Miller


          /s/ WILLIAM P. O'DONNELL   Director                   October 14, 1997
          ------------------------
          William P. O'Donnell
</TABLE>


                                       28
<PAGE>   30
                     BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)

                  SCHEDULE II--VALUATION & QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                BALANCE AT      CHARGE TO                       BALANCE AT
                                                BEGINNING       COSTS AND       DEDUCTIONS/       END OF
                                                OF PERIOD       EXPENSES           OTHER          PERIOD
                                                ----------      ---------       -----------     -----------
<S>                                             <C>             <C>             <C>             <C>
YEAR END 1997:
  Allowance for doubtful accounts               $10,930         $18,766         $(19,396)       $10,300
  Inventory valuation allowance                 $    --         $ 3,033         $     --        $ 3,033

YEAR END 1996:
  Allowance for doubtful accounts               $11,662         $11,839         $(12,571)       $10,930

YEAR END 1995:
  Allowance for doubtful accounts               $11,162         $10,501         $(10,001)       $11,662

</TABLE>



                                      F-19
<PAGE>   31

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
Barry's Jewelers, Inc.
Monrovia, California


We have audited the accompanying consolidated balance sheets of Barry's
Jewelers, Inc. (Debtor-in-Possession) and Subsidiary (the "Company") as of May
31, 1997 and 1996, and the related consolidated statements of operations,
shareholders' (deficiency) equity, and cash flows for each of the three years in
the period ended May 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Barry's Jewelers,
Inc. and Subsidiary as of May 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1997 in conformity with generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, the Company has
filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. The
accompanying consolidated financial statements do not purport to reflect or
provide for the consequences of the bankruptcy proceedings. In particular, such
financial statements do not purport to show (a) as to assets, their realizable
value on a liquidation basis or their availability to satisfy liabilities; (b)
as to prepetition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to shareholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any changes that may be made
in its business.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company is currently operating its
business as Debtor-in-Possession under the jurisdiction of the Bankruptcy Court,
and continuation of the Company as a going concern is contingent upon, among
other things, its ability to formulate a Plan of Reorganization which will be
approved by its creditors and confirmed by the Bankruptcy Court, and its ability
to generate sufficient cash flows from operations and financing sources. The
uncertainties inherent in the bankruptcy process and the Company's recurring
losses from operations and shareholders' capital deficiency raise substantial
doubt about its ability to continue as a going concern. Management's plans
concerning these matters are discussed in Note 1 to the consolidated financial
statements. The consolidated financial statements do not include adjustments
that might result from the outcome of this uncertainty.


/s/ Deloitte & Touche LLP


Los Angeles, California
October 1, 1997





                                      F-1
<PAGE>   32

                     BARRY'S JEWELERS, INC. and SUBSIDIARY
                             (Debtor-in-Possession)
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                        May 31, 1997            May 31, 1996
                                                        ------------            ------------
<S>                                                     <C>                     <C>
                                     ASSETS (Notes 1 and 6)

Current assets:
        Cash and cash equivalents (Note 6)              $  7,322                $  1,765
        Customer receivables, net of allowances
          for doubtful accounts of $10,300 (1997)
          and $10,930 (1996)                              54,552                  68,720
        Merchandise inventories (Note 3)                  41,374                  54,559
        Prepaid expenses and other current assets          2,142                   2,031
                                                        --------                --------
                Total current assets                     105,390                 127,075

Property and equipment: (Note 1)
        Leasehold improvements, furniture
          and fixtures                                    20,726                  23,013
        Computers and equipment                            4,110                   3,778
                                                        --------                --------
                                                          24,836                  26,791
        Less: accumulated depreciation
          and amortization                                 9,413                  10,425
                                                        --------                --------
        Net property and equipment                        15,423                  16,366
        Deferred income taxes (Note 7)                        72                     122
        Other assets, principally deferred debt
          issuance costs, net of accumulated
          amortization of $1,834 (1997)
          and $1,864 (1996) (Note 6)                       2,598                   2,312
                                                        --------                --------
                Total assets                            $123,483                $145,875
                                                        ========                ========

                LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY (Notes 1 and 6)

Current liabilities:
        Accounts payable - trade                        $    221                $  3,837
        Other accrued liabilities (Note 4)                 5,687                   5,238
        Current portion of long-term
          debt (Note 6)                                        -                     181
                                                        --------                --------
                Total current liabilities                  5,908                   9,256
Long-term debt, less current
  maturities (Note 6)                                          -                 103,398
Liabilities subject to compromise under
  reorganization proceedings (Notes 5 and 6)             130,271                       -
Commitments and contingencies (Notes 8 and 9)
Shareholders' (deficiency) equity: (Note 9)
        Common stock, no par value; authorized
          8,000,000 shares; issued and
          outstanding, 4,029,372 (1997) and
          3,999,416 (1996)                                33,247                  33,196
        (Accumulated deficit) Retained earnings          (45,943)                     25
                                                        --------                --------
                Total shareholders' (deficiency)
                  equity                                 (12,696)                 33,221
                                                        --------                --------
                Total liabilities and shareholders' 
                  (deficiency) equity                   $123,483                $145,875
                                                        ========                ========

</TABLE>

See Notes to Consolidated Financial Statements


                                      F-2
<PAGE>   33
                     BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)

                     CONSOLIDATED STATEMENTS OF OPERATIONS
            (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                               FOR THE YEARS ENDED MAY 31,
                                                        ----------------------------------------
                                                          1997            1996            1995
                                                        --------        --------        --------
<S>                                                     <C>             <C>             <C>
Net sales                                               $130,446        $140,145        $136,055
Finance and credit insurance fees                         13,900          16,008          15,681
                                                        --------        --------        --------
                                                         144,346         156,153         151,736
                                                        --------        --------        --------
Costs and expenses:
  Cost of goods sold, buying and occupancy (Note 3)       93,002          83,769          78,907
  Selling, general and administrative expenses            57,036          51,974          50,966
  Provision for doubtful accounts                         18,766          11,759          10,193
  Impairment loss (Note 2)                                 3,947            --              --
  Restructuring expenses (Note 1)                          1,336            --              --
                                                        --------        --------        --------
                                                         174,087         147,502         140,066
                                                        --------        --------        --------
        Operating (loss) income                          (29,741)          8,651          11,670

Interest expense, net                                     12,745          11,146           9,764
                                                        --------        --------        --------
    (Loss) income before reorganization costs,
      income taxes, and extraordinary item               (42,486)         (2,495)          1,906
Reorganization costs (Notes 2 and 8)                       2,322            --              --
                                                        --------        --------        --------
    (Loss) income before income taxes and
      extraordinary item                                 (44,808)         (2,495)          1,906
Income taxes (Note 7)                                        284             288            --
                                                        --------        --------        --------
    (Loss) income before extraordinary item              (45,092)         (2,783)          1,906
Extraordinary item (Note 6)                                 (876)           --              --
                                                        --------        --------        --------
Net (loss) income                                       $(45,968)       $ (2,783)       $  1,906
                                                        ========        ========        ========

