##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION



Form 10-K

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended July 31, 2000

OR

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period
from          to

Commission file no. 1-04129

Zale Corporation



|                                                                               |  |                                                
|------------------------------------------------------------------------------ |  | -----------------------------------------------
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Delaware(State or other jurisdiction of
	incorporation or organization)        |  | 75-0675400(I.R.S. Employer
	Identification No.)
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|901 W. Walnut Hill Lane
	Irving, Texas(Address of principal executive offices) |  | 75038-1003(Zip code)                           

Registrants telephone number, including area code: 
(972) 580-4000

Securities registered pursuant to Section 12(b) of the
Act:

|                                       |  |                        
|-------------------------------------- |  | -----------------------
|                                       |  | Name of each exchange  
|Title of each class                    |  | on which registered    
|                                       |  |                        
|Common Stock, $.01 par value per share |  | New York Stock Exchange

Securities registered pursuant to Section 12(g) of the
Act:

None


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

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

As of September 5, 2000 the aggregate market value of the
registrants voting stock held by non-affiliates of the
registrant was approximately $1,258,246,623.

As of September 5, 2000, the registrant had outstanding
35,268,963 shares of its common stock, $.01 par value
per share.

DOCUMENTS INCORPORATED BY REFERENCE.

Part III of this report incorporates information from the
registrants definitive Proxy Statement relating to the
registrants annual meeting of stockholders to be held on
November 3, 2000.









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TABLE OF CONTENTS



|                                                                  |  |  |  |  |  |  |  | 
|----------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                           
|PART II                                                          
|PART III                                                         
|PART IV                                                          
|MANAGEMENTS REPORT                                              
|REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                         
|CONSOLIDATED STATEMENTS OF OPERATIONS                            
|CONSOLIDATED BALANCE SHEETS                                      
|CONSOLIDATED STATEMENTS OF CASH FLOWS                            
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT              
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT --(Continued)
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                       
|SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS     
|SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET               
|SIGNATURES                                                       
|REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                         
|INDEX TO EXHIBITS                                                
|Receivables Purchase Agreement                                   
|Agreement and Plan of Merger                                     
|Amended and Restated Bylaws                                      
|Amended/Restated Omnibus Stock Incentive Plan                    
|2nd Amend/Restated Empl. Agrmt. - Robert DiNicola                
|Consulting Agreement with Robert DiNicola                        
|Amendment ot Employment Agreement - Beryl B. Raff                
|Subsidiaries of the Registrant                                   
|Consent of Independent Public Accountants                        
|Financial Data Schedule                                          



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PART I

Item 1.  Business

General

Zale Corporation and its wholly owned subsidiaries (the
Company) is the largest specialty retailer of fine
jewelry in North America. At July 31, 2000, the Company
operated 1,389 retail jewelry stores located primarily in
shopping malls throughout the United States, Canada and Puerto
Rico. The Company operates under four brand names: Zales
Jewelers®, Gordons Jewelers®, Bailey
Banks & Biddle Fine Jewelers®, and Peoples
Jewellers®. Zales Jewelers provides traditional, moderately
priced jewelry to a broad range of customers. Gordons
Jewelers offers contemporary merchandise targeted to regional
preferences at somewhat higher price points than Zales Jewelers.
Bailey Banks & Biddle Fine Jewelers operates upscale
jewelry stores which are considered among the finest jewelry
stores in their markets. Under the Zales Jewelers brand name the
Company also operated 68 Zales Outlet stores in
26 states and offered online shopping at www.zales.com, at
July 31, 2000. The Company acquired substantially all of the
 assets and certain operational liabilities of Peoples Jewellers
Corporation, a Canadian company, effective May 23, 1999.
Peoples Jewellers offers traditional moderately priced jewelry to
 customers across Canada. During the fiscal year ended
July 31, 2000, the Company generated $1.8 billion of
net sales.

