<PAGE>
                                                                      EXHIBIT 13

                                 * commitment *


                                    [PHOTO]


                  Whitehall Jewellers, Inc. 2002 annual report


<PAGE>
--------------------------------------------------------------------------------
Company Profile    Founded in 1895, Whitehall Jewellers, Inc. is a leading
national specialty retailer of fine jewelry. The Company operates 385 stores in
regional and superregional malls in 38 states under the names Whitehall
Jewellers, Lundstrom Jewelers and Marks Bros. Jewelers. Whitehall Jewellers,
Inc.common stock is traded on the New York Stock Exchange under the symbol
"JWL."

<PAGE>

TO OUR SHAREHOLDERS

In the 1990s, Whitehall's sales and profitability growth placed
it among the industry's leaders. From fiscal 1994 through fiscal 1999 comparable
store sales grew at an average annual rate of 8.0% while income from operations
compounded at an annual rate of 26%. Since 2000, Whitehall has faced a
challenging environment, including a recession, terrorism and military conflict,
including the war in Iraq. These events negatively impacted consumer confidence
and created a difficult environment for retailers selling luxury goods.

     During 2002, conflicting trends demonstrated how the economic and
geopolitical environment impacts Whitehall's sales and profitability. During the
first quarter of 2002, the stock market and consumer confidence improved as the
economy demonstrated signs of strength. During this quarter, our sales were up
8.2% while comparable store sales were up 4.9%. More importantly, our earnings
improved and significantly exceeded expectations. Unfortunately, by early summer
the economy, stock market and consumer confidence declined, as did our sales.
This more difficult sales environment was particularly evident in non-holiday
periods when worried consumers were less likely to spend their money on luxury
items. As a result, while our total sales were up marginally in 2002, comparable
store sales were down 1.9%. Our earnings in 2002 were $0.66 per diluted share,
compared to $0.69 per diluted share in 2001.

     Two years ago we charted a new course for Whitehall, focusing our efforts
on controlling expenses and improving profitability. By the end of fiscal year
2002 we had achieved the bulk of our goals in this area. We reduced SG&A
expenses by $2.2 million in 2002, which was on top of cutting $5.6 million in
SG&A expenses during 2001. Even with comparable store sales down for this year,
we reduced SG&A expenses as a percentage of sales to 31.6% from 32.4% in 2001.

<PAGE>
                                    [PHOTO]


                                   * growth *

                                   [BAR GRAPH]

Solid diluted earnings per share

01  $0.46
02  $0.69
03  $0.66
fiscal years ended January 31


<PAGE>
We did so by streamlining our field supervisory structure and more effectively
managing store staff hours and rates. We rolled out reporting tools which
enabled our operating team to continue to carve out expenses. We also leveraged
our supply chain costs through technology and the use of our buying power. We
continued to cut overhead expenses in our support office by refining processes.
And, we did all of this while opening 17 new stores in 2002.

     Turning to our balance sheet, we eliminated our gold consignment of $20.5
million. We also used our financial strength when we converted some consignment
merchandise to asset inventory on very attractive terms. Looking ahead, we
believe that our continued focus on improving our supply chain practices will
further reduce our average per store inventory while permitting us to continue
to offer one of the best selections of jewelry in the marketplace.

     As we move into 2003, we are mindful of the continued economic stresses and
geopolitical risks. Indeed, as I write this letter the United States is involved
in a global war against terrorism and the recent war for the freedom of Iraq. We
certainly wish the best for our young men and women in the Armed Forces as well
as for the citizens of Iraq. With the conclusion of the war in Iraq we are
hopeful that the economic environment in this country will gradually improve.

     In light of this, we have recently refocused our efforts on building sales.
As with our successful campaign to increase operational controls and reduce
expenses, we will be relying on a number of specific initiatives. While a few of
these initiatives will begin to roll out in the first half of 2003, we expect
all will be in place by Christmas of this year. A few examples of these new
programs are as follows.

     First, in late 2002 we introduced Movado and ESQ watches into a number of
test markets. This test was successful. The Movado brand represents quality in
design and manufacture. We believe the addition of these Swiss watches to our
stores will enhance the Whitehall brand, and we feel that the additional sales


<PAGE>
will be largely incremental. We are very pleased that we have now reached
agreement with Movado to introduce Movado and ESQ watches in to most of our
stores. In anticipation of this rollout, we have increased the number of lineal
feet of showcase space in our stores by the selective addition of "two tier"
showcases. As a result, the introduction of these two watch lines will not
materially reduce the amount of showcase space available to display our
selection of diamonds and other fine jewelry.

     We have also initiated a series of changes which should improve the sales
performance of our in-store special events, such as restyling shows. In 2002,
our special events represented approximately 10% of our total store sales. Over
a several year period we would like to take special event sales to approximately
15% of our total sales.

     Finally, we have just implemented a program to improve our new store
performance. This includes an extensive training module for all new store
managers and sales associates as well as a detailed timeline focusing District
Managers on all elements of a new store opening. This year we will be opening 21
new stores. Sixteen of these stores were open as of April 30th and initial sales
results for these stores has been quite encouraging.

     Over the last two years we have created a sound foundation for long-term
profit growth. Our concept facilitates this. We operate smaller stores which
reduces both our occupancy costs and personnel expense. We do not take credit
risk for the customer's failure to pay. We carry better quality jewelry which
greatly reduces the likelihood of inventory write-downs. Simply put, our model
differentiates us as a low cost provider.

     Ultimately, when the economy strengthens and when we post low to mid single
digit comparable store sales increases on a sustained basis, we expect to
generate strong profit growth by returning our net income rate over time to our
historical highs of 6% of sales or more.

/s/ Hugh M. Patinkin

Hugh M. Patinkin
Chairman of the Board
Chief Executive Officer and President
April 30, 2003



<PAGE>

                                   * future *


                                    [PHOTO]

  "Focusing our efforts on controlling operations and improving profitability"


<PAGE>
                                      ***
  4  Alabama
 13  Arizona
 51  California
  7  Colorado
 10  Connecticut
  2  Delaware
 42  Florida
 12  Georgia
 33  Illinois
  5  Indiana
  1  Iowa
  1  Kentucky
  1  Louisiana
  7  Maryland
  7  Massachusetts
  5  Michigan
  8  Minnesota
  9  Missouri
  2  Nebraska
  7  Nevada
  3  New Hampshire
 16  New Jersey
  3  New Mexico
 20  New York
 21  North Carolina
  5  Ohio
  4  Oklahoma
  3  Oregon
 15  Pennsylvania
  1  Rhode Island
  3  South Carolina
  1  South Dakota
  6  Tennessee
 33  Texas
 13  Virginia
  7  Washington
  1  West Virginia
  3  Wisconsin

385 stores in 38 states

<PAGE>

THE WHITEHALL MODEL

     Our real estate strategy is a key element of our business model. We
identify prime, high-traffic locations in regional malls throughout the country.
Our stores are small and inviting, with open storefronts that present our
merchandise and sales associates prominently to mall shoppers.

     Our merchandise strategy is to serve customers who are interested in higher
quality diamond, precious gem and karat gold jewelry. About half our sales are
of bridal jewelry (historically the most stable part of a jeweler's business),
and traditionally more than 15 percent of our sales are generated by items
priced above $3,000. In fiscal 2002, thirty percent of our sales were generated
by items priced at $1,500 or more.

     Our "no risk" credit policy protects our business from problems associated
with customers' failure to pay. Working with private label non-recourse credit
purveyors, we offer many customers attractive credit terms. Our credit policy
also preserves strong cash flow for the Company. We generally receive cash
payment for private-label credit purchases in two business days.

     Our strategy for increasing in-store productivity is focused on controlling
payroll costs while we improve operating margins. By linking compensation to
sales, we retain our most productive sales associates. We use promotional
programs at the point of sale which provide customer value and generate in-store
excitement. Our network of 385 stores allows us to thoroughly test and fine tune
promotional campaigns before launching them companywide.

     As in the past, Whitehall Jewellers will use these strategies with the goal
of driving growth, capturing the interest of discriminating customers, and
creating shareholder value through strong earnings and significant returns on
investment.


<PAGE>

financial statements


Select Historical Financial and Operating Data                                 9
Management's Discussion and Analysis                                          10
Statements of Operations                                                      21
Balance Sheets                                                                22
Statements of Stockholders' Equity                                            23
Statements of Cash Flows                                                      24
Notes to Financial Statements                                                 25
Report of Independent Accountants                                             40
Corporate Information                                                         41





<PAGE>

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following table sets forth certain financial and operating data of the
Company. The selected statement of operations data and balance sheet data as of
and for the fiscal year ended January 31, 2003 (fiscal 2002) and each of the
four prior fiscal years are derived from audited financial statements of the
Company. The selected financial information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's audited financial statements
appearing elsewhere herein.

<TABLE>
<CAPTION>
(in thousands, except for
per share and selected operating data)              Fiscal 2002     Fiscal 2001      Fiscal 2000      Fiscal 1999  Fiscal 1998
------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>             <C>             <C>            <C>
Statement of Operations Data:
Net sales                                           $   341,037     $   338,911     $   355,065     $   315,406    $   238,942
Cost of sales (including buying
   and occupancy expenses)                              212,910         206,574         217,164         182,898        139,368
------------------------------------------------------------------------------------------------------------------------------
     Gross profit                                       128,127         132,337         137,901         132,508         99,574
Selling, general and administrative expenses (1)        107,790         109,975         115,600          95,252         72,261
------------------------------------------------------------------------------------------------------------------------------
     Income from operations                              20,337          22,362          22,301          37,256         27,313
Interest expense                                          4,341           6,902           5,757           5,819          4,123
------------------------------------------------------------------------------------------------------------------------------
     Income before income taxes                          15,996          15,460          16,544          31,437         23,190
Income tax expense                                        6,089           5,380           6,170          12,103          8,928
------------------------------------------------------------------------------------------------------------------------------
     Income before cumulative effect of
            accounting change                             9,907          10,080          10,374          19,334         14,262
Cumulative effect of accounting change, net (2)              --              --          (3,068)             --             --
------------------------------------------------------------------------------------------------------------------------------
     Net income                                     $     9,907     $    10,080     $     7,306     $    19,334    $    14,262
------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Income before
   cumulative effect of accounting change           $      0.66     $      0.69     $      0.65     $      1.28    $      0.92
Selected Operating Data:
   Stores open at end of period                             370             364             348             290            250
   Average net sales per store (3)                  $   925,000     $   952,000     $ 1,116,000     $ 1,163,000    $ 1,073,000
   Average net sales per
     gross square foot (4)                          $     1,068     $     1,093     $     1,286     $     1,319    $     1,323
   Average merchandise sale                         $       302     $       304     $       319     $       303    $       286
   Comparable store sales (decrease) increase (5)          (1.9%)         (10.7%)          (1.7%)          11.0%           5.8%
Balance Sheet Data (at end of period)
     Working capital                                $    58,529     $    53,197     $    46,187     $    31,338    $    38,478
     Total assets                                       272,958         252,348         255,794         219,363        171,601
     Total debt                                          99,630          45,667          61,860          59,007         49,526
     Stockholders' equity                               118,653         113,684         103,171          71,928         62,168
</TABLE>

(1) In fiscal 2002, the Company adopted FAS 142 and has discontinued
amortization of goodwill. (See Note 9)

(2) Reflects net cumulative effect in the change in accounting for layaway
sales. (See Note 2)

(3) Average net sales per store represents the total net sales for stores open
for a full fiscal year divided by the total number of such stores.

(4) Average net sales per gross square foot represents total net sales for
stores open for a full fiscal year divided by the total square feet of such
stores.

(5) Comparable store sales are defined as net sales of stores which are
operating for the month in the current reporting period as well as open for the
same month during the prior year reporting period. Fiscal year 1998 includes
sales from the acquired Jewel Box stores from October 1998 through January 1999.
Fiscal year 1999 includes sales from these acquired Jewel Box stores from
February through July 1999 and from October through January 2000.




<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's financial
statements, including the notes thereto.

BACKGROUND The Company is a leading national specialty retailer of fine jewelry
operating 370 stores in 38 states as of January 31, 2003. The Company
experienced rapid growth over a number of years with net sales increasing to
$341.0 million in fiscal 2002 compared with $91.1 million in fiscal 1993 and the
number of Company stores growing to 370 from 122 during that same period.
However, a lackluster economy, lower consumer confidence and an unstable
geopolitical environment leading up to and during fiscal 2002 resulted in lower
comparable store sales than in the prior fiscal year. The Company continued a
course of action during 2002 to reduce supply chain costs and improve its
expense structure. This course of action included a series of targeted
initiatives. While the Company continued to implement processes to improve
control over price discounting in stores, promotional pricing initiatives and
reduced leverage of certain buying and occupancy costs, gross profit decreased
by 140 basis points in 2002. The Company's continued focus on expense controls
resulted in over $2.1 million of selling general and administrative expense
savings. The Company also used the strength of its balance sheet to make
opportunistic inventory purchases. Also during 2002, the Company repurchased
$6.5 million of common stock under a newly instituted $25 million stock
repurchase program.

         The Company's business is highly seasonal, with a significant portion
of its sales transacted and substantially all of its income generated during the
fourth fiscal quarter ending January 31, 2003. Historically, income generated in
the fourth fiscal quarter ending each January 31 represents all or a majority of
the income generated during the fiscal year. The Company has historically
experienced lower net sales in each of its first three fiscal quarters and
expects this trend to continue. The Company's quarterly and annual results of
operations may fluctuate significantly as a result of factors including, among
others, increases or decreases in comparable store sales, the timing of new
store openings, net sales contributed by new stores, timing of certain holidays
and Company initiated special events, changes in the Company's merchandise,
marketing, or credit programs, general economic, industry, weather conditions
and calamitous national events that affect consumer spending, as well as
pricing, merchandising, marketing, credit and other programs of competitors.