Per share data:
  (Loss) income before extraordinary item               $ (11.25)       $  (0.70)       $   0.48
                                                        ========        ========        ========
  Extraordinary item (Note 6)                           $  (0.22)       $   --          $   --
                                                        ========        ========        ========
  (Loss) income                                         $ (11.47)       $  (0.70)       $   0.48
                                                        ========        ========        ========
Weighted average number of common
  shares outstanding                                       4,007           3,978           3,969
                                                        ========        ========        ========
</TABLE>


See Notes to Consolidated Financial Statements



                                      F-3
<PAGE>   34
                     BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)

          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
                       (DOLLARS AND SHARES IN THOUSANDS)

<TABLE>
<CAPTION>
                                             COMMON STOCK              RETAINED
                                       ------------------------        EARNINGS        DEFERRED
                                       SHARES           AMOUNT         (DEFICIT)     COMPENSATION        TOTAL
                                       ------           ------         --------      ------------      ---------
<S>                                    <C>              <C>            <C>            <C>              <C>
Balance at May 31, 1994                 3,969           $32,715        $    902         $(50)           $ 33,567
  Net income for the year                                                 1,906                            1,906

  Utilization of pre-reorganization
    net operating loss carryovers
    (Note 7)                                                221                                              221
  Amortization of deferred compensation                                                   50                  50
                                       ------           -------        --------         ----            --------
Balance at May 31, 1995                 3,969            32,936           2,808           --              35,744
  Net loss for the year                                                  (2,783)                          (2,783)
  Utilization of pre-reorganization
    net operating loss carryovers
    (Note 7)                                                173                                              173
  Shares issued pursuant to employee
    stock purchase plan (Note 9)           30                87                                               87
                                       ------           -------        --------         ----            --------
Balance at May 31, 1996                 3,999            33,196              25           --              33,221
  Net loss for the year                                                 (45,968)                         (45,968)
  Shares issued pursuant to employment
    contracts (Note 9)                     20                37                                               37
  Shares issued pursuant to employee
    stock purchase plan (Note 9)           10                14                                               14
                                       ------           -------        --------         ----            --------
Balance at May 31, 1997                 4,029           $33,247        $(45,943)        $ --            $(12,696)
                                       ======           =======        ========         ====            ========   

</TABLE>

See Notes to Consolidated Financial Statements



                                      F-4
<PAGE>   35
                     BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                             FOR THE YEARS ENDED MAY 31,
                                                        --------------------------------------
                                                         1997            1996             1995
                                                        ------          -------          ------
<S>                                                     <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income                                     $(45,968)       $ (2,783)       $  1,906
  Adjustments to reconcile net (loss) income
    to net cash provided by (used in) 
    operating activities:
    Depreciation and amortization                          4,992           4,626           3,854
    Impairment of long-lived assets                        3,947             --              --
    Extraordinary loss                                       876             --              --
    Compensation on issuance of common stock
      (Note 9)                                                37             --               50
    Provision for doubtful accounts                       18,766          11,759          10,193
    Inventory valuation allowance                          3,003             --              --
    Loss on sale of abandonment of property
      and equipment                                          311             274             101
    Deferred income taxes                                     50             878            (882)
  Changes in assets and liabilities:
    Customer receivables                                  (4,598)        (10,395)        (16,151)
    Merchandise inventories                               10,152            (724)        (11,260)
    Prepaid expenses and other current assets               (111)             (4)         (1,141)
    Other assets                                          (2,385)         (1,336)           (351)
    Restructuring and reorganization costs                 2,752             --              --
    Accounts payable - trade                               6,728          (6,296)          2,703
    Other accrued liabilities                              9,681          (1,995)          1,380
                                                        --------        --------        --------
      Net cash provided by (used in)
        operating activities                               8,263          (5,996)         (9,598)
                                                        --------        --------        --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                      (7,158)         (4,500)         (6,516)
  Proceeds from sale of assets                                74               9              24
                                                        --------        --------        --------
      Net cash used in investing activities               (7,084)         (4,491)         (6,492)
                                                        --------        --------        --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowing (repayments) under revolving
    credit facility                                       49,666         (13,435)         16,507
  Net (repayments) borrowings under securitization
    facility                                             (45,119)         45,119              --
  Proceeds from employee stock purchase plan                  14              87              --
  Principal payments on long-term debt                      (183)           (473)           (561)
  Reduction of long-term debt from securitization 
    transaction                                               --         (20,000)             --
                                                        --------        --------        --------
      Net cash provided by financing activities            4,378          11,298          15,946
                                                        --------        --------        --------
Net increase (decrease) in cash and cash 
  equivalents                                              5,557             811            (144) 
Cash and cash equivalents at beginning of year             1,765             954           1,098
                                                        --------        --------        --------
Cash and cash equivalents at end of year                $  7,322        $  1,765        $    954      
                                                        ========        ========        ========
</TABLE>

See Notes to Consolidated Financial Statements



                                      F-5
<PAGE>   36
                     BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                             FOR THE YEARS ENDED MAY 31,
                                                        --------------------------------------
                                                         1997            1996            1995
                                                        ------          -------         ------
<S>                                                     <C>             <C>             <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for
    Interest                                            $8,364          $11,338         $9,105
    Income taxes                                        $   30          $   543         $  976
  Noncash investing and financing activities:
    Capital lease obligations                           $   --          $    19         $  487
    Utilization of pre-reorganization net
      operating loss carryovers (increase to 
      common stock and reduction of current
      income taxes payable)                             $   --          $   173         $  221


</TABLE>

See Notes to Consolidated Financial Statements                  



                                      F-6
<PAGE>   37

                     BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED MAY 31, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)


1.         REORGANIZATION AND BASIS OF PRESENTATION

           Barry's Jewelers, Inc. (Debtor-in-Possession) and subsidiary (the
           "Company") operates a chain of retail stores that sell fine jewelry
           and watches, utilizing credit financing to enhance sales. Since May
           11, 1997, the Company has operated as "Debtor-in-Possession" under
           the protection of Chapter 11 of the United States Bankruptcy Code
           ("Chapter 11"). It operated 130 stores on May 31, 1997, 161 stores on
           May 31, 1996, and 162 stores on May 31, 1995.