The Company believes it is well-positioned to compete in the
approximately $40 billion, highly fragmented retail jewelry
industry, leveraging its established brand names, economies of
scale and geographic and demographic diversity. The Company
enjoys significant brand name recognition as a result of its
long-standing presence in the industry and its national and
regional advertising campaigns. The Company believes that name
recognition is an important advantage in jewelry retailing as
products are generally unbranded and consumers must trust in a
retailers reliability and credibility. In addition, as the
largest specialty retailer of fine jewelry in North America, the
Company believes it realizes economies of scale in purchasing and
 distribution, real estate, advertising and administrative costs.
 The Company also believes that the geographic diversity of its
retail distribution network through all 50 states, Puerto
Rico and Canada and the demographic breadth of its target
customer groups may serve to mitigate earnings volatility
typically associated with local or regional conditions.

The Company is incorporated in Delaware. Its principal executive
offices are located at 901 W. Walnut Hill Lane, Irving,
 Texas 75038-1003, its telephone number at that address is
(972) 580-4000, and its internet address is
www.zalecorp.com.

Business Initiatives and Strategy

The Company has developed and implemented disciplined
merchandising and marketing strategies to promote its brand
identities. Differentiated target customer segments have been
emphasized for Zales, Gordons, Bailey Banks &
Biddle, and Peoples. Product assortments have been broadened to
capitalize on year round gift giving, bridal, fashion and special
 occasions.

Management has developed a key item strategy as the foundation
for merchandising and marketing initiatives. Items have been
identified from among the best selling products in the retail
jewelry industry, such as tennis bracelets, diamond solitaires,
diamond stud earrings, and the three stone anniversary band. The
Company has ensured that these items are available in an
appropriate variety of styles and sizes to offer a range of
competitive price points. At the same time, the Company has
adopted an aggressive approach to inventory management to keep
key items in stock and inventories current. This is achieved
through the merchandise system which provides regular reporting
to the Companys merchandise buyers on in-stock position and
 slow moving merchandise. The Company employs a consistent
methodology which provides inventory turnover and profitability
information to identify slow-moving merchandise and determine
appropriate merchandising actions on a timely basis.

The Companys marketing efforts are designed to enhance
brand identity through product and event-focused promotional
activities. The Company features selected key items at various
price points through its advertising on television and radio, and
 in nationally distributed newspapers and magazines, local
newspaper





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The Company has recruited experienced buyers and has centralized
purchasing for each brand to ensure consistency of quality and
cost. In addition, the Company leverages its size to achieve
better prices, payment terms, return privileges and cooperative
advertising arrangements with certain product suppliers.

The Company has enhanced its image as a provider of fine jewelry
at competitive prices by establishing price points for
merchandise that are perceived by customers as good values.
Certain items are labeled Brilliant Buys,
Premier Values and Baileys Classic
Values in Zales and Peoples, Gordons and Bailey
Banks & Biddle stores, respectively. These items are
prominently displayed along with their prices throughout the
store, a practice that is uncommon in the U.S. jewelry
retailing industry and one that the Company believes enhances its
 reputation for pricing integrity.

Over the past six years, the Company has opened approximately
400 stores. Additionally, approximately 70 percent of
the Companys stores have received significant remodeling or
 renovation within the last six years. Typically, these stores
experience revenue growth that is significantly higher than other
 stores. The Company has taken steps to provide upgraded sales
and product training through company-wide employee and manager
training programs. Staffing plans are coordinated to schedule
employees during peak sales periods.

The Companys strategy is to continue to increase store
productivity and profitability by: (i) focusing on the core
categories of bridal, fashion and watches; (ii) using key
item merchandise to drive volume; (iii) remodeling and
renovating all existing stores; (iv) enhancing merchandising
 systems to assist buyer decision making; (v) executing
tailored staffing and training programs for store personnel;
(vi) focusing advertising on brand building and product
distinction; and (vii) providing exclusive products to
develop brand distinction.