         The Company offers a layaway program that enables its customers to hold
an item at its stores and pay for it over a one-year period without interest
charges. The Company retains possession of merchandise placed in layaway until
the customer has made all required payments. On December 3, 1999, the SEC issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101"). Among other things, SAB 101 requires the deferral of revenue from
layaway sales until merchandise is delivered to the customer. Accordingly, the
Company implemented a change in accounting in the first quarter of fiscal year
2000. The Company recorded a charge of approximately $5.0 million ($3.1 million
net of tax) on February 1, 2000, which represented the cumulative effect of this
accounting change.



<PAGE>


RESULTS OF OPERATIONS The following table sets forth for the periods indicated
certain information derived from the statements of operations of the Company
expressed as a percentage of net sales for such periods.

<TABLE>
<CAPTION>
Percentage of Net sales                                          Fiscal 2002       Fiscal 2001      Fiscal 2000
----------------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>              <C>
Net sales                                                            100.0%              100%         100.0%
Cost of sales (including buying and occupancy expenses)               62.4              61.0           61.1
----------------------------------------------------------------------------------------------------------------
   Gross profit                                                       37.6              39.0           38.9
Selling, general and administrative expenses                          31.6              32.4           32.6
----------------------------------------------------------------------------------------------------------------
   Income from operations                                              6.0               6.6            6.3
Interest expense                                                       1.3               2.0            1.6
----------------------------------------------------------------------------------------------------------------
   Income before income taxes                                          4.7               4.6            4.7
Income tax expense                                                     1.8               1.6            1.7
----------------------------------------------------------------------------------------------------------------
   Income before cumulative effect of accounting change                2.9               3.0            3.0
Cumulative effect of accounting change, net                             --                --           (0.9)
----------------------------------------------------------------------------------------------------------------
   Net income                                                          2.9%              3.0%           2.1%
----------------------------------------------------------------------------------------------------------------
</TABLE>

FISCAL 2002 COMPARED TO FISCAL 2001 Net sales increased $2.1 million, or 0.6%,
to $341.0 million in fiscal 2002 from $338.9 million in fiscal 2001. Comparable
store sales decreased $6.4 million, or 1.9%, in fiscal 2002. Additionally, sales
were lower by $5.8 million due to store closings and stores closed for
remodeling for limited periods. These decreases were offset by sales from new
store openings of $12.5 million and a reduction in the reserve for sales returns
and allowances of $1.6 million. The total number of merchandise units sold
slightly increased compared to fiscal 2001, while the average price per
merchandise item sold decreased by approximately 0.7% to $302 in fiscal 2002
from $304 in fiscal 2001, reflecting a continued reduction in consumer demand
for higher priced items. Comparable store sales decreased in fiscal 2002
primarily due to the recession and lower consumer confidence. The reduction in
the reserve for sales returns and allowances reflects the historical trends in
returns which are governed by the Company's return policies and management's
initiatives to ensure compliance with those policies. Credit sales increased to
40.6% in fiscal 2002 from 40.1% in fiscal 2001. Higher third party credit sales
resulted from more aggressive promotional credit activities which were partially
offset by lower third party finance contract sales. The Company opened 17 new
stores and closed eleven stores during fiscal 2002, increasing the number of
stores operated to 370 as of January 31, 2003 from 364 as of January 31, 2002.

         Gross profit decreased $4.2 million, or 3.2%, to $128.1 million in
fiscal 2002, from $132.3 in fiscal 2001. As a percentage of net sales, gross
profit decreased to 37.6% in fiscal 2002 from 39.0% in fiscal 2001. During
fiscal 2002, gross merchandise margin declined by approximately 100 basis points
compared to fiscal 2001. This decline resulted from, among other things, an
increase in promotional pricing activity and an increase in the mix of sales of
lower margin diamond merchandise. Store occupancy and buying expenses which
increased at a higher rate than the increase in sales, also contributed to the
reduction in gross profit percentage. These declines in gross profit were
somewhat offset by better experience associated with sales returns and
allowances.

         On August 22, 2002, the Company purchased 66,500 troy ounces of gold at
an average gold price of $307.56 per ounce for a total of $20.5 million. The
Company delivered the gold to its banks and extinguished all existing Company
gold consignment obligations to the banks under the Credit Agreement. The
purchase had the effect of increasing the weighted average cost of gold
available for retail sale by the Company, resulting in a higher weighted average




<PAGE>
cost of sales in future periods. The Company then estimated that future costs
of sales would be approximately $1.5 million greater based on the effect of the
transaction on the weighted average cost of gold product in its inventory.
Approximately $725,000 of this increase in cost of sales is reflected in the
year ended January 31, 2003. This purchase increased the Company's inventory by
$20.5 million and was funded by revolver loan borrowings.

         The Company's continued efforts to improve its expense structure
resulted in a decrease in selling, general and administrative expenses of $2.2
million, or 2.0%, to $107.8 million in fiscal 2002 from $110.0 million in fiscal
2001, while opening 17 new stores. As a percentage of net sales, selling,
general and administrative expenses decreased to 31.6% in fiscal 2002 from 32.4%
in fiscal 2001. The dollar decrease was related to lower personnel expense ($2.0
million), lower other expenses ($1.5 million) and lower advertising costs ($0.5
million), somewhat offset by higher credit expense ($2.3 million). Selling,
general and administrative expense attributable to 17 stores opened in fiscal
2002 and 27 stores opened in fiscal 2001 were absorbed in developing the overall
reduction in selling, general and administrative expense and were partially
offset by greater reductions achieved in existing stores. Payroll costs
decreased in fiscal 2002 as compared to fiscal 2001 as a result of continued
efforts to reduce store payroll hours and control labor rates. The decrease in
other expenses resulted from, among other things, centralized control of the
consumption of certain supplies and services along with reductions in negotiated
rates for these terms, somewhat offset by an additional litigation accrual.
Advertising costs decreased in fiscal 2002, as compared to fiscal 2001, due to
the Company's efforts to reduce production costs through a competitive bidding
process and increased vendor funding of promotional initiatives.

         The increase in credit expense relates to, among other things, a
significant increase in the use of one year no interest promotions, higher
credit sales volume, and higher bad debt expense. The increase in bad debt
expense versus fiscal 2001 relates to reductions taken in the accounts
receivable reserve in fiscal 2001, which are established to address exposures to
chargebacks on credit receivables that have already been collected. These
reserves were reduced in fiscal 2001 as a result of improved credit practices,
reductions in the use of third party finance contract sales and management's
belief that the Company's exposure was diminished. The reserve calculation
assumptions remained unchanged in fiscal 2002.

         As a result of the factors discussed above, income from operations
decreased to $20.3 million in fiscal 2002 from $22.4 million in fiscal 2001. As
a percentage of net sales, income from operations decreased to 6.0% in fiscal
2002 from 6.6% in fiscal 2001.

         Interest expense decreased $2.6 million, or 37.1%, to $4.3 million in
fiscal 2002 from $6.9 million in 2001. The decrease in interest expense resulted
from lower average outstanding borrowings and lower average interest rates.

         Income tax effective rate increased in fiscal 2002 to 38.1% from 34.8%
in fiscal 2001. The Company expects to utilize certain income tax net operating
losses over the next fifteen to twenty years.

FISCAL 2001 COMPARED TO FISCAL 2000 Net sales decreased $16.2 million, or 4.6%,
to $338.9 million in fiscal 2001 from $355.1 million in fiscal 2000. Comparable
store sales decreased $36.4 million, or 10.7%, in fiscal 2001. Additionally,
sales were lower by $9.4 million due to store closings and stores closed for
remodeling for limited periods. These decreases were partially offset by sales
from new store openings of $29.7 million. The total number of merchandise units
sold remained flat compared to fiscal 2000, while the average price per
merchandise item sold decreased by approximately 4.7% to $304 in fiscal 2001
from $319 in fiscal 2000 reflecting a reduction in consumer demand for higher
priced items. Comparable store sales decreased in fiscal 2001 primarily due to




<PAGE>
the recession, lower consumer confidence and the elimination during fiscal 2001
of certain promotional practices related to break-up sales and trade-ins (which
the Company believes negatively impacted comparable store sales by 5%). Also,
the use of third party credit decreased to 40.1% of sales in fiscal 2001 from
41.4% of sales in fiscal 2000. The decrease in credit sales resulted from lower
third party finance contract sales. The Company opened 27 new stores and closed
eleven stores during fiscal 2001, increasing the number of stores operated to
364 as of January 31, 2002 from 348 as of January 31, 2001.

         Gross profit decreased $5.6 million, or 4.0%, to $132.3 million in
fiscal 2001, from $137.9 million in fiscal 2000. As a percentage of net sales,
gross profit increased to 39.0% in fiscal 2001 from 38.9% in fiscal 2000. During
fiscal 2001, gross merchandise margin improved by over 200 basis points compared
to fiscal 2000. This improvement resulted from, among other things, the impact
of eliminating two promotional practices, outside trade-ins and certain breakup
sales, an improvement in diamond jewelry gross margins, repair margins and the
higher penetration of warranty sales. This increase was offset by a shift in
demand away from slightly higher margin categories of gold, precious and
semi-precious merchandise to the diamond category which carries a somewhat lower
gross margin. The improvement in merchandise gross margin was offset by higher
occupancy, depreciation and buying expenses which grew more than the sales
contributed by the operation of an additional sixteen stores in fiscal 2001. In
addition, an impairment write-off of leasehold improvements and other fixed
assets totaling $0.8 million for seven store closings was taken in the third
quarter.

         Management initiatives reduced selling, general and administrative
expenses by $5.6 million, or 4.9%, to $110.0 million in fiscal 2001 from $115.6
million in fiscal 2000 while opening 27 new stores. As a percentage of net
sales, selling, general and administrative expenses decreased to 32.4% in fiscal
2001 from 32.6% in fiscal 2000. The dollar decrease related to lower other
expense ($3.8 million) and lower credit expense ($3.4 million), somewhat offset
by higher payroll costs ($1.3 million) and higher advertising costs ($0.3
million). Selling, general and administrative expenses attributable to the 27
stores opened in fiscal 2001 and the 66 stores opened in fiscal 2000 were
absorbed in developing the overall reduction in selling, general and
administrative expenses and partially offset greater reductions achieved in
existing stores. Advertising expenses increased in fiscal 2001, as compared to
fiscal 2000, due to an expansion of the Company's marketing and promotion
programs. Payroll costs increased in fiscal 2001, as compared to fiscal 2000,
due to, among other things, the increased number of stores, but were offset by
expense reductions to reduce store payroll hours and control labor rates. The
reduction in credit expense relates to a significant reduction in the use of one
year no interest promotions. Also, lower sales volumes and reduced credit sales
along with reductions in accounts receivable reserves ($1.0 million), which are
established to address exposures to chargebacks on credit receivables that have
already been collected. These reserves were reduced as a result of improved
credit practices, reductions in the use of third party finance contract sales
and management's belief that the Company's exposure was diminished. The decrease
in other expenses resulted from the increased oversight and consolidation of
service and supply purchases.

         As a result of the factors discussed above, income from operations
increased to $22.4 million in fiscal 2001 from $22.3 million in fiscal 2000. As
a percentage of net sales, income from operations increased to 6.6% in fiscal
2001 from 6.3% in fiscal 2000.

         Interest expense increased $1.1 million, or 19.9%, to $6.9 million in
fiscal 2001 from $5.8 million in fiscal 2000. The increase in interest expense
is a result of an increase in average outstanding borrowings partially offset by
lower average interest rates.

         Income tax effective rate decreased from 37.3% in fiscal 2000 to 34.8%
in fiscal 2001 primarily due to lower income tax and estimated accruals. The
Company expects to utilize certain income tax net operating losses expiring over
the next fifteen to twenty years.



<PAGE>

LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements consist
principally of funding inventory for existing stores, capital expenditures and
working capital (primarily inventory) associated with the Company's new stores.
The Company's primary sources of liquidity have historically been cash flow from
operations and bank borrowings under the Company's Credit Agreement, which was
amended effective January 31, 2003 as discussed in Note (11) of the January 31,
2003 financial statements.

FISCAL 2002 The Company's cash flow used in operating activities was $20.1
million in fiscal 2002 compared to cash flow provided by operating activities of
$45.2 million in fiscal 2001. Decreases in accounts payable ($31.4 million) in
order to gain cash discounts and increases in merchandise inventories ($3.5
million) as compared to a prior year decrease in inventory ($7.1 million) and
increase in accounts payable ($12.3 million) were the significant changes in
fiscal 2002. Cash used in investing activities included the funding of capital
expenditures of $8.6 million, related primarily to the opening of 17 new stores
in fiscal 2002 compared to $12.7 used for capital expenditures in 2001.

         Cash generated by financing activities included revolver borrowings
($59.2 million) and proceeds from the exercise of options ($1.6 million). The
Company utilized cash for financing activities in fiscal 2002 primarily to (i)
purchase gold to settle the gold consignment facility ($20.5 million), (ii) make
scheduled principal payments on the term loan ($5.3 million) and (iii)
repurchase of 605,600 shares of common stock under the Stock Repurchase Program
announced July 23, 2002 ($6.5 million). Stockholders equity increased from
$113.7 million at January 31, 2002 to $118.7 million at January 31, 2003.