           Throughout fiscal 1997, the Company experienced significant operating
           losses that necessitated the Company's renegotiation of financial
           covenants and certain other terms contained in its Amended Revolving
           Credit Agreement during the second quarter of fiscal 1997 (Note 6).

           In January, 1997, management announced its intent to implement a
           Company-wide restructuring and other cost savings initiatives during
           the third and fourth quarters of fiscal 1997. Those initiatives
           included a plan not to renew leases on twelve stores and closing
           eighteen to twenty-four under-performing stores with concurrent
           reductions in overhead at the Company's remaining stores and
           reduction in corporate expenses. However, the management team of the
           Company was replaced in February 1997 prior to the full execution of
           the restructuring and cost savings initiatives. At the end of the
           third quarter, the Company recorded restructuring charges of
           approximately $1,336 primarily related to severance and costs
           associated with eleven stores closed during the quarter, impairment
           losses of approximately $1,970 related principally to impairment of
           leasehold improvements and fixtures at twenty-six under performing
           stores and a $1,095 cost of goods sold charge to hasten the
           liquidation of aged inventory in an effort to improve cash flow.

           At the end of the third quarter, due to continued operating losses
           the Company was again not in compliance with certain financial
           covenants contained in the Second Amended Revolving Credit Agreement.
           As a result, the Company was unable to make interest payments to the
           holders of the Senior Secured Notes (Note 6). Additionally, most
           vendors were not extending terms and substantially all new
           merchandise purchases were on a cash basis. Because of these
           restrictions on cash flow and an inability to renegotiate existing
           bank debt or raise additional capital through other sources, the
           Company decided to seek bankruptcy protection.

           On May 11, 1997, (the "Petition Date"), the Company filed a voluntary
           petition for reorganization under Chapter 11 in the United States
           Bankruptcy Court for the Central District of California, Los Angeles
           Division. Management determined that filing the Chapter 11 petition
           would allow the Company the needed time and flexibility to
           restructure its operations, help assure the continued flow of
           merchandise to its stores, and provide the time and protection
           necessary to restructure the Company's funding sources.

           Since the Petition Date, the Company has continued in possession of
           its properties and, as Debtor-in-Possession, is authorized to operate
           and manage its businesses and enter into all transactions (including
           obtaining services, inventories, and supplies) that it could have
           entered into in the ordinary course of business without approval of
           the Bankruptcy Court. A statutory Creditors' Committee and an
           official Bondholders' Committee have also been appointed.

           In a Chapter 11 filing, substantially all liabilities as of the
           Petition Date are subject to compromise or other treatment under a
           plan of reorganization. For financial reporting purposes, those
           liabilities and obligations whose disposition is dependent on the
           outcome of the Chapter 11 filing have been segregated and classified
           as liabilities subject to compromise under reorganization proceedings
           in the accompanying consolidated balance sheet (Note 5). Generally,
           actions to enforce or otherwise effect payment of all pre-Chapter 11
           liabilities as well as all pending litigation against the Company are
           stayed while the Company continues its business operations as
           Debtor-in-Possession. Schedules have been filed by the Company with
           the Bankruptcy Court setting forth its assets and liabilities as of
           the Petition Date as reflected in the Company's accounting records.
           Differences between amounts reflected in such schedules and claims
           filed by creditors will be


                                      F-7
<PAGE>   38

                      BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)


           investigated and either amicably resolved or adjudicated before the
           Bankruptcy Court. The ultimate amount of and settlement terms for
           such liabilities are subject to a plan of reorganization and
           accordingly are not presently determinable.

           Under the Bankruptcy Code, the Company may elect to assume or reject
           real estate leases, employment contracts, personal property leases,
           service contracts and other prepetition executory contracts, subject
           to Bankruptcy Court approval. The liabilities subject to compromise
           under reorganization proceedings include a provision for the
           estimated amount that may be claimed by lessors and allowed in
           connection with the unexpired real estate leases. The Company will
           continue to analyze its executory contracts and may assume or reject
           additional contracts.

           The new management team has developed a business plan to (1)
           reposition the Company's merchandise selection; (2) establish vendor
           partnering programs to bring in new consignment inventory and return
           aged merchandise to vendors in exchange for new inventory; (3)
           establish a consistent store format and consolidate trade names; (4)
           adjust the Company's pricing and commission structure to improve
           sales and strengthen its competitive position; (5) pursue
           alternatives to an in-house credit and collection process; and (6)
           install modern merchandising and point-of-sale systems.

           The Company reached an agreement in July 1997 with its vendors and
           creditors regarding the terms of a trade debtor-in-possession
           financing agreement. Pursuant to the agreement, the participating
           vendors will allow the Company to return merchandise with a value
           equal to up to 75% of the vendor's prepetition claim. The value of
           the prepetition merchandise returned shall not exceed, in the
           aggregate, approximately $7,913. Additionally, participating vendors
           will also provide credit for merchandise purchases in an amount equal
           to two and one-half times the value of the prepetition merchandise
           returned. The revolving trade credit will be granted, generally, on
           90-day terms for a period of one year from the date of the agreement.

           Additionally, the Company also reached an agreement in July 1997 with
           its vendors and creditors allowing the Company to increase the level
           of consigned merchandise. Pursuant to the terms of the agreement,
           certain Company vendors will commit to maintain a specified minimum
           amount of consigned merchandise with the Company for a specified
           period. The Company shall hold such merchandise for sale in the
           ordinary course of its business and is responsible for insuring the
           consignment merchandise for its full value and against all risks of
           loss.

           The accompanying consolidated financial statements have been prepared
           in conformity with principles of accounting applicable to a going
           concern, which contemplate the realization of assets and the
           satisfaction of liabilities in the normal course of business. As a
           result of the Chapter 11 filing and circumstances relating to this
           event, such realization of assets and satisfaction of liabilities is
           subject to uncertainty. A plan of reorganization could materially
           change the amounts reported in the accompanying consolidated
           financial statements, which do not give effect to adjustments to the
           carrying values of assets and liabilities, which may be necessary as
           a consequence of a plan of reorganization. The Company's ability to
           continue as a going concern is contingent upon, among other things,
           its ability to formulate a plan of reorganization that will be
           confirmed by the Bankruptcy Court, to achieve satisfactory levels of
           profitability and cash flow from operations, to maintain compliance
           with the debtor-in-possession trade financing agreement and terms of
           the cash stipulation (Note 6), and the ability to obtain sufficient
           financing sources to meet future obligations.

2.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

           Principles of Consolidation The consolidated financial statements
           include the accounts of Barry's Jewelers Inc. and its wholly owned
           subsidiary for the fiscal years ended May 31, 1997 and 1996;
           intercompany transactions and balances have been eliminated.