The Company plans to open approximately 150 new stores,
principally under the brand names Zales, Zales Outlet and Bailey
Banks & Biddle, for which it will incur approximately
$50 million in capital expenditures during the combined
fiscal years 2001 and 2002. The Company expects these stores to
solidify the Companys core mall business by further
penetrating markets where the Company is underrepresented and to
expand into new markets such as outlet malls and selected urban
settings. The Company targets premier regional mall locations
throughout the country and selects sites based on a variety of
well-defined demographic and store profitability characteristics.
 The Company has identified the specific malls for this planned
expansion which satisfy the Companys real estate strategy.
The Company also plans to refurbish, remodel or relocate
approximately 250 stores at a cost of approximately
$60 million during the combined fiscal years 2001 and 2002.

Over the past five years the Company has reduced selling, general
 and administrative expenses as a percent of sales principally by
 leveraging its fixed store and corporate operating expenses
while increasing sales in its stores. Additionally, the Company
has continued a focused effort to reduce selling, general and
administrative expenses where appropriate by streamlining
processes and leveraging technology where possible. Initiatives
include: (i) outsourcing certain business functions,
including certain aspects of management information systems
operations, and the internal audit department, among other areas
and (ii) streamlining corporate operations through review
and improvement of current processes and application of new
technology in areas such as merchandising and financial systems.

Current Year Events

Stock Repurchase Plan.On July 18, 2000, the Company
announced a stock repurchase program pursuant to which the
Company, from time to time at the discretion of management and
the Board of Directors and in accordance with the Companys
usual policies and applicable securities laws, may purchase

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In April, 2000 the Company completed a $50 million
repurchase program, which was authorized during
September 1999. Under this program, the Company repurchased
1.3 million shares in fiscal 2000.

Revolving Credit Agreement.In order to support the
Companys growth plans, the Company amended and restated its
 unsecured revolving credit agreement with a group of banks on
March 30, 2000. The amended and restated revolving credit
agreement (the Revolving Credit Agreement) provides
for (i) a revolving credit loan facility to the Company and
to its operating subsidiary, Zale Delaware, Inc. (such
facility, the U.S. Revolving Credit Facility),
in the aggregate principal amount of up to $215 million in
commitments by certain U.S. lenders (the
U.S. Commitments), including a $5 million
sublimit for letters of credit, and (ii) a separate
revolving credit facility for a Canadian subsidiary (the
Canadian Revolving Credit Facility), which provides
for Canadian Dollar denominated loans in the aggregate principal
amount of up to a U.S. Dollar equivalent of $10 million
 in commitments by a Canadian lender (the Canadian
Commitment). The total amount of commitments under the
Revolving Credit Agreement to the Company and its subsidiaries is
 approximately $225 million. The Revolving Credit Agreement
term is five years. Under the Revolving Credit Agreement the
Company may, subject to approval of the U.S. Agent or the
Canadian Agent, as the case may be, increase the total
U.S. commitment to $285 million and the Canadian
commitment to the U.S. Dollar equivalent of $25 million
 provided that the commitments together do not exceed a
U.S. Dollar equivalent of $300 million. The increase
can come from within or outside the bank group.