FISCAL 2001 The Company's cash flow provided by operating activities increased
to $45.2 million in fiscal 2001 compared to cash flow used in operating
activities of $6.2 million in fiscal 2000. Increases in accounts payable ($12.3
million) and decreases in merchandise inventories ($7.1 million) as compared to
a prior year increase ($27.8 million) were the primary changes in fiscal 2001.
The decrease in inventory was achieved while the Company operated an additional
16 stores resulting in a decrease of over 6% in average store inventory. Since
the majority of the inventory reduction took place in central inventory, store
assortments continued to be very strong. Additional focus was given to the
timing and flow of merchandise purchases which contributed to the increase in
accounts payable. Cash used in investing activities included the funding of
capital expenditures of $12.7 million, related primarily to the opening of 27
new stores in fiscal 2001.

         Cash generated by financing activities included proceeds received from
gold transferred and consigned under the gold consignment facility ($3.1
million) and proceeds from the exercise of options ($0.4 million). The Company
utilized cash for financing activities in fiscal 2001 primarily to (i) decrease
revolver borrowings under the credit facility ($12.0 million), (ii) decrease
outstanding checks ($13.6 million), (iii) make scheduled principal payment on
the term loan ($4.3 million) and (iv) purchase gold under the gold consignment
facility ($6.1 million). Stockholders equity increased from $103.2 million at
January 31, 2001 to $113.7 million at January 31, 2002.

OTHER LIQUIDITY AND CAPITAL RESOURCES ELEMENTS During fiscal 2002, the Company
amended its $166.5 million credit facility. The Company has a $150.0 million
revolving credit facility and a $4.5 million term loan facility (originally
$16.5 million, less principal repayments) through June 30, 2004. A gold
consignment facility of up to $40.0 million is available under the revolving
credit facility. Interest rates and commitment fees charged on the unused
facility float based on the Company's quarterly performance. Since these




<PAGE>
interest rates are determined by reference to Eurodollar or prime rates,
changes in market interests rates can materially affect the Company's interest
expense. Borrowings under the revolver are limited to a borrowing base
determined based on the levels of the Company's inventory and accounts
receivable. Availability under the revolver is based on amounts outstanding
thereunder, including the value of consigned gold which fluctuates based on
current gold prices. The Company periodically determines the value of the unused
facility based upon a formula the result of which varies with fluctuations in
inventory levels, aggregate borrowings and performance versus certain financial
covenant ratios. As of January 31, 2003, the most restrictive financial covenant
was total funded debt to earnings before interest, taxes, depreciation and
amortization as defined in the agreement. This financial covenant was set at a
ratio of 2.95 to 1.00, as amended. The peak outstanding borrowing under the
Company's revolver during fiscal 2002 and 2001 was $111.9 million and $90.4
million, respectively. The unused facility was $28.9 million as of January 31,
2003.

         The Company has a gold consignment facility as part of its credit
facility pursuant to which the Company accepts as consignee, and is responsible
to return at a future date, a fixed number of ounces of gold. The Company has
the opportunity to enter into gold consignments with certain third party
financial institutions. The Company provides the third party financial
institution with title to a certain number of troy ounces of gold held in the
Company's existing merchandise inventory in exchange for cash. The Company then
consigns the gold from the third party financial institution, pursuant to the
gold consignment agreement. This agreement entitles the Company to use the gold
in the ordinary course of its business.

         The gold consignment facility is a transfer of title in specified
quantities of the gold content of the Company's inventory. The Company continues
to bear responsibility for damage to the inventory, as is the case in all of its
consigned inventory arrangements with its other vendors. Similar to other
consigned inventories in the possession of the Company (for which the Company
bears risk of loss but does not possess title), the value of the inventory is
not included in the assets of the Company.

         On August 22, 2002, the Company purchased 66,500 troy ounces of gold at
an average gold price of $307.56 per ounce for a total of $20.5 million. The
Company delivered the gold to its banks and extinguished all existing Company
gold consignment obligations to the banks under the Credit Agreement (See Note
11). The purchase had the effect of increasing the weighted average cost of gold
available for retail sale by the Company and will result in a higher weighted
average cost of sales in future periods. The Company estimated subsequent cost
of sales as a result of this transaction to be approximately $1.5 million
greater based on the effect of the transaction on the weighted average cost of
gold product in its inventory prior to this purchase. Approximately $725,000 of
this increase in cost of sales is reflected in the year ended January 31, 2003.
This purchase increased the Company's inventory by $20.5 million and was funded
by revolver loan borrowings. The total amount available to borrow under the
Company's Credit Agreement was unchanged.

         A substantial portion of the merchandise sold by the Company is carried
on a consignment basis prior to sale or is otherwise financed by vendors,
thereby reducing the Company's direct capital investment in inventory. The peak
consigned inventories from merchandise vendors were $85.7 million and $87.0
million during fiscal 2002 and 2001, respectively. The willingness of vendors to
enter into such arrangements may vary substantially from time to time based on a
number of factors, including the merchandise involved, the financial resources
of vendors, interest rates, availability of financing, fluctuations in gem and
gold prices, inflation, the financial condition of the Company, the vendors'
understanding that the Company bears risk of loss but does not possess title,
and a number of economic or competitive conditions in the jewelry business or
the general economy. Any change in these relationships could have a material
adverse effect on the Company's results of operations or financial condition.




<PAGE>

         On March 6, 2000, the Company completed the sale to the public of
2,325,000 shares of its common stock at an offering price of $19.5625 per share.
The Company received net proceeds of approximately $42.5 million, which it used
to reduce bank debt, to accelerate new store openings and for working capital
and general corporate purposes.

         On July 14, 2000, the Company announced that its Board of Directors had
authorized the repurchase of up to $15.0 million of its common stock. The
repurchase program authorized the Company to purchase shares over an 18-month
period in the open market or through privately negotiated transactions. On
August 23, 2000, the Company announced that its Board of Directors had
authorized a $5.0 million increase in the stock repurchase program (increasing
the total authorized to $20 million). As of January 31, 2002, the Company had
repurchased 2,317,500 shares at a total cost of approximately $19.0 million
under this program. This program has been terminated.

         On July 23, 2002, the Company announced that the Board of Directors had
established a new stock repurchase program covering up to $25.0 million of its
common stock. As of January 31, 2003, the Company had repurchased a total of
605,600 shares at a total cost of $6.5 million under this program.

         The Company's inventory levels and working capital requirements have
historically been highest in advance of the Christmas season. The Company has
funded these seasonal working capital needs through borrowings under the
Company's revolver and increases in trade payables and accrued expenses.

         Management expects that cash flows from operating activities and funds
available under its revolving credit facility will be sufficient to support the
Company's current new store expansion program and seasonal working capital needs
for the foreseeable future.

INTEREST RATE RISK The Company's exposure to changes in interest rates relates
primarily to its borrowing activities to fund business operations. The Company
principally uses floating rate borrowings under its revolving credit and term
loan facilities. The Company currently does not use derivative financial
instruments to protect itself from fluctuations in interest rates.

         The information below summarizes the Company's interest rate risk
associated with debt obligations outstanding as of January 31, 2003. The table
presents principal cash flows and related interest rates by fiscal year of
maturity or repricing date.

<TABLE>
<CAPTION>
                                               Expected Fiscal Year of Maturity/Repricing
-----------------------------------------------------------------------------------------------------
(in thousands)                                  2003            2004       2005       Total
-----------------------------------------------------------------------------------------------------
<S>                                          <C>              <C>       <C>         <C>
Variable rate (a)                            $  98,990            --         --     $   98,990
Average interest rate                              4.3%           --         --            4.3%
Fixed rate                                          --        $  640         --     $      640
Average interest rate                               --         12.15%        --          12.15%
-----------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $4.5 million of term debt with scheduled principal payments due
between April 2003 and September 2003. All term loans are variable rate, which
reprice within 2003. Interest rates charged on the facility float based on the
Company's quarterly financial performance.

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities" (the effective date of which was amended in
September 1999 by SFAS No. 137). This Statement was further amended in June 2000
by SFAS No. 138. SFAS No. 133 and the amendments found in SFAS No. 138 require
that entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.

<PAGE>

Effective February 1, 2001, the Company adopted SFAS133, as amended, with no
impact on its financial statements.

CONTRACTUAL OBLIGATIONS AND CONTINGENCIES The following summarizes the Company's
contractual obligations at January 31, 2003:

<TABLE>
<CAPTION>
                                                             Due Fiscal      Due Fiscal          Due
(in thousands)                                Total             2003         2004-2006        Thereafter
-----------------------------------------------------------------------------------------------------------
<S>                                       <C>                <C>           <C>                <C>
Revolver                                  $  94,490          $  94,490     $      --          $      --
Accrued interest                                268                268            --                 --
Long-term debt                                4,500              4,500            --                 --
Subordinated debt                               640                 --           640                 --
Operating leases                            195,190             28,945        80,015             86,230
------------------------------------------------------------------------------------------------------------
Total contractual obligations             $ 295,088          $ 128,203     $  80,655          $  86,230
------------------------------------------------------------------------------------------------------------
</TABLE>

         On July 25, 2002, the Company was named a defendant in a wage hour
class action suit filed in California by three former store managers. The case
is based principally upon the allegation that store managers employed by the
Company in California should have been classified as non-exempt for overtime
purposes. The plaintiffs seek recovery of allegedly unpaid overtime wages for
the four-year period preceding the filing date, along with certain penalties,
interest and attorneys fees. The purported class includes all current and former
store managers employed by the Company in California for the four-year period
preceding the filing of the complaint. The Company denied liability and asserted
that its managers were properly classified. The parties have reached a
preliminary agreement to settle the matter resulting in a pre-tax charge of
$1,000,000, inclusive of the plaintiffs' attorneys' fees, interest, penalties,
administrative costs and other Company costs. This settlement covers the period
from July 25, 1998 through the date of settlement approval. Completion of the
settlement is subject to, among other things, the successful negotiation and
execution of a written settlement agreement, opt out and other potential
contingencies in the settlement agreement, court approval and administration of
the claims process. The parties are in the process of negotiating the specific
settlement terms.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's critical accounting
policies and estimates, including the assumptions and judgments underlying them,
are disclosed in the Notes to the Financial Statements. These policies have been
consistently applied in all material respects and address such matters as
revenue recognition, inventory valuation, depreciation methods and asset
impairment recognition. While the estimates and judgments associated with the
application of these policies may be affected by different assumptions or
conditions, the Company believes the estimates and judgments associated with the
reported amounts are appropriate in the circumstances. Management has discussed
the development and selection of these critical accounting estimates with the
audit committee of our Board of Directors.

ACCOUNTS RECEIVABLE Accounts receivable consists primarily of customer credit
card charges and other non-recourse third party credit arrangements for
merchandise delivered to the customer for which the Company has not yet received
payment under the terms of the arrangements. Allowance for doubtful accounts
represents reserves established to address exposures to chargebacks on credit
receivables that have already been collected. The Company accrues an estimate of
expected chargebacks based on the Company's historical chargeback experience.

MERCHANDISE INVENTORIES Merchandise inventories are stated principally at the
lower of weighted average cost or market. Cost is reduced to reflect certain
allowances and discounts received from vendors. Periodic payments from vendors





<PAGE>
in the form of buydowns, volume or other purchase discounts that are evidenced
by signed agreements are reflected in the carrying value of the inventory when
earned and as a component of cost of sales, buying and occupancy as the
merchandise is sold. To the extent the Company's agreements with vendors specify
co-op advertising, the Company has historically classified such credits as a
reduction to advertising expense in selling, general and administrative
expenses. Emerging Issues Task Force ("EITF") Issue No. 02-16, "Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor" ("EITF 02-16"), which was effective for all arrangements entered into
after December 31, 2002, requires vendor allowances to be classified as a
reduction to cost of sales unless evidence exists supporting an alternative
classification.

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

REVENUE RECOGNITION The Company recognizes revenue from sales of merchandise
when earned, as required by SAB 101. Revenue is recognized when delivery has
occurred and title and risk of loss have transferred to the customer. The
Company accrues an estimate of expected returns based on the Company's
historical returns experience which is governed by the Company's merchandise
returns policy for expected returns which have not been presented. The Company
charges the customer to cover the costs of administration for inactive layaways.

ACCOUNTING FOR STOCK BASED COMPENSATION The Company follows APB No. 25
"Accounting for Stock Issued to Employees" and the related interpretations in
accounting for its stock option plans. Since the stock option plans meet certain
criteria of APB No. 25, the Company does not recognize any compensation cost in
the income statement. SFAS No. 123, "Accounting for Stock-Based Compensation"
issued subsequent to APB No. 25, defines a "fair value based method" of
accounting for employee stock options but allows companies to continue to
measure compensation cost for employee stock options using the "intrinsic value
based method" prescribed in APB No. 25.

         The Company believes that applying the intrinsic value based method of
accounting for stock options prescribed by APB No. 25 is a critical accounting
policy because application of SFAS No. 123 would require the Company to estimate
the fair value of employee stock options at the date of the grant and record an
expense in the income statement over the vesting period for the fair value
calculated, thus reducing net income and earnings per share. Our accounting
policy to follow APB No. 25 in accounting for our stock options plans is a
critical accounting policy.

         The Company has no immediate plans at this time to voluntarily change
its accounting policy to the fair value based method; however, the Company
continues to evaluate this alternative. In accordance with SFAS No. 123, the
Company has been disclosing in the Notes to the Financial Statements the impact
on net income and earnings per share as if the fair value based method was
adopted.