                                      F-8
<PAGE>   39

                      BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)


           Prior Reorganization    On February 26, 1992, the Company voluntarily
           initiated a case under Chapter 11 of the United States Bankruptcy
           Code and filed a prenegotiated plan of reorganization. On June 19,
           1992, the United States Bankruptcy Court for the Central District of
           California entered an order confirming the Company's Amended Plan of
           Reorganization, as modified (the "Prior Reorganization Plan"). The
           effective date of the Prior Reorganization Plan was June 30, 1992.

           Cash and Cash Equivalents    The Company considers all highly liquid
           investments with an original maturity of three months or less to be 
           cash equivalents.

           Customer Receivables    The Company offers its merchandise on credit
           terms to qualified customers. The Company's policy is to attempt to
           obtain a cash down payment on all credit sales, with remaining
           monthly payments established such that the payment of the credit
           balance will occur, generally, over a period ranging from 24 to 36
           months. In accordance with industry practice, customer receivables
           are included in current assets in the Company's consolidated balance
           sheet. The Company routinely assesses the collectibility of its
           customer receivables.

           The Company's receivables are with customers residing principally in
           Texas and California, with approximately 40% and 33%, respectively,
           of all customer accounts. The Company does business in 18 states,
           primarily California, Texas, Arizona, North Carolina, Utah, Indiana,
           Ohio, Colorado, Idaho, and Montana.

           Merchandise Inventories    Merchandise inventories, substantially all
           of which represent finished goods, are stated at the lower of
           weighted average cost or market. Weighted average cost is determined
           on the first-in, first-out method.

           Property and Equipment    Property and equipment in existence at June
           30, 1992 were stated at fair values as of that date pursuant to fresh
           start reporting adopted in connection with the Prior Reorganization
           Plan. Additions since June 30, 1992 are stated at cost.

           Depreciation and amortization of leasehold improvements, furniture
           and fixtures, and equipment are computed by the straight-line method
           over the lesser of related lease terms or the estimated useful lives
           of such assets as set forth in the following table:


<TABLE>
<CAPTION>
                                                Useful Lives
                                                 in Years
                                                -----------
                      <S>                       <C>
                      Leasehold improvements       10-15
                      Furniture and fixtures        5-10 
                      Computers and equipment          5
</TABLE>


           Impairment of Long-lived Assets    The Financial Accounting Standards
           Board ("FASB") issued Statement of Financial Accounting Standards
           ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets
           and for Long-lived Assets to be Disposed Of," which is effective for
           fiscal years beginning after December 15, 1995. The standard requires
           an entity to review long-lived assets for impairment and recognize a
           loss if expected future cash flows are less than the carrying amount
           of the assets; such losses are measured as the difference between the
           carrying value and the estimated fair value of the assets. The
           estimated fair value is determined based on expected future cash
           flows. The Company adopted this standard in fiscal 1997 and
           recognized an impairment loss of approximately $3,947. This
           impairment loss is comprised of leasehold improvements and fixtures
           at 37 closed stores, as well as computer equipment and software
           related to the Company's plan to replace its merchandise management
           and point-of-sale systems.

           Deferred Debt Issuance Costs    Deferred debt issuance costs are
           reported on the Company's consolidated balance sheet as other assets
           and are being amortized on a straight-line basis over the terms of
           the related financing agreements.


                                      F-9
<PAGE>   40

                      BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)


           Revenue Recognition     The Company recognizes revenue upon delivery
           of merchandise to the customer and either the receipt of a cash
           payment or approval of a credit agreement.

           Reorganization Costs     Professional fees and expenditures directly
           related to the Chapter 11 filing are classified as reorganization
           costs and are expensed as incurred. Reorganization costs for the year
           ended May 31, 1997, consisted primarily of estimated store lease
           rejection claims and professional fees. Cash paid for reorganization
           costs during the year ended May 31, 1997 amounted to $1,205,
           including amounts paid to professionals as retainers. The retainers
           are included in prepaid and other current assets in the accompanying
           consolidated balance sheet.

           Income Taxes     Income taxes are computed using the liability
           method. The provision for income taxes includes income taxes payable
           for the current period and the deferred income tax consequences of
           transactions that have been recognized in the Company's financial
           statements or income tax returns. The carrying value of deferred
           income tax assets is determined based on an evaluation of whether the
           realization of such assets is more likely than not. Temporary
           differences result primarily from accrued liabilities, valuation
           allowances, depreciation and amortization, and state franchise taxes.

           Income (Loss) per Share     Income (loss) per share is based on the
           weighted average number of shares of common stock and common stock
           equivalents outstanding during the periods presented. Common stock
           equivalents consist of shares issuable upon the exercise of stock
           options and warrants, and are included in the calculation of the
           weighted average number of shares outstanding when their effect is
           dilutive.

           On November 1, 1994, the Company's Board of Directors declared a
           1-for-5 reverse stock split of the Company's common stock and
           decreased authorized common shares to 8 million shares effective
           November 16, 1994. All references in the financial statements to the
           number of shares and per share amounts have been retroactively
           adjusted for the reverse stock split and the decrease in the number
           of authorized shares.

           Accounting for Stock-based Compensation     In October 1995, the FASB
           issued SFAS No. 123, "Accounting for Stock-based Compensation." SFAS
           No. 123 requires compensation expense equal to the fair value of the
           option grant to be estimated using accepted option policy formulas
           when the option is granted. The compensation may either be charged to
           the statement of operations or set forth as pro forma information in
           the footnotes to the financial statements, depending on the method
           elected by the Company upon adoption of the standard. During fiscal
           1997, the Company adopted the disclosure requirements of SFAS No. 123
           and elected to continue using the intrinsic value method prescribed
           in Accounting Principles Board Opinion ("APB") No. 25, "Accounting
           for Stock Issued to Employees," for stock option expense recognition.
           The Company omitted the pro forma information required to be
           disclosed due to immateriality.

           Use of Estimates     The preparation of financial statements in
           conformity with generally accepted accounting principles requires
           management to make estimates and assumptions that affect the reported
           amounts of assets and liabilities and disclosure of contingent assets
           and liabilities at the date of the financial statements and the
           reported amounts of revenues and expense during the reporting period.
           Actual results could differ from those estimates.

           Fair Market Value of Financial Instruments     The carrying amounts
           of cash and cash equivalents, trade accounts payable and accrued
           liabilities approximate fair value because of the short maturity of
           these financial instruments. As a result of the Company's Chapter 11
           filing, a limited market has developed for the trading of financial
           instruments included as liabilities subject to compromise. Since the
           market for claims against the Company under Chapter 11 is not well
           developed, no reliable source of market price is available.

           Reclassifications    Certain reclassifications have been made to
           prior year amounts to conform to the current year presentation.