The revolving credit loans bear interest at floating rates as
follows: (A) loans outstanding under the U.S. Revolving
 Credit Facility bear interest, at the Companys option, at
either (i) the applicable Eurodollar Rate plus a margin
equal to 0.75 percent (subject to adjustment as described
below), or (ii) the Base Rate (which is the higher of the
annual rate of interest announced from time to time by the agent
bank under the Revolving Credit Agreement as its base rate or the
 Federal Funds Effective Rate plus 0.5 percent); and
(B) loans outstanding under the Canadian Revolving Credit
Facility bear interest, at the Companys option, at either
(i) a Bankers Acceptance Discount Rate (which varies
depending upon whether the Canadian Lender is a bank named under
Schedule I or II to the Bank Act (Canada) or neither)
plus a margin equal to 0.75 percent (subject to adjustment
as described below), or (ii) the annual rate of interest
announced from time to time by the Canadian agent bank under the
Revolving Credit Agreement as its prime rate for
commercial loans in Canadian Dollars to borrowers in Canada. The
margin applicable to Eurodollar Rates and Bankers
Acceptance Discount Rates and letter of credit commission rates
will be automatically reduced or increased from time to time
based on certain future performance levels attained by the
Company and its subsidiaries. Such margin will also be reduced if
 the debt of the Company and its subsidiaries under the Revolving
 Credit Agreement achieves an investment grade rating, and
thereafter will be reduced or increased based upon changes in
such rating. A utilization fee of 0.125 percent is to be
paid on the average daily amount during each calendar quarter to
the extent that the outstanding amount of loans under the
U.S. Revolving Credit Facility exceeds 50 percent of
the total U.S. Commitments during the preceding quarter,
and/or if and to the extent that the outstanding amount of loans
under the Canadian Revolving Credit Facility exceeds
50 percent of the total Canadian Commitments during the
preceding fiscal quarter, such utilization fee being payable in
each case on the average daily amount of such excess. The Company
 currently pays a commitment fee of 0.25 percent per annum
on the preceding months unused U.S. Commitments and
Canadian Commitment, which commitment fee is also subject to
reduction or increase based on future performance and upon
changes in the Companys debt rating. The Company and its
subsidiaries may repay the revolving credit loans under the
Revolving Credit Agreement at any time without penalty prior to
the maturity date. At July 31, 2000, there were no
outstanding amounts under the U.S. Revolving Credit
Facility. At July 31, 2000, the U.S. dollar equivalent
of $9.7 million in revolving credit loans was outstanding
under the Canadian Revolving Credit Facility, at an applicable
interest rate on such date of 7.50 percent. The Revolving
Credit Agreement contains certain restrictive covenants, which,
among other things, requires the Company to comply with certain
financial covenants including limitations on indebtedness,
investments and capital expenditures. The Company is currently in
 compliance with all of its obligations under the Revolving
Credit Agreement and the instruments governing its other
indebtedness.

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Sale of Private Label Credit Card Business.On
July 10, 2000, the Company announced that it had agreed to
sell its private label credit card operations to Associates First
 Capital Corporation (AFCC). Effective July 31,
2000, the Company sold, without recourse, all of the outstanding
accounts receivable owned by Zale Funding Trust
(ZFT), a Delaware statutory business trust and
indirect wholly owned subsidiary of the Company, to Associates
Credit Card Services, Inc. (Associates), a
Delaware corporation, and wholly owned subsidiary of AFCC. The
accounts receivable acquired by Associates constituted
substantially all of the assets of ZFT. The total purchase price
for the accounts receivable was approximately $542 million.
The Company recognized a pretax gain of $0.2 million, net of
 an allowance for final settlement and transaction costs. The
purchase price is subject to post-closing adjustment for
improperly classified receivables. The transaction is accounted
for as a sale in accordance with Statement of Financial
Accounting Standards No. 125, Accounting for Transfers
 and Servicing of Financial Assets and Extinguishment of
Liabilities (SFAS No. 125).

In connection with executing the Receivables Purchase Agreement,
the Company entered into a ten year agreement whereby Hurley
State Bank (Hurley), a wholly-owned subsidiary of
AFCC, will issue private label credit cards branded with
appropriate Company trademarks, and provide financing for the
Companys customers to purchase merchandise in exchange for
payment by the Company of a merchant fee based upon a percentage
of each credit card sale. The merchant fee is a percentage per
credit sale credited to the Company under standard revolving
accounts and a percentage per credit sale charged to the Company
under certain promotional credit programs. The Company received a
 $41.8 million incentive for entering into the agreement.
Portions of this payment are subject to refund for early
termination of the agreement. This incentive payment will be
recognized ratably over the term of the agreement.