<PAGE>


ACCOUNTING OF BUSINESS COMBINATIONS AND GOODWILL AND OTHER TANGIBLES In
accordance with the Financial Accounting Standard Board Statement No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets," the Company evaluates goodwill
for impairment on an annual basis or whenever indicators of impairment exist.
SFAS 142 requires that if the carrying value of a reporting unit for which the
goodwill relates to exceeds its fair value, an impairment loss is recognized to
the extent that the carrying value of the reporting unit goodwill exceeds the
"implied fair value" of reporting unit goodwill. As discussed in the notes to
the financial statements, the Company evaluated goodwill using discounted cash
flow and a market multiple approach for impairment and concluded that no
impairment currently exists.

         The Company believes that the accounting estimate related to
determining fair value is a critical accounting estimate because: (1) it is
highly susceptible to change from period to period because it requires Company
management to make assumptions about the future cash flows over several years in
the future and (2) the impact that recognizing an impairment would have on the
assets reported on our balance sheet as well as our results of operations could
be material. Management's assumptions about future cash flows requires
significant judgment and actual cash flows in the future may differ
significantly from those forecasted today.

NEW ACCOUNTING PRONOUNCEMENTS

ACCOUNTING FOR THE IMPAIRMENT OF DISPOSAL OF LONG-LIVED ASSETS In August 2001,
the Financial Accounting Standards Board issued Statement No. 144 ("SFAS 144"),
"Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS 144
establishes accounting requirements for impaired long-lived assets to be held
and used, long-lived assets to be disposed of other than by sale and long-lived
assets to be disposed of by sale. The Company adopted SFAS 144 effective
February 1, 2002, which had no impact on its financial statements.

ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES In June 2002,
the Financial Accounting Standards Board issued Statement No. 146 ("SFAS 146"),
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146
requires that costs associated with disposal or exit activities after December
31, 2002 be recorded at fair value in the period the liability is incurred. The
Company adopted SFAS 146 effective January 1, 2003, which had no impact on its
financial statements.

ACCOUNTING FOR STOCK BASED COMPENSATION The Financial Accounting Standards Board
issued Statement No. 148 ("SFAS No. 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure", during fiscal 2002. This Statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and amends the
disclosure requirements to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company adopted the disclosure requirements of this statement as of January 31,
2003.

ACCOUNTING FOR GUARANTEES The Financial Standards Accounting Board issued FASB
Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and interpretation of FASB Statements No. 5, 57 and 107 and Rescission
of FASB Interpretation No. 34. Under its bylaws, the Company has agreed to
indemnify its officers and directors for certain events or occurrences while the
officer or director is, or was serving, at its request in such capacity. The
maximum potential amount of future payments the Company could be required to
make pursuant to these indemnification obligations is unlimited; however, the
Company has a directors and officer liability insurance policy that, under
certain circumstances, enables it to recover a portion of any future amounts
paid. As a result of its insurance policy coverage, the Company believes the
estimated fair value of these indemnification obligations is minimal. The
Company has no liabilities recorded for these obligations as of January 31,
2003.



<PAGE>


TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES The Company provides certain
office services to Double P Corporation, PDP Limited Liability Company and CBN
Limited Liability Company or other companies, from time to time, which own and
operate primarily mall-based snack food stores, and in which Messrs. Hugh
Patinkin, John Desjardins and Matthew Patinkin own a 52% equity interest. A
substantial portion of the remaining equity interest is owned by the adult
children and other family members of Norman Patinkin. For these services, Double
P Corporation pays the Company $700 per month. Matthew Patinkin has served as a
director of Double P Corporation and one of Norman Patinkin's adult children is
a director and chief executive officer of Double P Corporation. Messrs. Hugh
Patinkin, John Desjardins and Matthew Patinkin spend a limited amount of time
providing services to Double P Corporation, PDP Limited Liability Company and
CBN Limited Liability Company. In the case of Hugh Patinkin and John Desjardins,
these services are performed solely in their capacities as shareholders of
Double P Corporation. In the case of Matthew Patinkin, these services are
performed in his capacity as a shareholder of Double P Corporation and were
previously performed in his capacities as a director and a shareholder of Double
P Corporation. Messrs. Hugh Patinkin and John Desjardins receive no remuneration
for these services. Matthew Patinkin receives no remuneration for these services
other than the fee he previously received for his services as a director of
Double P Corporation. In several cases the Company and Double P Corporation have
reached joint agreements to divide and separately lease contiguous mall space.
The Company and Double P Corporation concurrently negotiated separately with the
landlord to reach such a joint agreement. Since the Company's initial public
offering, its policy has required that the terms of any such leases must be
approved by a majority of the Company's outside directors.

INFLATION The Company believes that inflation generally has not had a material
effect on the results of its operations. There is no assurance, however, that
inflation will not materially affect the Company in the future.

FORWARD-LOOKING STATEMENTS This report contains certain forward-looking
statements (as such term is defined in Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934) and information relating
to the Company that are based on the current beliefs of management of the
Company as well as assumptions made by and information currently available to
management including statements related to the markets for our products, general
trends and trends in our operations or financial results, plans, expectations,
estimates and beliefs. In addition, when used in this report, the words
"anticipate," "believe," "estimate," "expect," "intend," "plan," "predict" and
similar expressions and their variants, as they relate to the Company or our
management, may identify forward-looking statements. Such statements reflect our
judgment as of the date of this report with respect to future events, the
outcome of which is subject to certain risks, including the factors described
below, which may have a significant impact on our business, operating results or
financial condition. Investors are cautioned that these forward-looking
statements are inherently uncertain. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results or outcomes may vary materially from those described herein.
Whitehall Jewellers undertakes no obligation to update forward-looking
statements. The following factors, among others, may impact forward-looking
statements contained in this report: (1) a change in economic conditions or the
financial markets which negatively impacts the retail sales environment and
reduces discretionary spending on goods such as jewelry; (2) our ability to
execute our business strategy and the related effects on comparable store sales
and other results; (3) the extent and results of our store expansion strategy
and associated occupancy costs, and access to funds for new store openings; (4)
the high degree of fourth quarter seasonality of our business; (5) the extent
and success of our marketing and promotional programs; (6) personnel costs and
the extent to which we are able to retain and attract key personnel; (7) the
effects of competition; (8) the availability and cost of consumer credit; (9)
relationships with suppliers; (10) our ability to maintain adequate information
systems capacity and infrastructure; (11) our leverage and cost of funds and
changes in interest rates that may increase such costs; (12) our ability to
maintain adequate loss prevention measures; (13) fluctuations in raw material
prices, including diamond, gem and gold prices; (14) the extent and results of
our E-commerce strategies and those of others; (15) regulation affecting the
industry generally, including regulation of marketing practices; (16) the
successful integration of acquired locations and assets into our existing
operations; and (17) the risk factors identified from time to time in our
filings with the Securities and Exchange Commission.


<PAGE>

Whitehall Jewellers, Inc.
Statements of Operations
For the Years Ended January 31, 2003, 2002 and 2001

<TABLE>
<CAPTION>
(in thousands, except per share data)                                         2003              2002              2001

-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>               <C>
Net sales                                                                  $ 341,037         $ 338,911         $ 355,065
Cost of sales (including buying
   and occupancy expenses)                                                   212,910           206,574           217,164
-----------------------------------------------------------------------------------------------------------------------------
     Gross profit                                                            128,127           132,337           137,901
Selling, general and administrative expenses                                 107,790           109,975           115,600
-----------------------------------------------------------------------------------------------------------------------------
     Income from operations                                                   20,337            22,362            22,301
Interest expense                                                               4,341             6,902             5,757
-----------------------------------------------------------------------------------------------------------------------------
     Income before income taxes                                               15,996            15,460            16,544
Income tax expense                                                             6,089             5,380             6,170
-----------------------------------------------------------------------------------------------------------------------------
     Income before cumulative effect of change in accounting, net              9,907            10,080            10,374
Cumulative effect of change in accounting, net                                   --                --             (3,068)
-----------------------------------------------------------------------------------------------------------------------------
     Net income                                                            $   9,907         $  10,080         $   7,306
-----------------------------------------------------------------------------------------------------------------------------

Basic earnings per share:
     Income before cumulative effect of change in accounting, net          $    0.68         $    0.69         $    0.66
     Cumulative effect of change in accounting, net                              --                --              (0.19)
-----------------------------------------------------------------------------------------------------------------------------
     Net income                                                            $    0.68         $    0.69         $    0.47

-----------------------------------------------------------------------------------------------------------------------------
     Weighted average common shares                                           14,545            14,584            15,617

-----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
     Income before cumulative effect of change in accounting, net          $    0.66         $    0.69         $    0.65
     Cumulative effect of change in accounting, net                              --                --              (0.19)
-----------------------------------------------------------------------------------------------------------------------------
     Net income                                                            $    0.66         $    0.69         $    0.46
-----------------------------------------------------------------------------------------------------------------------------

     Weighted average common shares
     and common share equivalents                                             15,038            14,685            15,964

-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.




<PAGE>


Whitehall Jewellers, Inc.
Balance Sheets
As of January 31, 2003 and January 31, 2002

<TABLE>
<CAPTION>

(in thousands, except per share amounts)                                                   2003                2002

-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                  <C>
ASSETS
Current assets:
   Cash                                                                                $   2,048            $   2,741
   Accounts receivable, net                                                                1,621                1,189
   Merchandise inventories                                                               197,859              173,931
   Other current assets                                                                    1,239                  973
   Deferred income taxes, net                                                              2,172                2,704
   Deferred financing costs                                                                  510                  511

-----------------------------------------------------------------------------------------------------------------------------
     Total current assets                                                                205,449              182,049
Property and equipment, net                                                               61,634               63,914
Goodwill, net                                                                              5,662                5,662
Deferred financing costs                                                                     213                  723
-----------------------------------------------------------------------------------------------------------------------------
     Total assets                                                                      $ 272,958            $ 252,348

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

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Revolver loans                                                                      $  94,490            $  35,277
   Current portion of long-term debt                                                       4,500                5,250
   Customer deposits                                                                       3,454                3,963
   Accounts payable                                                                       24,726               56,695
   Income taxes                                                                            3,261                3,226
   Accrued payroll                                                                         3,282                6,270
   Other accrued expenses                                                                 13,207               18,171

-----------------------------------------------------------------------------------------------------------------------------
     Total current liabilities                                                           146,920              128,852

Long-term debt                                                                               640                5,140
Deferred income taxes, net                                                                 3,607                2,012
Other long-term liabilities                                                                3,138                2,660

-----------------------------------------------------------------------------------------------------------------------------
     Total liabilities                                                                   154,305              138,664
Commitments and contingencies
Stockholders' equity:
     Common Stock, ($.001 par value; 30,000,000 shares authorized;
     18,020,968 shares and 17,809,830 shares issued, respectively)                            18                   17
     Class B Common Stock, ($1.00 par value; 29,567 shares authorized;
     142 shares and 142 shares issued and outstanding, respectively)                          --                   --
     Additional paid-in capital                                                          105,795              103,767
     Retained earnings                                                                    48,777               38,870

-----------------------------------------------------------------------------------------------------------------------------
                                                                                         154,590              142,654
   Treasury stock, 3,822,637 and 3,200,209 shares, respectively at cost                  (35,937)             (28,970)
-----------------------------------------------------------------------------------------------------------------------------

     Total stockholders' equity, net                                                     118,653              113,684

-----------------------------------------------------------------------------------------------------------------------------
     Total liabilities and stockholders' equity                                        $ 272,958            $ 252,348

-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.



<PAGE>


Whitehall Jewellers, Inc.
Statements of Stockholders' Equity
For the Years Ended January 31, 2003, 2002 and 2001


<TABLE>
<CAPTION>
                                                                Class B        Additional
                                                 Common          Common           Paid-in          Retained         Treasury
(in thousands)                                    Stock           Stock           Capital          Earnings            Stock
-----------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>               <C>           <C>                 <C>              <C>
Balance at January 31, 2000                    $     15          $   --          $ 60,426          $ 21,484          $ (9,997)
Net income                                           --              --                --             7,306                --
Exercise of options                                  --              --               380                --                --
Equity offering                                       2              --            42,535                --                --
Treasury stock repurchase                            --              --                --                --           (18,980)
-----------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 2001                          17              --           103,341            28,790           (28,977)
Net income                                           --              --                --            10,080                --
Exercise of options                                  --              --               426                --                --
Stock issued under
   Employee Stock Purchase Plan                      --              --                --                --                 7

-----------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 2002                          17              --           103,767            38,870           (28,970)
Net income                                           --              --                --             9,907                --
Exercise of options                                   1              --             2,028                --              (459)
Treasury stock repurchase                            --              --                --                --            (6,548)
Stock issued under
   Employee Stock Purchase Plan                      --              --                --                --                40

-----------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 2003                    $     18          $   --          $105,795          $ 48,777          $(35,937)

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

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



<PAGE>


Whitehall Jewellers, Inc.
Statements of Cash Flows
For the Years Ended January 31, 2003, 2002 and 2001

<TABLE>
<CAPTION>
(in thousands)                                                                      2003             2002             2001

-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>              <C>                <C>
Cash flows from operating activities:
     Net income                                                               $     9,907      $    10,080      $     7,306
     Adjustments to reconcile net income to net
       cash (used in) provided by operating activities:
     Cumulative effect of accounting change, net                                       --               --            3,068
     Depreciation and amortization                                                 11,216           10,715            9,198
     Store closing impairment charge                                                   --              822            1,118
     Loss on disposition of assets                                                    146               74               75
     Changes in assets and liabilities:
     (Increase) decrease in accounts receivable, net                                 (432)             217            1,753
     Increase (decrease) in merchandise inventories, net of gold consignment       (3,475)           7,133          (27,774)
     (Increase) decrease in other current assets                                     (266)            (285)             421
     Increase (decrease) in deferred taxes, net                                     2,126            2,652             (645)
     (Decrease) increase in accounts payable                                      (31,341)          12,277              273
     (Decrease) increase customer deposits                                           (509)            (251)             260
     Increase (decrease) in income taxes                                               35              286           (2,455)
     (Decrease) increase in accrued liabilities and long-term liabilities          (7,473)           1,473            1,154

-----------------------------------------------------------------------------------------------------------------------------
       Net cash (used in) provided by operating activities                        (20,066)          45,193           (6,248)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
     Capital expenditures                                                          (8,571)         (12,695)         (22,688)

-----------------------------------------------------------------------------------------------------------------------------
       Net cash used in investing activities                                       (8,571)         (12,695)         (22,688)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows financing activities:
     Borrowing on revolver loan                                                 1,065,170        1,043,464          444,147
     Repayment of revolver loan                                                (1,005,957)      (1,055,407)        (438,044)
     Repayment of term loan                                                        (5,250)          (4,250)          (3,250)
     Purchase of gold to settle the gold consignment                              (20,453)          (6,118)              --
     Proceeds from gold consignment                                                    --            3,107            2,016
     Proceeds from equity offering                                                     --               --           42,537
     Financing costs                                                                   --             (348)            (441)
     Proceeds from exercise of stock options                                        1,570              426              380
     Proceeds from stock issued under the
       Employee Stock Purchase Plan                                                    40                7               --
     Purchase of treasury stock                                                    (6,548)              --          (18,980)
     (Decrease) increase in outstanding checks, net                                  (628)         (13,564)           1,071

-----------------------------------------------------------------------------------------------------------------------------
       Net cash provided by (used in) financing activities                         27,944          (32,683)          29,436

-----------------------------------------------------------------------------------------------------------------------------
       Net change in cash and cash equivalents                                       (693)            (185)             500
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period                                    2,741            2,926            2,426

-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                    $     2,048      $     2,741      $     2,926

-----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
     Interest paid during year                                                $     2,515      $     6,372      $     5,383
     Income taxes paid during year                                            $     3,809      $     2,274      $     9,319
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.