                                      F-10
<PAGE>   41



                      BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)


           Prospective Accounting Changes     The FASB has issued SFAS No. 128, 
           "Earnings Per Share".  The Company will adopt SFAS No. 128 in fiscal 
           1998.

           In June 1997, the FASB issued SFAS No. 131, "Disclosure about
           Segments of an Enterprise and Related Information," which will be
           effective for the Company beginning with fiscal 1998. SFAS No. 131
           redefines how operating segments are determined and requires
           disclosure of certain financial and descriptive information about an
           enterprise's operating segments. The Company has not yet completed
           its analysis of which operating segments it will report, if any.

3.         INVENTORY VALUATION

           In connection with the change in merchandising  strategy  developed 
           by the Company's new management team, an inventory valuation reserve 
           of $3,033 was established as of May 31, 1997 to adjust the carrying 
           value of ending inventory to its estimated net realizable value.

4.         OTHER ACCRUED LIABILITIES

           Other accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                     May 31,                           1997           1996
                     ---------------------------     ------         ------
                     <S>                             <C>            <C>   
                     Accrued wages and benefits      $2,277         $2,325
                     Other accrued expenses           1,707          1,392
                     Sales tax                          633            581
                     Accrued interest                   617            594
                     Layaway and customer refunds       453            346
                                                     ------         ------
                                                     $5,687         $5,238
                                                     ======         ======
</TABLE>



                                      F-11
<PAGE>   42


                      BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)


5.         LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS

           Liabilities subject to compromise under reorganization proceedings
           consist of the following as of May 31, 1997:
                                
<TABLE>
        <S>                                                     <C>
        Secured liabilities:
          Borrowings outstanding under
            Revolving Credit Agreement (Note 6)                 $ 57,855
          Senior Secured Notes (includes interest payable               
            of $3,073 accrued through Petition Date)              53,073
          Other notes payable and capital lease obligations           88
                                                                --------
                                                                 111,016

        Unsecured liabilities:
          Trade accounts payable                                  10,344
          Other accrued expenses (includes restructuring
            and reorganization expenses)                           8,911
                                                                --------
                                                                  19,255
                                                                --------
                                                                $130,271
                                                                ========
</TABLE>

           Any plan of reorganization ultimately approved by the Company's
           impaired prepetition creditors and shareholders and confirmed by the
           Bankruptcy Court may materially change the amounts and terms of these
           prepetition liabilities. Such amounts are estimated as of May 31,
           1997, and the Company anticipates that claims filed with the
           Bankruptcy Court by the Company's creditors will be reconciled to the
           Company's financial records. The additional liability arising from
           this reconciliation process, if any, is not subject to reasonable
           estimation, and accordingly, no provision has been recorded for these
           possible claims. The termination of other contractual obligations and
           the settlement of disputed claims may create additional prepetition
           liabilities. Such amounts, if any, will be recognized in the balance
           sheet as they are identified and become subject to reasonable
           estimation.

6.         LONG-TERM DEBT

           Long-term debt consists of the following (amounts as of May 31, 1997
           are included with Liabilities Subject to Compromise -- Note 5):

<TABLE>
<CAPTION>
        MAY 31,                                                 1997        1996
        -------------------------------------------------   --------    --------
        <S>                                                 <C>         <C>
        Revolving Credit Agreement                          $ 57,855    $  8,190
        Senior Secured Notes                                  50,000      50,000
        Other notes payable and capital lease obligations         88         270
        Accounts Receivable Securitization Facility             --        45,119
                                                            --------    --------
                                                             107,943     103,579
        Less: current portion                                   --           181
                                                            --------    --------
                                                            $107,943    $103,398
                                                            ========    ========
</TABLE>



                                      F-12
<PAGE>   43

                      BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)


           On December 21, 1995, the Company completed an accounts receivable
           securitization (the "Securitization Facility"). In connection with
           the Securitization Facility, the Company also entered into an amended
           and restated revolving credit facility (the "Revolving Credit
           Agreement"), which amended the original December 22, 1993 credit
           agreement. The Company granted the lender under the Revolving Credit
           Agreement a lien on substantially all of its assets and properties.
           Both the Securitization Facility and the Revolving Credit Agreement
           were three-year facilities.

           The Senior Secured Notes bear interest at 11% per annum, payable
           semiannually on April 30 and October 31, are due December 22, 2000,
           and are secured by an interest in the Company's assets that is second
           in priority to the obligations pursuant to the Revolving Credit
           Agreement. Accrued interest payable on the Senior Secured Notes was
           $3,234 and $458 at May 31, 1997 and 1996, respectively.

           During the first quarter of fiscal 1997, the Company was notified
           that the Agent of the Securitization Facility desired to extinguish
           the commitment under the facility. On August 30, 1996, in conjunction
           with the termination of the Securitization Facility, the Company
           entered into an amended revolving credit agreement (the "Amended
           Revolving Credit Agreement") and paid fees of approximately $2,305,
           which it deferred and is amortizing over the term of the agreement.
           On August 30, 1996, the indenture governing the Senior Secured Notes
           was also amended to the extent required to permit the consummation of
           the Amended Revolving Credit Agreement and the termination of the
           Securitization Facility. The Company recorded an extraordinary charge
           of $876 in connection with the early extinguishment of the
           Securization Facility.

           On January 27, 1997, the Company's Amended Revolving Credit Agreement
           was amended again (the "Second Amended Revolving Credit Agreement")
           and the bank waived the Company's non-compliance with certain
           financial covenants therein for the quarter ended November 30, 1996
           and reduced its commitment to lend to the Company from $85,000 to
           $70,000 as of January 27, 1997 through May 31, 1997, at which time
           the commitment would be further reduced to $65,000 from June 1, 1997
           through the final maturity date of August 31, 1999. Outstanding
           borrowings bear interest at the agent bank's reference rate plus 1.5%
           unless an Event of Default (as defined in the Second Amended
           Revolving Credit Agreement) has occurred and is continuing, or is not
           waived, in which case such outstanding borrowings bear interest at
           3.0% above the rate otherwise payable.

           The Company again failed to meet certain financial covenants
           contained in the Second Amended Revolving Credit Agreement at
           February 28, 1997, which constituted an Event of Default, and the
           bank did not waive the Company's non-compliance with these financial
           covenants. Additionally, the Event of Default prohibited the Company
           from paying the interest on the Senior Secured Notes due on April 30,
           1997.

           Loans outstanding of $57,855 under the Second Amended Revolving
           Credit Agreement at May 31, 1997 bear a weighted average interest
           rate of 13.3%. All debt has been classified as liabilities subject to
           compromise in the accompanying consolidated balance sheet as a result
           of the Chapter 11 filing (Note 1).