In connection with the Receivables Purchase Agreement, the
Company agreed pursuant to an Agreement and Plan of Merger, dated
 as of July 10, 2000, to merge Jewelers National Bank
(JNB), a wholly owned subsidiary of the Company, with
 and into Hurley (the Merger). With a portion of the
proceeds from such sale, ZFT paid off all of its outstanding
indebtedness and the Companys receivables securitization
facility was terminated. The Merger is subject to, among other
things, Federal Deposit Insurance Corporation approval and
approval from the Director of the Division of Banking for the
State of South Dakota. The Company anticipates that the closing
of the transactions contemplated under the Agreement and Plan of
Merger will take place by the first calendar quarter of 2001.
Until consummation of the Merger, the Company will sell, without
recourse, its credit card receivables to Associates on a daily
basis pursuant to an interim purchase and servicing arrangement.
Following consummation of the Merger, AFCC and its affiliates
will assume responsibility for JNBs previously owned credit
 operations, including servicing facilities in San Marcos,
Texas; Clearwater, Florida; Tempe, Arizona; and San Juan,
Puerto Rico.

As a result of the sale of the Companys customer
receivables to AFCC and the Merger, the Companys current
credit processing service agreement with a third-party servicer
will terminate upon conversion to AFCCs systems, which is
expected to occur by the first calendar quarter of 2001.

On July 31, 2000, the Company redeemed the then outstanding
balance of approximately $335 million aggregate principal
amount of variable notes under the Companys securitization
facility with the proceeds from the sale of its customer
receivables and terminated its securitization facility. The
variable notes bore interest at the market commercial paper rate
plus a dealer fee of 0.05 percent and the Company paid a fee
 of 0.375 percent per annum on the funded portion of the
facility and a commitment fee of .25 percent per annum on
the unfunded portion.

Recent Development

Acquisition of Piercing Pagoda, Inc. On
August 11, 2000, the Company entered into an Agreement and
Plan of Merger with Piercing Pagoda, Inc., a Delaware
corporation, pursuant to which the Company through an indirect
wholly owned subsidiary (Jewelry Expansion Corp.) agreed to
acquire all of the outstanding shares of Piercing Pagoda.

The Company through its subsidiary commenced a tender offer on
August 22, 2000 to purchase all of the outstanding shares of
 Piercing Pagoda, Inc.s $0.01 par value per share
 common stock for $21.50 per share in

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Retirement of Robert J. DiNicola.On
August 30, 2000, Robert J. DiNicola announced his
retirement as Chairman of the Board of Directors of the Company,
effective September 6, 2000, but continues to serve as a
Director. Beryl B. Raff, who had served as Chief Executive
Officer and President of the Company, was appointed to serve as
Chairman of the Board and Chief Executive Officer. Alan P.
Shor, who had served as Executive Vice President and Chief
Operating Officer of the Company, was appointed to serve as
President and Chief Operating Officer, and was named a member of
the Companys Board of Directors.

Industry

The U.S. retail jewelry industrys sales were
approximately $40 billion in 1999. Specialty jewelry stores
(such as the Company) account for over half of the industry,
according to publicly available data. Historically, retail
jewelry store sales have exhibited only limited effects of
cyclicality. According to the United States Census Bureau, retail
 jewelry store sales have increased every year for the past
16 years with the exception of 1991 which included both the
Persian Gulf War and the introduction of the luxury tax. Other
significant segments of the industry include national chain
department stores (such as J.C. Penney Company, Inc. and
Sears, Roebuck and Co.), mass merchant discount stores (such
 as Wal-Mart Stores, Inc.), other general merchandise stores
 and apparel and accessory stores. The remainder of the retail
jewelry industry is composed primarily of catalog and mail order
houses, direct-selling establishments, TV home shopping (such as
QVC, Inc.) and computer online shopping.

The U.S. retail jewelry industry is highly fragmented with
the seven largest companies accounting for less than
25 percent of the market. The largest jewelry retailer is
believed to be Wal-Mart Stores, Inc., followed by the
Company. The Company is the largest specialty jewelry retail
chain in North America, with approximately five percent of market
 share based on the United States Census Bureau estimate of 1999
U.S. Retail Jewelry and Watch Sales. Only two other
specialty jewelry retailers had greater than three percent market
 share.