<PAGE>


NOTES TO FINANCIAL STATEMENTS

(1) Description of Operations

The financial statements of Whitehall Jewellers, Inc. (the "Company") include
the results of the Company's chain of specialty retail fine jewelry stores. The
Company operates exclusively in one business segment, specialty retail jewelry.
The Company has a national presence with 370 and 364 stores located in 38 states
operating in regional or super-regional shopping malls as of January 31, 2003
and January 31, 2002, respectively. The consolidated financial statements
include the accounts and transactions of the Company and its subsidiaries.
Intercompany accounts and transactions have been eliminated.

(2) Accounting Change

On December 3, 1999 the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101, among other things,
requires that revenue from layaway sales should only be recognized upon delivery
of merchandise to the customer. The accounting required by this bulletin became
effective for the Company the first fiscal quarter of the fiscal year beginning
after December 15, 1999. Accordingly, the Company adopted this pronouncement in
the first quarter of fiscal year 2000.

   Effective February 1, 2000, the Company changed its accounting policy for
layaway sales in accordance with SAB 101, which requires that revenue from
layaway sales be deferred until merchandise is delivered to the customer. The
Company charges the customer to cover the costs of administration for inactive
layaways.

   Prior to February 1, 2000, layaway receivables included those sales to
customers under the Company's layaway policies, which had not been fully
collected as of the end of the fiscal year. Layaway receivables are net of
customer payments received to date and net of an estimate for payments on
layaway sales which the Company anticipated would never be consummated. This
estimate is based on the Company's historical calculation of layaway sales.

   The Company recorded a charge of approximately $3.1 million during the first
quarter, which is net of a $1.9 million tax benefit, presented as a cumulative
effect of this accounting change as of February 1, 2000.

(3) Equity Offering

In March 2000, the Company completed an offering of common stock. The Company
issued 2,325,500 shares of common stock, and received proceeds of $42.5 million
net of underwriting discounts and offering costs. The Company used the proceeds
to reduce the Company's indebtedness and for working capital and other general
corporate purposes.

(4) Common Stock Repurchase Program

On July 14, 2000, the Board of Directors authorized the Company to repurchase up
to $15.0 million of its common stock. On August 23, 2000, the Company announced
that its Board of Directors had increased the authorization to purchase shares
under the stock repurchase program from $15.0 million to $20.0 million of the
Company's common stock. As of January 31, 2002, the Company had repurchased
2,317,500 shares under this stock repurchase program, at a total cost of
approximately $19.0 million. This program has been terminated.

   On July 23, 2002, the Company announced that the Board of Directors had
established a new stock repurchase program covering up to $25.0 million of its
common stock. As of January 31, 2003, the Company had repurchased a total of
605,600 shares of common stock under the stock repurchase program at a total
cost of approximately $6.5 million. Shares repurchased by the Company reduce the
weighted average number of shares of Common Stock outstanding for basic and
diluted earnings per share calculations.




<PAGE>


(5) Summary of Significant Accounting Policies

CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the
Company considers any temporary cash investments purchased with an original
maturity of three months or less to be cash equivalents.

ACCOUNTS RECEIVABLE Accounts receivable consists primarily of customer credit
card charges and other non-recourse third party credit arrangements for
merchandise delivered to the customer for which the Company has not yet received
payment under the terms of the arrangements. Allowance for doubtful accounts
represents reserves established to address exposures to chargebacks on credit
receivables that have already been collected. The Company accrues an estimate of
expected chargebacks based on the Company's historical chargeback experience.

MERCHANDISE INVENTORIES Merchandise inventories are stated principally at the
lower of weighted average cost or market. Cost is reduced to reflect certain
allowances and discounts received from vendors. Periodic payments from vendors
in the form of buydowns, volume or other purchase discounts that are evidenced
by signed agreements are reflected in the carrying value of the inventory when
earned and as a component of cost of sales, buying and occupancy as the
merchandise is sold. To the extent the Company's agreements with vendors specify
co-op advertising, the Company has historically classified such credits as a
reduction to advertising expense in selling, general and administrative
expenses. Emerging Issues Task Force ("EITF") Issue No. 02-16, "Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor" ("EITF 02-16"), which was effective for all arrangements entered into
after December 31, 2002, requires vendor allowances to be classified as a
reduction to cost of sales unless evidence exists supporting an alternative
classification.

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

PROPERTY AND EQUIPMENT Property and equipment are carried at cost, less
accumulated depreciation and amortization. Furniture and fixtures are
depreciated on a straight-line basis over estimated useful lives ranging from
five to ten years. Software costs are amortized on a straight-line basis over
five years. Leasehold improvements are amortized on a straight-line basis over
the lesser of the remaining lease terms or ten years.

   Upon retirement or disposition of property and equipment, the applicable cost
and accumulated depreciation are removed from the accounts and any resulting
gains or losses are included in the results of operations.

LONG-LIVED ASSETS When facts and circumstances indicate potential impairment,
the Company evaluates the recoverability of long-lived asset carrying values,
using projections of undiscounted future cash flows over remaining asset lives.
When impairment is indicated, any impairment loss is measured by the excess of
carrying values over fair values.

GOODWILL Goodwill represents the excess of cost over the fair value of assets
acquired in purchase business combinations. Under the Financial Standards




<PAGE>


Accounting Board Statement No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets" goodwill and indefinite lived intangible assets are reviewed annually
(or more frequently if impairment indicators arise) for impairment. The Company
adopted SFAS 142 on February 1, 2002 and has discontinued the amortization of
goodwill. The Company reviewed goodwill for impairment as of January 31, 2003
and determined that no impairment existed.

DEFERRED FINANCING COSTS In connection with the Company's financing agreements,
the Company incurred various financing costs, which have been deferred on the
Company's balance sheet and are amortized over the terms of the agreements and
included in interest expense.

ACCOUNTS PAYABLE Accounts payable includes outstanding checks which were
$6,512,000 and $7,140,000 as of January 31, 2003 and 2002, respectively.

STORE PREOPENING EXPENSE Expenses associated with the opening of new store
locations are expensed in the period such costs are incurred.

LEASE EXPENSE The Company leases the premises for its office facilities and all
of its retail stores. Certain leases require increasing annual minimum lease
payments over the term of the lease. Minimum lease expense under these
agreements is recognized on a straight-line basis over the terms of the
respective leases. Virtually all leases covering retail stores provide for
additional contingent rentals based on a percentage of sales. These costs are
expensed in the period incurred.

SELF-INSURANCE The Company self-insures or retains a portion of the exposure for
losses related to workers compensation and general liability costs. It is the
Company's policy to record self-insurance reserves, as determined actuarially,
based upon claims filed and an estimate of claims incurred but not yet reported.

REVENUE RECOGNITION The Company recognizes revenue from sales of merchandise
when earned, as required by SAB 101. Revenue is recognized when delivery has
occurred and title and risk of loss have transferred to the customer. The
Company accrues an estimate of expected returns based on the Company's
historical returns experience which is governed by the Company's merchandise
returns policy. The Company charges the customer to cover the costs of
administration for inactive layaways.

EARNINGS PER SHARE Basic earnings per share is computed by dividing net earnings
available to holders of common stock by the weighted average number of shares of
common stock outstanding. Diluted earnings per share are computed assuming the
exercise of all dilutive stock options. Under these assumptions, the weighted
average number of common shares outstanding is increased accordingly.

INCOME TAXES Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax basis of assets and liabilities and
their financial reporting amounts based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable earnings. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.

STOCK BASED COMPENSATION The Financial Accounting Standards Board issued SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure,"





<PAGE>


during 2002. This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and amends the disclosure requirements to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company adopted the disclosure requirements of
this statement as of January 31, 2003.

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

   The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," as amended by FASB
Statement No. 148, "Accounting for Stock-Based Compensation and Disclosure," to
stock-based employee compensation.

<TABLE>
<CAPTION>
(in thousands, except per share amounts)                             2003       2002       2001
--------------------------------------------------------------------------------------------------
<S>                                                             <C>        <C>        <C>
Net income, as reported                                         $   9,907  $  10,080  $   7,306

Deduct: Total stock-based employee
   compensation expense determined under fair
   value based method, net of related tax effects                  (1,951)    (2,459)    (3,583)

--------------------------------------------------------------------------------------------------
Pro forma net income                                            $   7,956  $   7,621  $   3,723

--------------------------------------------------------------------------------------------------
Earnings per share:
   Basic-as reported                                            $    0.68  $    0.69  $    0.47
   Basic-pro forma                                              $    0.55  $    0.52  $    0.24

   Diluted-as reported                                          $    0.66  $    0.69  $    0.46
   Diluted-pro forma                                            $    0.53  $    0.52  $    0.23
--------------------------------------------------------------------------------------------------
</TABLE>



   For purposes of pro forma net income and earnings per share calculation in
accordance with SFAS No. 123, for each option granted during the years ended
January 31, 2003, 2002, 2001, 2000, and 1999 the fair value is estimated using
the Black-Scholes option-pricing model. The assumptions used are as follows:

<TABLE>
<CAPTION>
                                                2003       2002       2001       2000       1999
----------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>        <C>        <C>        <C>
Risk-free interest rate                        4.1%         5.1%       6.6%       5.3%       5.3%
Dividend yield                                    0            0          0          0          0
Option life                               5.5 years      7 years    7 years    6 years    6 years
Volatility                                      62%          44%        53%        39%        40%
----------------------------------------------------------------------------------------------------
</TABLE>



MANAGEMENT ESTIMATES The preparation of financial statements in conjunction with
accounting principles generally accepted in the United States 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
expenses during the reporting period. Valuation reserves for inventory, accounts
receivable, sales returns and deferred tax assets are significant examples of
the use of such estimates. Actual results could differ from those estimates.





<PAGE>


ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), as amended by Statement of Financial
Accounting Standards No. 137, was required to be adopted by the Company for its
fiscal year beginning after December 1, 2000. SFAS 133 requires disclosures of
the objectives for holding or issuing derivative instruments, the context to
understand the objectives and the strategies for achieving the objectives and
disclosures related to the impact of derivatives as reflected in the statement
of comprehensive income and requires that all derivative instruments be
recognized as either assets or liabilities in the balance sheet and measured at
their fair values. SFAS 133 also requires changes in the fair value of
derivatives to be recorded in each period in current earnings or comprehensive
income, depending on the intended use of the derivatives. The Company adopted
SFAS 133, as amended, effective February 1, 2001, which had no impact on its
financial statements.

ACCOUNTING FOR THE IMPAIRMENT OF DISPOSAL OF LONG-LIVED ASSETS In August 2001,
the Financial Accounting Standards Board issued Statement No. 144 ("SFAS 144"),
"Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS 144
establishes accounting requirements for impaired long-lived assets to be held
and used, long-lived assets to be disposed of other than by sale and long-lived
assets to be disposed of by sale. The Company adopted SFAS 144 effective
February 1, 2002, which had no impact on its financial statements.

ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSED ACTIVITIES In June 2002,
the Financial Accounting Standards Board issued Statement No. 146 ("SFAS 146"),
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146
requires that costs associated with disposal or exit activities after December
31, 2002 be recorded at fair value in the period the liability is incurred. The
Company adopted SFAS 146 effective January 1, 2003, which had no impact on its
financial statements.

ACCOUNTING FOR GUARANTEES The Financial Standards Accounting Board issued FASB
Interpretation No. 45 ("FIN 45") Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and interpretation of FASB Statements No. 5, 57 and 107 and Rescission
of FASB Interpretation No. 34. Under its bylaws, the Company has agreed to
indemnify its officers and directors for certain events or occurrences while the
officer or director is, or was serving, at its request in such capacity. The
maximum potential amount of future payments the Company could be required to
make pursuant to these indemnification obligations is unlimited; however, the
Company has a directors and officer liability insurance policy that, under
certain circumstances, enables it to recover a portion of any future amounts
paid. As a result of its insurance policy coverage, the Company believes the
estimated fair value of these indemnification obligations is minimal. The
Company has no liabilities recorded for these obligations as of January 31,
2003.