           On May 14, 1997, the Company received interim approval of the
           Bankruptcy Court of an Agreement to Use Cash Collateral. At May 31,
           1997, approximately $1,313 of the Company's consolidated cash balance
           was restricted from use in accordance with the terms of the
           agreement. The Company operated under this agreement until July 22,
           1997, at which time it received final court approval of an Amended
           and Restated Stipulation Pursuant to Sections 361 and 363 of the
           Bankruptcy Code Authorizing Debtor's Use of Cash Collateral and
           Granting Adequate Protection to Collateral Agent, Lenders and
           Bondholders (the "Cash Stipulation"). Pursuant to the terms of the
           Cash Stipulation, the lenders agreed to increase the availability
           under the Company's Second Amended Revolving Credit Agreement to 82%
           of eligible accounts receivable, as defined, and to 45% of eligible
           inventory, as defined, subject to various reductions stipulated in
           the Cash Stipulation. As of the Petition Date, the Company had no
           availability under the Second Amended Revolving Credit Agreement.



                                      F-13
<PAGE>   44

                      BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)


7.         INCOME TAXES

           At May 31, 1997, the Company had a net operating loss carryforward
           for federal income tax purposes of $61,700 which is scheduled to
           expire in the years May 31, 2006 through May 31, 2012. Of this
           $61,700, approximately $14,000 is scheduled to expire in the years
           May 31, 2006 through May 31, 2008, and is subject to the limitations
           imposed under Internal Revenue Code ("IRC") Section 382.

           Section 382 of the Code provides a limitation (Section 382
           limitation) on the use of net operating loss carryovers, net
           operating losses, and certain built-in losses and deduction items of
           a loss corporation that has an ownership change. For financial
           statement purposes, utilization of a net operating loss, under
           Section 382 of the Code, is recorded as a credit to common stock.

           The balance of the net operating losses, approximately $47,700, is 
           not subject to the limitations imposed under IRC Section 382 and is 
           scheduled to expire through May 31, 2012.

           At May 31, 1997 and 1996, the Company has recorded a noncurrent
           deferred tax asset of $72 and $122, respectively, representing
           alternative minimum tax (AMT) credit carryforwards. Unlike net
           operating loss carryforwards, the AMT credit has an indefinite
           carryforward periods as it will be available to reduce the Company's
           regular tax liability in any future year.

           The Company maintains a valuation allowance against the net deferred 
           tax assets, which, in management's opinion, reflects the net 
           deferred tax asset which is more likely than not to be realized.

           The provision for income taxes includes the following:


<TABLE>
<CAPTION>
                  For the years ended May 31,         1997      1996    1995
                  ---------------------------         ----     -----   -----
                  <S>                                 <C>      <C>      <C>
                           Current:
                                    Federal           $204     $(630)  $ 853
                                    State               30        40      29
                                                      ----     -----   -----
                                                       234      (590)    882

                           Deferred:
                                    Federal             50       285    (652)
                                    State                -       593    (230)
                                                      ----     -----   -----
                                                        50       878    (882)
                                                      ----     -----   -----
                                                      $284     $ 288   $   -
                                                      ====     =====    ====
</TABLE>



                                      F-14
<PAGE>   45
                      BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)


           The Company's effective tax rate differs from the statutory federal
income tax rate as follows:

For the years ended May 31,                             1997    1996    1995
---------------------------                            ------  ------  ------
   Statutory rate                                      -35.0%  -35.0%   35.0%
   Surtax benefit                                        1.0     1.0    (1.0)
   State taxes (net of federal benefit)                  --      1.1     3.6
   Valuation allowance                                  35.4    41.7   (34.8)
   Alternative minimum tax credits                       --      --     (3.8)
   Other                                                (0.8)    2.7     1.0
                                                        ----    ----    ----
                                                         0.6%   11.5%    0.0%
                                                        ====    ====    ====

           Significant components of the Company's deferred income taxes are as
follows:

Current tax assets:                             May 31, 1997    May 31, 1996
                                                ------------    ------------
   Customer accounts receivable                    $ 4,460        $  4,734
   Merchandise inventories                             896           1,225
   Vacation accrual                                    211             283
   State franchise taxes                              (741)             (4)
   Other                                                --             (64)
                                                  --------        --------
                                                     4,826           6,174

Noncurrent tax assets:
   State franchise taxes                            (1,039)           (745)
   Property and equipment                              (36)           (111)
   Inventory valuation allowance                     1,313              --
   Net operating loss carryforwards                 22,492           6,053
   Other                                               362             421
                                                  --------        --------
                                                    23,092           5,618
                                                  --------        --------
Total deferred tax assets                           27,918          11,792
   Valuation allowance                             (27,846)        (11,670)
                                                  --------        --------
Net deferred tax assets                           $     72        $    122
                                                  ========        ========




                                      F-15
<PAGE>   46

                      BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)


8.         COMMITMENTS AND CONTINGENCIES

           The Company leases store and office facilities and certain equipment
           used in its regular operations under operating leases which expire at
           various dates through 2007. The store leases provide for additional
           rentals based upon sales and for payment of taxes, insurance and
           certain other expenses. Rent expense charged to operations is as
           follows:

<TABLE>
<CAPTION>
For the years ended May 31,             1997            1996            1995
---------------------------           -------         -------         -------  
<S>                                     <C>             <C>             <C>
    Minimum rentals                   $11,616         $10,514         $ 9,914
    Contingent rentals                  2,706           2,829           2,816
                                      -------         -------         -------
                                      $14,322         $13,343         $12,730
                                      =======         =======         =======
</TABLE>
 
           Included in the above table is rent expense paid to officers/
           shareholders  related to certain stores and the office facility of 
           $649, $684, and $787,  respectively for the fiscal years ended May 
           31, 1997, 1996, and 1995.

           Subject to the approval of the Bankruptcy Court, the Company can
           reject executory contracts, including leases, under the relevant
           provisions of the Bankruptcy Code. Rejection of a lease gives the
           lessor the right to assert a prepetition claim against the Company.
           However, the amount of the claim may be limited by the Bankruptcy
           Court. In connection with the closure of certain stores (Note 1),
           certain leases have been renegotiated, settled, or rejected. The
           expected costs of such lease terminations are included in
           reorganization expenses in the statement of operations. The analysis
           of minimum rental commitments has not been adjusted to reflect
           possible additional future lease rejections.