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Operations

The Company operates principally under four brand names. The
following table presents net sales, average sales per store and
the number of stores for Zales, Gordons, Bailey
Banks & Biddle, and Peoples for the periods indicated.

|                            |                                              |                     |           |           |  |      |           |           |  |   |           |           | 
|--------------------------- | -------------------------------------------- | ------------------- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                            |                                              |                    
|                            |                                              | Year Ended July 31,
|                            |                                              |                    
|                            |                                              | 2000                |           | 1999      |  | 1998
|                            |                                              |                     |           |           |  |     
|Net Sales (in thousands)    |                                              |                     |           |           |  |      |           |           |  |   |           |          
|                           
|                           
|                           
|                           
|                            | Zales (including Outlet stores and Zale.com) |                     | $         | 977,042   |  |      | $         | 831,645   |  |   | $         | 738,238   | 
|                           
|                           
|                           
|                           
|                            | Gordons                                     |                     |           | 341,719   |  |      |           | 311,671   |  |   |           | 309,327   | 
|                           
|                           
|                           
|                           
|                            | Bailey Banks & Biddle                        |                     |           | 319,481   |  |      |           | 264,315   |  |   |           | 241,441   | 
|                           
|                           
|                           
|                           
|                            | Peoples(a)                                   |                     |           | 155,354   |  |      |           | 21,237    |  |   |           |          | 
|                           
|                           
|                           
|                           
|                            | Other(b)                                     |                     |           |          |  |      |           |          |  |   |           | 24,704    | 
|                            |                                              |                     |           |           |  |      |           |           |  |   |           |          
|                            |                                              | $                   | 1,793,596 |           |  | $    | 1,428,868 |           |  | $ | 1,313,710 |          
|                            |                                              |                     |           |           |  |      |           |           |  |   |           |          
|Average sales per store(c)  |                                              |                     |           |           |  |      |           |           |  |   |           |          
|                           
|                           
|                           
|                           
|                            | Zales (including Outlet stores)              |                     | $         | 1,285,000 |  |      | $         | 1,166,000 |  |   | $         | 1,092,000 | 
|                           
|                           
|                           
|                           
|                            | Gordons                                     |                     |           | 1,105,000 |  |      |           | 994,000   |  |   |           | 967,000   | 
|                           
|                           
|                           
|                           
|                            | Bailey Banks & Biddle                        |                     |           | 2,984,000 |  |      |           | 2,497,000 |  |   |           | 2,290,000 | 
|                           
|                           
|                           
|                           
|                            | Peoples                                      |                     |           | 869,000   |  |      |           |          |  |   |           |          | 
|                           
|Stores opened during period |                                              |                     |           |           |  |      |           |           |  |   |           |          
|                           
|                           
|                           
|                           
|                            | Zales (including Outlet stores)              |                     |           | 72        |  |      |           | 54        |  |   |           | 65        | 
|                           
|                           
|                           
|                           
|                            | Gordons                                     |                     |           | 3         |  |      |           | 4         |  |   |           | 17        | 
|                           
|                           
|                           
|                           
|                            | Bailey Banks & Biddle                        |                     |           | 9         |  |      |           | 6         |  |   |           | 7         | 
|                           
|                           
|                           
|                           
|                            | Peoples(a)                                   |                     |           | 0         |  |      |           | 0         |  |   |           |          | 
|                            |                                              |                     |           |           |  |      |           |           |  |   |           |          
|                            |                                              |                     | 84        |           |  |      | 64        |           |  |   | 89        |          
|                            |                                              |                     |           |           |  |      |           |           |  |   |           |          
|Stores closed during period |                                              |                     |           |           |  |      |           |           |  |   |           |          
|                           
|                           
|                           
|                           
|                            | Zales (including Outlet stores)              |                     |           | 7         |  |      |           | 16        |  |   |           | 6         | 
|                           
|                           
|                           
|                           
|                            | Gordons                                     |                     |           | 9         |  |      |           | 9         |  |   |           | 10        | 
|                           
|                           
|                           
|                           
|                            | Bailey Banks & Biddle                        |                     |           | 4         |  |      |           | 7         |  |   |           | 13        | 
|                           
|                           
|                           
|                           
|                            | Peoples(a)                                   |                     |           | 8         |  |      |           | 0         |  |   |           |          | 
|                            |                                              |                     |           |           |  |      |           |           |  |   |           |          
|                            |                                              |                     | 28        |           |  |      | 32        |           |  |   | 29        |          
|                            |                                              |                     |           |           |  |      |           |           |  |   |           |          
|Total Stores                |                                              |                     |           |           |  |      |           |           |  |   |           |          
|                           
|                           
|                           
|                           
|                            | Zales (including Outlet stores)              |                     |           | 804       |  |      |           | 739       |  |   |           | 701       | 
|                           
|                           
|                           
|                           
|                            | Gordons                                     |                     |           | 306       |  |      |           | 312       |  |   |           | 317       | 
|                           
|                           
|                           
|                           
|                            | Bailey Banks & Biddle                        |                     |           | 111       |  |      |           | 106       |  |   |           | 107       | 
|                           
|                           
|                           
|                           
|                            | Peoples(a)                                   |                     |           | 168       |  |      |           | 176       |  |   |           |          | 
|                            |                                              |                     |           |           |  |      |           |           |  |   |           |          
|                            |                                              |                     | 1,389     |           |  |      | 1,333     |           |  |   | 1,125     |          
|                            |                                              |                     |           |           |  |      |           |           |  |   |           |          