<PAGE>


(6) Accounts Receivable, Net

Accounts receivables, net included the following as of January 31:

<TABLE>
<CAPTION>
(in thousands)                                                                2003         2002
-----------------------------------------------------------------------------------------------------
<S>                                                                        <C>        <C>
Accounts receivable                                                        $2,165     $   1,862
Less: allowance for doubtful accounts                                        (544)         (673)
-----------------------------------------------------------------------------------------------------
Accounts receivable, net                                                   $1,621     $   1,189
-----------------------------------------------------------------------------------------------------
</TABLE>

The Company has charged bad debt expense of $1,686,000, $577,000 and $2,331,000
for doubtful accounts for the years ended January 31, 2003, 2002 and 2001,
respectively.

(7) Inventory

Merchandise inventories consisted of the following as of January 31:

<TABLE>
<CAPTION>
(in thousands)                                                               2003         2002
-----------------------------------------------------------------------------------------------------
<S>                                                                        <C>          <C>
Raw materials                                                           $    7,657    $   6,958
Finished goods inventory                                                   190,202      166,973
-----------------------------------------------------------------------------------------------------
Merchandise inventories                                                 $  197,859    $ 173,931
-----------------------------------------------------------------------------------------------------
</TABLE>



Raw materials consist primarily of diamonds, precious gems, semi-precious gems
and gold. Included within finished goods inventory are allowances for inventory
shrink, scrap and miscellaneous costs of $3,150,000 and $3,003,000 for the years
ended January 31, 2003 and 2002, respectively. As of January 31, 2003 and 2002,
merchandise consignment inventories held by the Company that are not included in
its balance sheets total $74,924,000 and $80,425,000, respectively.

   Gold consignments of $23,298,000 are not included in the Company's balance
sheet at January 31, 2002 (see Note 11, Financing Arrangements) as the title to
such gold has passed to the consignor and is subject to the same risk of
physical loss as other inventory held on consignment by the Company. On August
22, 2002, the Company purchased 66,500 troy ounces of gold at an average gold
price of $307.56 per ounce for a total of $20.5 million. The Company delivered
the gold to its banks and extinguished all existing Company gold consignment
obligations to the banks under the Credit Agreement (See Note 11). The purchase
had the effect of increasing the weighted average cost of gold available for
retail sale by the Company and will result in a higher weighted average cost of
sales in future periods. The Company estimated subsequent cost of sales as a
result of this transaction to be approximately $1.5 million greater based on the
effect of the transaction on the weighted average cost of gold product in its
inventory prior to this purchase. Approximately $725,000 of this increase in
cost of sales is reflected in the year ended January 31, 2003. This purchase
increased the Company's inventory by $20.5 million and was funded by revolver
loan borrowings. The total amount available to borrow under the Company's Credit
Agreement is unchanged.

   Certain merchandise procurement, distribution and warehousing costs are
allocated to inventory. As of January 31, 2003 and 2002, these amounts included
in inventory are $3,364,000 and $3,306,000, respectively. The amounts comprising
the overhead pool of capitalizable costs were $5,566,000, $5,211,000 and
$4,964,000 for the years ended January 31, 2003, 2002 and 2001, respectively.

<PAGE>


(8) Property and Equipment
Property and equipment included the following as of January 31:


<TABLE>
<CAPTION>
(in thousands)                                                             2003          2002
-----------------------------------------------------------------------------------------------------
<S>                                                                     <C>           <C>
Furniture and fixtures, and software                                    $  77,614    $  71,245
Leasehold improvements                                                     36,407       37,417
-----------------------------------------------------------------------------------------------------
Property and equipment                                                    114,021      108,662
Accumulated depreciation and amortization                                 (52,387)     (44,748)

-----------------------------------------------------------------------------------------------------
Property and equipment, net                                             $  61,634    $  63,914
-----------------------------------------------------------------------------------------------------
</TABLE>


   Depreciation expense was $10,704,000, $9,955,000 and $8,558,000 for the years
ended January 31, 2003, 2002, and 2001, respectively.

   The Company has recognized impairment charges included in costs of sales,
measured as the excess of net book value of furniture, fixtures and leasehold
improvements over their fair values, associated with management's decision to
close stores. The Company recorded $822,000 and $1,118,000 in impairment charges
for the years ended January 31, 2002 and 2001. As of January 31, 2003 the
Company has completed the closure of eleven stores without requiring significant
adjustment to the originally recorded charges and continues to pursue the
closure of the remainder.

   The amount of internally developed software capitalized during the year
ending January 31, 2003 and 2002 was $53,000 and $198,000, respectively and is
included in furniture, fixtures and software. Amortization of capitalized
software for the year ended January 31, 2003 and 2002, was $69,000 and $17,000,
respectively. The remaining unamortized costs of internally developed software
included in property and equipment as of January 31, 2003 and 2002 was $164,000
and $181,000, respectively.

(9) Goodwill

On September 10, 1998, the Company acquired substantially all of the assets of
36 jewelry stores operating under the Jewel Box name from Carlyle & Co. Jewelers
and its affiliates, headquartered in Greensboro, North Carolina. The Company
purchased all associated inventory, accounts receivable and fixed assets for
approximately $22 million (including fees and other costs) in cash (the
"Acquisition"). The Acquisition has been accounted for using the purchase method
of accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair values at the
date of Acquisition. The excess of the purchase price over the fair values of
the net assets acquired was $6.6 million and has been recorded as goodwill.

   The Company adopted the provisions of SFAS 142 effective February 1, 2002 and
has discontinued the amortization of goodwill. The Company has no other
separately identifiable intangible assets. Pursuant to this standard, the
Company has completed an assessment of the categorization of its existing
goodwill. In addition, the Company completed an analysis of the fair value using
both a discounted cash flow analysis and market multiple approach and has
determined that no impairment of goodwill was recorded. The carrying amount of
goodwill as of January 31, 2002 and January 31, 2003 was $5,662,000. The table
below shows income before income taxes, net income and earnings per share for
the years ended January 31, 2003, 2002 and 2001, adjusted to add back goodwill
amortization and related tax effects.

<PAGE>


<TABLE>
<CAPTION>

(in thousands, except per share data)               January 31, 2003   January 31, 2002  January 31, 2001
                                                  ---------------------------------------------------------
<S>                                                   <C>               <C>              <C>
Reported income before income taxes                         $  15,996         $  15,460        $  16,544
Add back: Goodwill amortization                                    --               262              262
                                                  ---------------------------------------------------------
Adjusted income before income taxes                         $  15,996         $  15,722        $  16,806
                                                  =========================================================

Reported net income                                         $   9,907         $  10,080        $   7,306
Add back: After tax impact of goodwill amortization                --               171              164
                                                  ---------------------------------------------------------

Adjusted net income                                         $   9,907         $  10,251        $   7,470
                                                  =========================================================

Basic earnings per share:
        Reported net income                                 $    0.68         $    0.69        $    0.47
        After tax impact of goodwill amortization                  --              0.01             0.01
                                                  ---------------------------------------------------------
        Adjusted net income                                 $    0.68         $    0.70        $    0.48
                                                  =========================================================

Diluted earnings per share:
        Reported net income                                 $    0.66         $    0.69        $    0.46
        After tax impact of goodwill amortization                  --              0.01             0.01
                                                  ---------------------------------------------------------
        Adjusted net income                                 $    0.66         $    0.70        $    0.47
                                                  =========================================================
</TABLE>

(10) Long-Term Liabilities

Included in long-term liabilities at January 31, 2003 and 2002 are $3,138,000
and $2,660,000 respectively, of deferred lease costs.

(11) Financing Arrangements

Effective January 31, 2003, the Company amended certain terms and conditions
within its Amended and Restated Revolving Credit, Term Loan and Gold Consignment
Agreement (the "Credit Agreement"), with its bank group to provide for a total
facility of $166.5 million through June 30, 2004. Interest rates and the
commitment fee charged on the unused portion of the facility float based upon
the Company's quarterly financial performance.

   Under this Credit Agreement, the banks have a collateral security interest in
substantially all of the assets of the Company. The Credit Agreement contains
certain restrictions on capital expenditures, investments, payment of dividends,
assumption of additional debt, acquisitions and divestitures, among others, and
requires the Company to maintain certain financial ratios based on levels of
funded debt, capital expenditures and earnings before interest, taxes,
depreciation and amortization. As of January 31, 2003, the most restrictive
financial covenant was total funded debt to earnings before interest, taxes,
depreciation and amortization as defined in the agreement. This financial
covenant was set at a ratio of 2.95 to 1.00, as amended, and is calculated based
on the daily outstanding average of all debt outstanding for the trailing four
quarters including borrowing under the credit facility, senior subordinated
debt, capital leases and other indebtedness divided by earnings before interest,
taxes, deprecation and amortization for the trailing four quarters.

REVOLVER LOAN The revolving loan facility under the Credit Agreement is
available up to a maximum of $150.0 million, including amounts borrowed under
the gold consignment facility, and is limited by a borrowing base computed based
on the value of the Company's inventory and accounts receivable. Availability
under the revolver is based on amounts outstanding thereunder, including the
value of consigned gold which fluctuates based on current gold prices. Interest
rates and commitment fees on the unused facility float based on the Company's
quarterly financial performance.

   Current interest rates for borrowings under this agreement are, at the
Company's option, based on Eurodollar rates or the banks' prime rate. Interest
is payable monthly for prime borrowings and upon maturity for Eurodollar
borrowings. The interest expense under the revolver facility for

<PAGE>


the years ended January 31, 2003, 2002 and 2001 was $3,008,000, $4,650,000 and
$3,449,000, respectively, reflecting a weighted average interest rate of 4.2%,
6.4% and 8.0%, respectively.

TERM LOAN The term loan facility under the Credit Agreement is available up to a
maximum of $4.5 million (originally $16.5 million, less principal repayments).
Current interest rates for these borrowings are, at the Company's option, based
on Eurodollar rates or the banks' prime rate. Interest is payable monthly for
prime borrowings and upon maturity for Eurodollar borrowings. Interest rates and
the commitment fee charged on the unused facility float based on the Company's
quarterly financial performance. The interest expense under the term loan
facility for the years ended January 31, 2003, 2002 and 2001 was $353,000,
$841,000 and $1,348,000, respectively for these borrowings, reflecting a
weighted average interest rate of 4.4%, 6.7% and 8.3%, respectively.

GOLD CONSIGNMENT FACILITY The Company has the opportunity to enter into gold
consignments with certain third party financial institutions. The Company
provides the third party financial institution with title to a certain number of
troy ounces of gold held in the Company's existing merchandise inventory in
exchange for cash at the current market price of gold. The Company then consigns
the gold from the third party financial institution, pursuant to the Gold
Consignment Agreement. This agreement entitles the Company to use the gold in
the ordinary course of its business. The Gold Consignment Facility is a transfer
of title in specified quantities of the gold content of the Company's inventory
(a non-financial asset) to a financial institution in exchange for cash. The
Company continues to bear responsibility for damage to the inventory, as is the
case in all of its consigned inventory arrangements with its other vendors.

   The Company has accounted for the transaction as a reduction in its
inventories, as it has transferred title to the gold to the financial
institution. Similar to other consigned inventories in the possession of the
Company (for which the Company bears risk of loss but does not possess title),
the value of the inventory is not included in the assets of the Company. The
terms of the Gold Consignment Agreement require the Company to deliver the
specified quantities of consigned gold back to the third party financial
institution at the end of the facility (which currently expires in 2004).
Physical delivery can be made from the Company's inventory or from gold acquired
by the Company in the open market. As an alternative to physical delivery of
these specific troy ounces of gold, the Company can elect to purchase the
consigned quantities at the end of the Gold Consignment Facility at the current
market price for gold on that date.

   On August 22, 2002, the Company purchased 66,500 troy ounces of gold at an
average gold price of $307.56 per ounce for a total of $20.5 million. The
Company delivered gold to its banks and extinguished all existing Company gold
obligations under the Credit Agreement.

   The facility provides for the sale of a maximum of 115,000 troy ounces of
gold or $40.0 million. Under the agreement, the Company pays consignment fees at
the rate set by the bank based on the London Interbank Bullion Rates payable
monthly. A commitment fee on the unused portion of the Gold Consignment Facility
is payable monthly. Interest rates and the commitment fees charged on the unused
facility float based on the Company's quarterly financial performance. The
consignment fees totaled $354,000, $804,000 and $520,000 for the years ended
January 31, 2003, 2002 and 2001, respectively, at a weighted average rate of
3.0%, 3.7% and 2.5%, respectively.

SUBORDINATED NOTES As of January 31, 2003 and 2002, the Company had Series C
Senior Subordinated Notes due 2004 (the "Series C Notes") totaling $640,000
which bear interest at 12.15% per annum payable in cash, with interest payments
due quarterly. Interest expense was $78,000 for each of the years ended January
31, 2003, 2002 and 2001, respectively.