           Minimum rental commitments for all remaining noncancelable leases 
           in effect as of May 31, 1997 are as follows:


<TABLE>
<CAPTION>
For the years ending May 31,         Shareholders      Others          Total
----------------------------         ------------     -------         -------  
<S>                                     <C>             <C>             <C>
    1998                              $  683         $ 7,896         $ 8,579
    1999                                 683           7,374           8,057
    2000                                 688           6,679           7,367
    2001                                 786           5,941           6,727
    2002                                 786           5,360           6,146
    Thereafter                         2,357          17,535          19,892
                                      ------         -------         -------
                                      $5,983         $50,785         $56,768
                                      ======         =======         =======           
</TABLE>

           The Company is from time to time involved in routine litigation
           incidental to the conduct of its business. Based upon discussions
           with legal counsel, management believes that its litigation currently
           pending, other than its Chapter 11 proceedings previously discussed,
           will not have a material adverse effect on the Company's financial
           position or results of operations.

9.         SHAREHOLDERS' (DEFICIENCY) EQUITY

           Stock Option Plans     In 1992, the Company adopted a stock incentive
           plan (the "1992 Stock Option Plan") to enable key employees to
           acquire shares of the Company's common stock. The 1992 Stock Option
           Plan was terminated and replaced by the Company's 1994 Employee Stock
           Option Plan. At May 31, 1997, there were options to purchase 16,080
           shares of the Company's common stock outstanding under the 1992 Stock
           Option Plan.


                                      F-16
<PAGE>   47
                     BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED MAY 31, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)


The 1994 Employee Stock Option Plan provides for the grant of Incentive Stock
Options (ISOs) and Nonqualified Stock Options (NSOs). Options granted are at the
fair market value at the date of grant for ISOs (or not less than 85% of fair
market value for NSOs) and, subject to termination of employment, expire no
later than ten years from the date of grant, are not transferable, and vest in
three equal annual installments as specified by the Audit and Compensation
Committee of the Board of Directors. Up to 420,000 shares of common stock may be
issued under the 1994 Employee Stock Option Plan, amended.

Under the 1994 Employee Stock Option Plan, nonemployee directors automatically
receive options to purchase 2,000 shares of common stock upon their being added
to the Board of Directors and options to purchase 1,000 shares of common stock
on the date of each annual meeting of shareholders at which they are reelected
to the Board.

Changes for all options are summarized as follows:

                                                                    Weighted
                                                                     Average 
                                  Number        Option Price        Exercise
                                Of Shares        Per Share            Price
                                ---------       -------------       --------
Outstanding at May 31, 1994      157,130        $4.13 - $4.13         $4.13
     Granted                     105,800        $4.13 - $4.13         $4.13
     Terminated                   (5,830)       $4.13 - $4.13         $4.13
                                ---------       -------------       --------
Outstanding at May 31, 1995      257,100        $4.13 - $4.13         $4.13
     Granted                     254,600        $3.44 - $4.43         $4.05
     Terminated                  (78,424)       $4.13 - $4.13         $4.13
                                ---------       -------------       --------
Outstanding at May 31, 1996      433,276        $3.44 - $4.43         $4.08
     Granted                     180,400        $1.69 - $3.88         $2.27
     Terminated                 (395,296)       $3.38 - $4.43         $4.08
                                ---------       -------------       --------
Outstanding at May 31, 1997      218,380        $1.69 - $4.13         $2.58
                                =========       =============       ========

May 31,                                           1997      1996      1995
----------------------------------------------------------------------------
Shares exercisable                               24,888   120,329     85,084
Shares available for grant at end of year       217,700    97,600    116,800


The Company omitted the pro forma information required to be disclosed by SFAS
No. 123 due to its immateriality. Because options vest over several years and
additional options are granted each year, the effects on pro forma net loss and
related per share amounts in the current year are not representative of the
effect for future years.

<TABLE>
<CAPTION>
                                                           Weighted                      Weighted
                                      Weighted Average     Average                        Average
     Range of           Shares           Remaining         Exercise        Shares         Exercise
 Exercise Prices      Outstanding     Contractual Life      Price        Exercisable        Price
-----------------    -------------    ----------------    ----------    -------------    ----------
<S>                  <C>              <C>                 <C>           <C>              <C>
 $1.69 to $3.56         169,000              9.5             $2.17          1,160           $3.50
 $3.56 to $4.13          49,380              7.3             $3.96         23,728           $4.07
                       --------                             ------        -------          ------
                        218,380                              $2.58         24,888           $4.05
</TABLE>




                                      F-17


<PAGE>   48



                      BARRY'S JEWELERS, INC. AND SUBSIDIARY
                             (DEBTOR-IN-POSSESSION)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED MAY 31, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)



           Warrants     In connection with the Prior Reorganization Plan, the 
           Company's then lenders received warrants to purchase an aggregate of 
           50,000 shares of the Company's common stock at a price of $16.75 per 
           share, expiring June 30, 2002.

           Employee Incentive Stock Plan     The Employee Incentive Stock Plan
           provides for the grant by the Company of shares of common stock for
           no consideration (other than past services). The Employee Incentive
           Stock Plan has a term of ten years. A total of 100,000 shares of
           common stock was initially reserved for issuance pursuant to the
           Employee Incentive Stock Plan. A total of 90,000 shares was issued
           under the plan during 1992 and 1993. The fair market value of the
           shares of $150,000 at the date of grant was charged to expense over
           the three-year vesting period.

           Employee Stock Purchase Plan     On November 1, 1994, shareholders of
           the Company approved the Company's Employee Stock Purchase Plan,
           which enables substantially all employees of the Company with more
           than one year of service to purchase shares of the Company's common
           stock at not less than 85% of the fair market value at the date of
           purchase during one or more offering periods specified by the
           Company. A total of 50,000 shares was authorized for issuance under
           this plan; 9,956 and 30,441 shares of common stock were purchased
           under this plan during fiscal 1997 and 1996, respectively.

           Additionally, on February 13, 1997, the Company issued 20,000 shares
           of common stock to two former executives in accordance with their
           employment agreements. The Company recognized compensation expense of
           approximately $37 in connection with this stock issuance.

           Nonqualified Deferred Compensation     Plan On June 1, 1994, a
           Nonqualified Deferred Compensation Plan was established for the
           benefit of a select group of management, highly compensated employees
           and/or Directors who contribute materially to continued growth,
           development and business success of the Company. The plan is unfunded
           for tax purposes and for the purposes of Title I of ERISA.

           401(k) Retirement Plan     The Board of Directors adopted a qualified
           401(k) retirement plan effective June 1, 1995. Substantially all
           employees of the Company are eligible to participate in the Company's
           401(k) plan upon attaining age 21 and six consecutive months of
           service. Employees may elect to contribute 1% to 15% of their
           compensation, subject to certain IRS limitations. Employer matching
           contributions are determined annually by a Board of Directors
           resolution. No employer matching contributions were granted during
           fiscal 1997 or 1996. Participants are partially vested in employer
           matching contributions after 2 years and fully vested after 5 years
           of employment with the Company.




                                      F-18
<PAGE>   49
                               INDEX TO EXHIBITS


EXHIBIT
   NO.         DESCRIPTION
   ---         -----------

   3.1     Restated Articles of Incorporation filed November 16, 1994 in
           connection with the Reverse Stock Split (5).

   3.2     Bylaws (10).

   4.1(a)  Indenture, dated as of December 22, 1993, between Barry's Jewelers,
           Inc. and First Trust National Association, as trustee ( the
           "Trustee"), with respect to the 11% Senior Secured Notes due December
           22, 2000, including the form of Note certificate (4).

   4.1(b)  Amendment No. 1 to Indenture, dated as of February 14, 1994,
           between Barry's Jewelers, Inc. and the Trustee (5).

   4.1(c)  Amendment No. 2 to Indenture, dated as of March 18, 1994, between
           Barry's Jewelers, Inc. and the Trustee (6).

   4.1(d)  Amendment No. 3 to Indenture, dated as of December 21, 1995, 
           between Barry's Jewelers, Inc. and the Trustee (6).

   4.1(e)  Amendment No. 4 to Indenture, dated as of August 30, 1996, between
           Barry's Jewelers, Inc. and the Trustee (9).

   4.2     Exchange Agreement, dated as of December 22, 1993, by and among the
           Company and the holders signatories thereto (1).

   4.3     Senior Secured Notes Registration Rights Agreement, dated as of
           December 22, 1993, by and among the Company and the holders
           signatories thereto (1).

   4.4     Common Stock Registration Rights Agreement, dated as of December 22,
           1993, by and among the Company and the holders signatories thereto
           (1).

   4.5     Second Amended and Restated Revolving Credit Agreement, dated as of
           August 30, 1996, by and among the Company, The First National Bank of
           Boston ("FNBB"), as lender and agent thereunder (9).

   4.6(a)  Collateral Agency and Intercreditor Agreement, dated as of December
           22, 1993, among FNBB, as collateral agent for the secured parties and
           as agent for the lenders (under the New Revolving Credit Agreement),
           the Trustee, on behalf of the holders of the Notes and the Company
           (1).

   4.6(b)  Amendment Agreement No. 1, dated as of December 21, 1995, to
           Collateral Agency and Intercreditor Agreement, dated as of December
           22, 1993, among FNBB, the Trustee, and the Company (6).

   4.6(c)  Amendment Agreement No. 2, dated as of August 30, 1996, to
           Collateral Agency and Intercreditor Agreement, dated as of December
           22, 1993, among FNBB, the Trustee, and the Company (5).

   4.7     Second Amended and Restated Security Agreement, dated as of August
           30, 1996, between the Company and FNBB, as collateral agent for the
           secured parties (9).

   4.8     Second Amended and Restated Trademark Collateral Security and Pledge
           Agreement, dated as of August 30, 1996, between the Company and FNBB
           (9).

  10.1     Lease dated February 1, 1990 between the El Monte Partnership as
           Landlord and Barry's Jewelers, Inc. as Tenant (8).

  10.2     Executive Incentive Bonus Plan for the year ended May 31, 1994 (2).*

  10.3     Executive Incentive Bonus Plan for the year ended May 31, 1995 (5).*
 
  10.4     Lease dated December 1, 1990, between Gerson I. Fox and David Blum,
           as Lessors, and BBF Jewelers Management, Inc., as Lessee (2).

  10.5     Deferred Compensation Plan (4).*

  10.6     Executive Deferral plan (6).*

  10.7     Executive Bonus Plan - Master Plan Document (4).*

  10.8     Executive Bonus Plan - Trust Agreement (4).*

  10.9     Employee Stock Purchase Plan (5).*

  10.10    Employment Agreement dated April 8, 2996, between the Company and
           Thomas S. Liston (9).*

  10.11    Employment Agreement dated April 8, 1996, between the Company and
           Robert Bridel (9).*

  10.12    Agreement dated March 19, 1997, between the Company and thomas S.
           Liston (10).*

  10.13    Agreement dated March 19, 1997, between the Company and Robert Bridel
           (10).*

  10.14(a) Form of Employment Agreement to be entered into between the Company
           and each of Samuel J. Merksamer, as President and Chief Executive
           Officer, E. Peter Healey, as Executive Vice President, Chief
           Financial Officer and Secretary, Randy N. McCullough, as Senior Vice
           President - Merchandising, Chad C. Haggar, as Vice President -
           Operations, and Bill R. Edgel, as Vice President - Marketing (10).*

  10.14(b) Term Sheet between the Company and certain of the Company's creditors
           evidencing their compromise regarding the terms of such employment
           agreements (10).*

  10.14(c) Schedule of Certain Terms of such employment agreements (10).*

  10.15(a) Trade Financing Agreement Term Sheet (10).

  10.15(b) Form of Trade Financing Agreement (10).

  10.15(c) Exhibit B to Form of Trade Financing Agreement (10).

  10.15(d) Form of Consignment Agreement (10).

  23       Consent of Independent Auditors (10).

  27       Financial Data Schedule (10).

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

  (1)    Incorporated herein by reference to the Company's Current Report on
         Form AK filed December 22, 1993.

  (2)    Incorporated herein by reference to the indicated exhibits filed in
         response to Item 14, "Exhibits," of the Company's Annual Report on Form
         10-K for the year ended May 31, 1993.
  
  (3)    Incorporated herein by reference to the indicated exhibits filed in
         response to Item 6, "Exhibits," of the Company's Quarterly Report on
         Form 10-Q for the quarter ended November 30, 1993.

  (4)    Incorporated herein by reference to the indicated exhibits filed in
         response to Item 14, "Exhibits," of the Company's Annual Report on Form
         10-K for the year ended May 31, 1994.
 
  (5)    Incorporated herein by reference to the indicated exhibits filed in
         response to Item 14, "Exhibits," of the Company's Annual Report on Form
         10-K for the year ended may 31, 1995.
 
  (6)    Incorporated herein by reference to the Company's Current Report on
         Form 8-K filed December 21, 1995.

  (7)    Incorporated herein by reference to the indicated exhibits filed in
         response to Item 14, "Exhibits," of the Company's Annual Report on Form
         10-K/A for the year ended May 31, 1995.

  (8)    Incorporated herein by reference to the indicated exhibits filed in
         response to Item 14, "Exhibits," of the Company's Annual Report on Form
         10-K for the year ended may 31, 1990.

  (9)    Incorporated herein by reference to the indicated exhibits filed in
         response to Item 14, "Exhibits," of the Company's Annual Report on Form
         10-K for the year ended may 31, 1996.

  (10)   Filed herewith.

         Management contract or compensatory plan or arrangement.