<PAGE>


   As of January 31, 2003 and 2002, the current portion and noncurrent portion
of long-term debt consisted of the following:

<TABLE>
<CAPTION>
(in thousands)                                                             2003            2002

-----------------------------------------------------------------------------------------------------
<S>                                                                     <C>           <C>
Current portion of long-term debt:
     Term loan                                                          $  4,500      $   5,250

-----------------------------------------------------------------------------------------------------
       Total                                                            $  4,500      $   5,250

-----------------------------------------------------------------------------------------------------
Long-term debt, net of current portion:
     Term loan                                                          $   ----      $   4,500
     Subordinated debt                                                       640            640
-----------------------------------------------------------------------------------------------------
       Total                                                            $    640      $   5,140

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

Future scheduled maturities under the loan agreements, excluding the revolver
for January 31, 2003, are as follows:


<TABLE>
<CAPTION>
                                                                           Subordinated
(in thousands)                                                       Term      Notes      Total
-----------------------------------------------------------------------------------------------------
<S>                                                             <C>          <C>      <C>
January 31, 2004                                                $   4,500    $    --  $   4,500
April 30, 2004                                                         --        640        640
-----------------------------------------------------------------------------------------------------
Total                                                           $   4,500    $   640  $   5,140

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


   The carrying amount of the Company's borrowings under the Credit Agreement
and other long-term borrowings approximates fair value based on current market
rates.

(12) Deferred Financing Costs

In conjunction with the Company's recapitalization of its financing arrangements
in fiscal 1997, the establishment of the Credit Agreement in fiscal 1998 and the
amendments to the Credit Agreement through fiscal 2003, costs associated with
these agreements are being amortized over the extended term of the Credit
Agreement. Amortization expense in the years ended January 31, 2003, 2002 and
2001 was $511,000, $487,000 and $378,000, respectively.
<PAGE>


(13) Income Taxes

The temporary differences between the tax basis of assets and liabilities and
their financial reporting amounts that give rise to a significant portion of the
deferred tax asset and deferred tax liability and their approximate tax effects
are as follows, as of January 31:

<TABLE>
<CAPTION>
                                                        2003                                       2002
--------------------------------------------------------------------------------------------------------------------
                                             Temporary                                  Temporary
(in thousands)                              Difference         Tax Effect              Difference         Tax Effect
--------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                 <C>                     <C>                <C>
Merchandise inventories                       $    535           $    209                $    677           $    249
Accrued rent                                     3,412              1,331                   2,833              1,043
Accounts receivable                                935                365                   1,011                372
Sales returns                                      709                276                   1,525                561
Vacation pay                                     1,132                441                   1,379                507
State and local government fees                    937                365                     600                221
Other                                            1,408                550                   1,057                389
Net operating loss carryforward                    858                334                     552                203
--------------------------------------------------------------------------------------------------------------------
     Total deferred tax asset                    9,926              3,871                   9,634              3,545
--------------------------------------------------------------------------------------------------------------------
Property and equipment, net                     12,446              4,854                   7,017              2,582
Goodwill                                         1,160                452                     737                271
--------------------------------------------------------------------------------------------------------------------
     Total deferred tax liability              (13,606)            (5,306)                 (7,754)            (2,853)
--------------------------------------------------------------------------------------------------------------------
     Net deferred tax asset (liability)       $ (3,680)          $ (1,435)               $  1,880           $    692
====================================================================================================================
</TABLE>



The net current and non-current components of deferred income taxes recognized
in the balance sheet at January 31 are as follows:

<TABLE>
<CAPTION>
(in thousands)                                                                2003         2002
-----------------------------------------------------------------------------------------------
<S>                                                                     <C>           <C>
Net current assets                                                       $   2,172    $   2,704
Net non-current (liability)                                                 (3,607)      (2,012)
-----------------------------------------------------------------------------------------------
     Net deferred tax asset (liability)                                  $  (1,435)   $     692
-----------------------------------------------------------------------------------------------
</TABLE>


   The Company has gross state net operating loss carryforwards of $9,931,000,
which have been benefited for deferred income tax purposes. The Company expects
to utilize certain income tax net operating losses expiring over the next
fifteen to twenty years.

   The income tax expense for the years ended January 31, consists of the
following:

<TABLE>
<CAPTION>
(in thousands)                                                  2003            2002       2001
-----------------------------------------------------------------------------------------------
<S>                                                          <C>           <C>        <C>
Current expense                                              $  3,807      $   3,563  $   7,217
Deferred tax expense                                            2,282          1,817     (1,047)
-----------------------------------------------------------------------------------------------
Total income tax expense                                     $  6,089      $   5,380  $   6,170
-----------------------------------------------------------------------------------------------
</TABLE>


   The provision for income taxes on income differs from the statutory tax
expense computed by applying the federal corporate tax rate of 35%, 34% and 34%
for the years ended January 31, 2003, 2002 and 2001, respectively.

<TABLE>
<CAPTION>
(in thousands)                                                  2003            2002       2001
-----------------------------------------------------------------------------------------------------
<S>                                                          <C>           <C>        <C>
Taxes computed at statutory rate                             $  5,599      $   5,256  $   5,671
State income tax expense, net of federal benefit                  513            291        504
Other                                                             (23)          (167)        (5)
-----------------------------------------------------------------------------------------------------
Total income tax expense                                     $  6,089      $   5,380  $   6,170
-----------------------------------------------------------------------------------------------------
</TABLE>





<PAGE>


(14) Common Stock

Following are the number of shares issued and outstanding for each of the
Company's classes of Common Stock as of January 31:



<TABLE>
<CAPTION>
                                                                     Class B
                                          Common Stock             Common Stock           Treasury
(in thousands)                          (par value $.001)        (par value $.001)         Stock
-----------------------------------------------------------------------------------------------------
<S>                                       <C>                          <C>               <C>
Balance at January 31, 2000               15,353,120                   152               (883,376)
Conversion of Class B Common Stock               151                    (4)                    --
Exercise of Options/Restricted Shares         54,616                    --                     --
Issuance of Stock                          2,325,500                    --                     --
Purchase of Treasury Stock                        --                    --             (2,317,500)

-----------------------------------------------------------------------------------------------------
Balance at January 31, 2001               17,733,387                   148             (3,200,876)
Conversion of Class B Common Stock               213                    (6)                    --
Exercise of Options/Restricted Shares         76,230                    --                     --
Issuance of Stock                                 --                    --                    667

-----------------------------------------------------------------------------------------------------
Balance at January 31, 2002               17,809,830                   142             (3,200,209)
Exercise of Options/Restricted Shares        211,138                    --                (21,418)
Purchase of Treasury Stock                        --                    --               (605,600)
Issuance of Stock                                 --                    --                  4,590
-----------------------------------------------------------------------------------------------------
Balance at January 31, 2003               18,020,968                   142             (3,822,637)

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



   Each share of Class B Common Stock is exchangeable into common stock on a
35.4 for 1 basis. Each share of Common Stock is entitled to one vote, and each
share of Class B Common Stock is entitled to 35.4 votes on each matter submitted
to stockholders for vote.

(15) Earnings Per Common Share

Basic earnings per share is computed by dividing net earnings available to
holders of common stock by the weighted average number of shares of common stock
outstanding. Diluted earnings per share are computed assuming the exercise of
all dilutive stock options. Under these assumptions, the weighted average number
of common shares outstanding is increased accordingly.

   The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computations (in thousands, except per share
amounts) for the years ended January 31:

<TABLE>
<CAPTION>
                                                      2003                        2002                        2001
--------------------------------------------------------------------------------------------------------------------------------
                                               Basic        Diluted        Basic        Diluted        Basic        Diluted
--------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>           <C>           <C>           <C>           <C>           <C>
EPS Numerator:
Net income                                    $ 9,907       $ 9,907       $10,080       $10,080       $ 7,306       $ 7,306
EPS Denominator:
Average common shares outstanding:             14,545        14,545        14,584        14,584        15,617        15,617
Effect of dilutive securities:
Stock options                                      --           493            --           101            --           347
--------------------------------------------------------------------------------------------------------------------------------
Total shares                                   14,545        15,038        14,584        14,685        15,617        15,964

--------------------------------------------------------------------------------------------------------------------------------
Earnings per share                            $  0.68       $  0.66       $  0.69       $  0.69       $  0.47       $  0.46
--------------------------------------------------------------------------------------------------------------------------------

Stock options excluded from the
   calculation of diluted earnings
   per share (due to their antidilutive
   effect on the calculation)                      --           606            --         1,133            --           483
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>






<PAGE>


(16) Employee Benefit Plans

Effective October 1, 2001, the Company established an Employee Stock Purchase
Plan ("ESPP") for the benefit of substantially all employees. Employees become
eligible to participate in the ESPP after six consecutive months of employment
and the employee's customary employment is more than 20 hours per week. Through
employee contributions to the ESPP, the employee can purchase common stock of
the Company at 90% of the market value.

   Effective October 1, 1997, the Company established a 401(k) Plan (the "Plan")
for the benefit of substantially all employees, the assets of which are not
commingled with Company funds. Employees become eligible to participate in the
Plan after one year of service, which is defined as at least one year of
employment and 1,000 hours worked in that year. The Company may make
discretionary contributions to the Plan. No such discretionary contributions
have been made since inception.

   In 1988, the Company established an Employee Stock Ownership Plan (the
"ESOP"), which is a noncontributory plan established to acquire shares of the
Company's Class B Common Stock for the benefit of all employees. In conjunction
with completion of the Company's initial public offering and recapitalization of
its financing arrangements, the Company restructured the ESOP. As of January 31,
1998, all remaining shares had been released to participants. As long as the
stock is publicly traded the Company is not required to repurchase shares from
ESOP participants. The Company has approximately 500,000 shares held by the ESOP
that would be subject to redemption at future market value if the Company were
to cease being public. The only remaining activity of the ESOP is to make
distributions to existing participants or beneficiaries.

(17) Stock Plans

On September 28, 1995, the Company authorized the equivalent of 1,039,647
options under the Incentive Stock Option Plan (the "1995 Plan") to be granted to
certain members of the Company's management. Options for the equivalent of
1,032,342 were issued at exercise prices ranging from $0.60 to $0.66 per share.
These prices were greater than or equal to the fair market value at the date of
grant, as determined by an independent third party valuation. The options
allowed the holders to purchase common stock within a period ranging from five
years and eight months, at a fixed price. No expense was recorded in connection
with these options.

   In April 1996, the Company approved the 1996 Long-Term Incentive Plan (the
"1996 Plan"). Under the 1996 Plan, the Company may grant incentive stock options
("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, or nonqualified stock options.

   In addition, the Company may grant stock appreciation rights ("SARs"), bonus
stock awards which are vested upon grant, stock awards which may be subject to a
restriction period and specified performance measures and performance shares.
Performance shares are rights, contingent upon the attainment of the performance
measures within a specified performance period, to receive one share of common
stock, which may be restricted, or the fair market value of such performance
share in cash. No compensatory options have been granted under the 1996 Plan
during fiscal 2002. A total of 1,156,784 shares of common stock have been
reserved for issuance under the 1996 Plan. Grants may be made under the 1996
Plan during the ten years after its effective date. Options granted under the
1996 Plan generally vest in four equal annual installments and expire ten years
after the date of grant. Options and shares granted under the plans are subject
to forfeiture based on, among other things, the nature and timing of the
termination of employment.

   The Company approved the 1997 Long-Term Incentive Plan (the "1997 Plan") on
February 24, 1997 and the stockholders adopted the 1997 Plan on June 5, 1997. On
June 8, 1999, June 1, 2000 and June 11, 2002, the stockholders adopted an
amendment to the 1997 Plan to increase the common stock reserved for issuance





<PAGE>


under the 1997 Plan. Under the 1997 Plan, the Company may grant ISOs or
nonqualified stock options. The 1997 Plan also provides for the grant of SARs,
bonus stock awards which are vested upon grant, stock awards which may be
subject to a restriction period and specified performance measures, and
performance shares. Performance shares are rights, contingent upon the
attainment of performance measures within a specified performance period, to
receive one share of common stock, which may be restricted, or the fair market
value of such performance share in cash. No compensatory options have been
granted under the 1997 Plan during fiscal 2002. A total of 2,500,000 shares of
Common Stock have been reserved for issuance under the 1997 Plan. Grants may be
made under the 1997 Plan during the ten years after its effective date. Options
granted under the 1997 Plan generally vest in three or four equal annual
installments and expire ten years after the date of grant.

   In December 1998, the Company adopted the 1998 Non-Employee Director Stock
Option Plan (the "1998 Plan"), effective February 1, 1998. Under the 1998 Plan,
non-employee directors may elect to receive all or a designated amount of their
directors' fee in the form of stock options. A total of 37,500 shares have been
reserved for issuance under the 1998 Plan. Grants may be made during the ten
years after its effective date. Options granted under the 1998 Plan vest at the
end of the quarter in which the date of grant occurs and expire ten years after
the date of grant. During fiscal 2002, no options had been granted under the
1998 Plan.

Option activity for the years ended January 31, 2001, 2002 and 2003 was as
follows:


<TABLE>
<CAPTION>
                                                              Weighted-Average         Options
                                             Shares            Exercise Price        Exercisable
-----------------------------------------------------------------------------------------------------
<S>                                       <C>                   <C>                   <C>
Balance at January 31, 2000               2,171,621             $   10.38               980,633

-----------------------------------------------------------------------------------------------------
Options granted                             429,363                 21.38
Options exercised                           (54,616)                 7.24
Options canceled                            (48,951)                12.84

-----------------------------------------------------------------------------------------------------
Balance at January 31, 2001               2,497,417             $   12.29             1,460,575

-----------------------------------------------------------------------------------------------------
Options granted                             469,849                  8.03
Options exercised                           (76,230)                11.75
Options canceled                           (120,318)                19.39

-----------------------------------------------------------------------------------------------------
Balance at January 31, 2002               2,770,718             $   11.36             1,567,816

-----------------------------------------------------------------------------------------------------
Options granted                             423,486                 13.50
Options exercised                          (211,138)                 8.87
Options canceled                            (27,062)                14.16

-----------------------------------------------------------------------------------------------------
Balance at January 31, 2003               2,956,004             $   11.81             2,105,510

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

   The weighted-average fair value of 423,486, 469,849 and 429,363 options
granted was $7.17, $8.03 and $13.37 for the years ended January 31, 2003, 2002
and 2001, respectively.





<PAGE>


   The following table summarizes the status of outstanding stock options as of
January 31, 2003:

<TABLE>
<CAPTION>
                                              Options Outstanding                                    Options Exercisable
------------------------------------------------------------------------------------------------------------------------------
                                          Number of     Weighted Average        Weighted-        Number of         Weighted-
Range of                                    Options        Remaining             Average           Options           Average
Exercise Prices                         Outstanding    Contractual Life       Exercise Price   Exercisable    Exercise Price

------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                 <C>              <C>              <C>              <C>
$6.532 - $9.333                           1,517,837           4.71             $   8.827        1,215,093        $   9.038
$9.344 - $11.460                            754,444           7.02                11.050          595,500           11.346
$11.540 - $16.453                           296,122           8.39                14.382           57,125           12.818
$17.063 - $24.250                           387,601           7.21                23.032          237,792           23.277
------------------------------------------------------------------------------------------------------------------------------
$6.532 - $24.250                          2,956,004           5.99             $  11.814        2,105,510        $  11.401

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



(18) Commitments and Contingencies

The Company was named a defendant in a wage hour class action suit filed in
California by three former store managers on July 25, 2002. The case is based
principally upon the allegation that store managers employed by the Company in
California should have been classified as non-exempt for overtime purposes. The
plaintiffs seek recovery of allegedly unpaid overtime wages for the four-year
period preceding the filing date, along with certain penalties, interest and
attorneys fees. The purported class includes all current and former store
managers employed by the Company in California for the four-year period
preceding the filing of the complaint. (See Note 21 Subsequent Event)

 The Company is subject to other claims and litigation in the normal course of
business. Although there can be no certainty, it is the opinion of management
that additional liabilities, if any, resulting from these claims and litigation
are not expected to have a material adverse effect on the Company's financial
condition and such matters could have a material adverse effect on quarterly or
annual operating results and cash flows when resolved in a future period.

 The Company leases the premises for its office facilities and all of its
retail stores, and certain office and computer equipment generally under
noncancelable agreements for periods ranging from two to 13 years. Most leases
require the payment of taxes, insurance and maintenance costs. Future minimum
rentals under noncancelable operating leases as of January 31, 2003 are as
follows:

<TABLE>
<CAPTION>
Years ending January 31 (in thousands)                                                  Amount
------------------------------------------------------------------------------------------------
<S>                                                                                   <C>
2003                                                                                  $  28,945
2004                                                                                     27,997
2005                                                                                     26,386
2006                                                                                     25,632
2007                                                                                     23,906
------------------------------------------------------------------------------------------------
Thereafter                                                                               62,324
------------------------------------------------------------------------------------------------
                                                                                      $ 195,190
------------------------------------------------------------------------------------------------
</TABLE>




<PAGE>



Total rental expense for all operating leases for the years ended January 31, is
as follows:

<TABLE>
<CAPTION>
(in thousands)                                                  2003            2002       2001
-----------------------------------------------------------------------------------------------
<S>                                                          <C>           <C>        <C>
Rental expense:
     Minimum                                                 $  28,437     $  26,730  $  23,179
     Rentals based on sales                                        923         1,137      2,247
     Other                                                         431           592        573
-----------------------------------------------------------------------------------------------
                                                             $  29,791     $  28,459  $  25,999
-----------------------------------------------------------------------------------------------
</TABLE>



(19) Unaudited Quarterly Results - Restated

The Company's results of operations fluctuate on a quarterly basis. The
following table sets forth summary restated unaudited financial information of
the Company for each quarter in fiscal 2002 and fiscal 2001. The first three
quarters of fiscal 2002 have been restated for adjustments related to the
timing of the recognition of certain allowances and discounts pertaining to the
Company's annual vendor agreements as well as incentives associated with the
advantageous purchase of consigned inventory on hand during the fiscal year
that should have been included in the weighted average cost of merchandise
inventory. During the first three quarters of 2002, such incentives had been
recorded by the Company as a direct reduction of cost of sales. In addition,
the adjustments made include a cost of sales effect related to the Company's
gold consignment arrangement which the Company ended during the third quarter.
In the opinion of management, this quarterly information has been prepared on
a basis consistent with the Company's audited financial statements appearing
elsewhere in this annual report, and reflects adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of such unaudited
quarterly results when read in conjunction with the audited financial
statements and notes thereto.


<TABLE>
<CAPTION>
                                                                        2002 Quarters Ended
-------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)    April 30, 2002        July 31, 2002        October 31, 2002         Jan 31, 2003
                                              Restated              Restated               Restated

-------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>                   <C>                    <C>                    <C>
Net sales                                     $ 74,588              $ 76,243               $ 61,831               $128,375
Gross profit                                    27,212                26,540                 18,872                 55,503
Income (loss) from operations                    1,585                 1,289                 (6,681)                24,144
Net income (loss)                                  369                   114                 (5,039)                14,463
Diluted earnings per share:
Net income (loss)                             $   0.02              $   0.01               $  (0.35)              $   1.00


<CAPTION>

-------------------------------------------------------------------------------------------------------------------------------
                                                                        2001 Quarters Ended
-------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)    April 30, 2001        July 31, 2001        October 31, 2001         Jan 31, 2002

-------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>                   <C>                    <C>                    <C>
Net sales                                     $ 68,931              $ 74,366               $ 65,136               $130,478
Gross profit                                    25,614                27,902                 22,107                 56,714
Income (loss) from operations                     (868)                  922                 (3,714)                26,022
Net income (loss)                               (1,622)                 (643)                (3,492)                15,837
Diluted earnings per share:
Net income (loss)                             $  (0.11)             $  (0.04)              $  (0.24)              $   1.07

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





<PAGE>


The following table reconciles the quarterly operating results as previously
reported to the restated amounts presented above.

<TABLE>
<CAPTION>
                                                                                      Income (loss)                        Diluted
                                                         Net             Gross           from            Net Income       Earnings
(in thousands, except for per share data)               Sales           Profit        Operations          (loss)          Per Share

-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>             <C>              <C>              <C>              <C>
April 30, 2002, as originally reported                $ 74,588        $ 27,015         $  1,388         $    242         $   0.02
Adjustments                                                 --             197              197              197               --
Tax effect of adjustments                                   --              --               --              (70)              --
                                                      --------        --------         --------         --------         --------
April 30, 2002, as restated                           $ 74,588        $ 27,212         $  1,585         $    369         $   0.02
                                                      --------        --------         --------         --------         --------

July 31, 2002, as originally reported                 $ 76,243        $ 27,322         $  2,000         $    571         $   0.04
Adjustments                                                 --            (782)            (711)            (711)           (0.05)
Tax effect of adjustments                                   --              --               --              254             0.02
                                                      --------        --------         --------         --------         --------
July 31, 2002, as restated                            $ 76,243        $ 26,540         $  1,289         $    114         $   0.01
                                                      --------        --------         --------         --------         --------

October 31, 2002, as originally reported              $ 61,831        $ 18,760         $ (6,793)        $ (5,111)        $  (0.35)
Adjustments                                                 --             112              112              112               --
Tax effect of adjustments                                   --              --               --              (40)              --
                                                      --------        --------         --------         --------         --------
October 31, 2002, as restated                         $ 61,831        $ 18,872         $ (6,681)        $ (5,039)        $  (0.35)
                                                      --------        --------         --------         --------         --------
</TABLE>


(20) Reclassifications

Certain Balance Sheet amounts from prior periods were reclassified to conform to
the current year presentation. These reclassifications had no impact on
earnings.

(21) Subsequent Event

On July 25, 2002, the Company was named a defendant in a wage hour class action
suit filed in California by three former store managers. The case is based
principally upon the allegation that store managers employed by the Company in
California should have been classified as non-exempt for overtime purposes. The
plaintiffs seek recovery of allegedly unpaid overtime wages for the four-year
period preceding the filing date, along with certain penalties, interest and
attorneys fees. The purported class includes all current and former store
managers employed by the Company in California for the four-year period
preceding the filing of the complaint. The Company denied liability and asserted
that its managers were properly classified. The parties have reached a
preliminary agreement to settle the matter resulting in an after tax charge of
$620,000, inclusive of the plaintiffs' attorneys' fees, interest, penalties,
administrative costs and other Company costs. This settlement covers the period
from July 25, 1998 through the date of settlement approval. Completion of the
settlement is subject to, among other things, the successful negotiation and
execution of a written settlement agreement, opt out and other potential
contingencies in the settlement agreement, court approval and administration of
the claims process. The parties are in the process of negotiating the specific
settlement terms.



<PAGE>


Report of Independent Accountants

To the Board of Directors and Shareholders of Whitehall Jewellers, Inc.

In our opinion, the accompanying balance sheets and the related statements of
operations, shareholders' equity, and cash flow, present fairly, in all material
respects, the financial position of Whitehall Jewellers, Inc. (the "Company") at
January 31, 2003 and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended January 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in Note 9 to the consolidated financial statements, effective
February 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. Additionally, as
described in Note 2 to the financial statements, the Company changed its method
of recognizing revenue for layaway sales during the year ended January 31, 2001.

Chicago, Illinois
March 4, 2003, except for Note 21 as to which the date is April 29, 2003

MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The
Company's stock began trading on the New York Stock Exchange under the symbol
"JWL" on January 27, 2000. Prior to that date the Company's stock traded on the
NASDAQ National Market System under the symbol "WHJI." At April 25, 2003, there
were 103 registered holders of Class B stock and 472 registered holders of
Common Stock for a total of 575 registered shareholders.


<TABLE>
<CAPTION>
                                                                 Year ended January 31,
                                                                ------------------------
                                                                2003                  2002
-----------------------------------------------------------------------------------------------------
                                                          High        Low       High        Low
-----------------------------------------------------------------------------------------------------
<S>                                                  <C>        <C>        <C>        <C>
First Quarter                                        $  20.170  $  13.670  $   9.615  $   7.550
Second Quarter                                          22.530     10.360     10.480      8.080
Third Quarter                                           12.885      8.325     12.065      8.240
Fourth Quarter                                          11.985      8.880     15.730      8.030
-----------------------------------------------------------------------------------------------------
</TABLE>


The Company has not declared any dividends in fiscal 2003 and 2002, and intends
to retain its earnings to finance future growth. Therefore, the Company does not
anticipate paying any cash dividends in the foreseeable future. The declaration
and payment of dividends, if any, is subject to the discretion of the Board of
Directors of the Company and to certain limitations under the General
Corporation Law of the State of Delaware. In addition, the Company's Credit
Agreement contains restrictions of the Company's ability to pay dividends. The
timing, amount and form of dividends, if any, will depend, among other things,
on the Company's results of operations, financial condition, cash requirements
and other factors deemed relevant by the Board of Directors.




<PAGE>
CORPORATE INFORMATION

<TABLE>
<S>                                   <C>                                  <C>

BOARD OF DIRECTORS                    CORPORATE OFFICERS                   INDEPENDENT AUDITORS


HUGH M. PATINKIN                      HUGH M. PATINKIN                     PriceWaterhouseCoopers, LLP
                                                                           One North Wacker Drive
Chairman of the Board,                Chairman of the Board,               Chicago, IL 60606
Chief Executive Officer,              Chief Executive Officer,
President                             President
                                                                           TRANSFER AGENT
RICHARD K. BERKOWITZ(1,2,3)           JOHN R. DESJARDINS
                                                                           Fleet National Bank
Arthur Anderson, L.L.P.               Executive Vice President,            c/o Equiserve Trust Company, N.A.
Former Partner                        Secretary                            150 Royall Street
                                                                           Canton, MA 02021

DANIEL H. LEVY(1,2,3)                 MATTHEW M. PATINKIN
                                                                           CORPORATE
Donnkenny, Inc.                       Executive Vice President,            HEADQUARTERS
Chairman and                          Operations
Chief Executive Officer                                                    155 North Wacker Drive
President                                                                  Chicago, IL 60606
                                      JON H. BROWNE

NORMAN J. PATINKIN(3)                 Executive Vice President,            ANNUAL MEETING
                                      Chief Financial and
United Marketing Group, L.L.C.        Administrative Officer and           The Annual Meeting
Former Chairman of the Board          Treasurer                            of Shareholders will be
                                                                           held June 25, 2003 at
                                                                           10:00a.m. (C.D.T.)
SANFORD SHKOLNIK(1,2)                 LYNN EISENHEIM

Encore Investments, LCC               Executive Vice President,            GENERAL COUNSEL
Principal                             Merchandising
                                                                           Sidley Austin Brown & Wood
                                                                           Bank One Plaza
JOHN R. DESJARDINS                    MANNY A. BROWN                       Chicago, IL 60603

Executive Vice President,             Executive Vice President,
Secretary                             Operations                           SHAREHOLDER INQUIRIES

                                                                           JOHN R. DESJARDINS
MATTHEW M. PATINKIN                                                        Executive Vice President
                                                                           312.762.9751
Executive Vice President,
Operations
                                                                           INTERNET WEBSITE

                                                                           www.whitehalljewellers.com
(1) Audit Committee

(2) Compensation Committee                                                 COMMON STOCK LISTING

(3) Corporate Governance and                                               Shares of Common Stock
    Nominating Committee                                                   of Whitehall Jewellers, Inc.
                                                                           are listed and traded on the
                                                                           New York Stock Exchange under
                                                                           the symbol "JWL".
</TABLE>