---



|    |  |                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Data from Peoples Jewellers in 1999 includes results from
	May 23, 1999, the date the Company acquired substantially
	all assets and certain operational liabilities of Peoples
	Jewellers Corp., through July 31, 1999.
|   
|(b) |  | In 1998, other net sales includes sales from Diamond Park Fine
	Jewelers which was divested during fiscal year 1998.                                                                                                    
|   
|(c) |  | Based on sales per store open a full twelve months during the
	respective year.                                                                                                                                         

6



---



##### Table of Contents





| |               
| | --------------
| | Zales Jewelers

Zales is positioned as the Companys national flagship and
is a leading brand name in jewelry retailing in the United
States. At July 31, 2000, Zales had 736 Zales stores in 50
states and Puerto Rico. Average store size is approximately
1,470 square feet, and the average selling price per unit
sold is $269. The Zales brand accounted for approximately
54 percent of the Companys sales in fiscal
year 2000.

Zales merchandise selection is generally standardized
across the nation and targeted at customers representing a
cross-section of mainstream America. In fiscal year 2000,
bridal merchandise represented 35 percent of merchandise
sales, while fashion jewelry and watches comprised the remaining
65 percent. The bridal merchandise category consists of
solitaire engagement rings, various bridal sets and diamond and
gold anniversary bands. Fashion jewelry consists generally of
diamond fashion rings, earrings, gold chains, watches and various
 other items. The Company believes that the prominence of diamond
 jewelry in its product selection fosters an image of quality and
 trust among consumers. While maintaining a strong focus on the
bridal segment of the business, Zales places added emphasis on
non-bridal merchandise such as the fashion and gift-giving
aspects of the business. Zales also introduces innovative items
and capitalizes on emerging trends, including platinum engagement
 rings, diamond fashion jewelry and 18 carat certified diamond
jewelry. The combination of Zales national presence and
centralized merchandise selection allows it to use television
advertising across the nation as its primary advertising medium,
supplemented by newspaper inserts and direct mail. Zales
broadened its television advertising presence in fiscal
year 2000 to include brand awareness marketing such as
sponsorship of the Rockefeller Center Christmas Tree Lighting and
 sponsorship of the CNN Voice of the Millenium. Zales is in the
direct fulfillment business through its direct mail operations
and internet web site, which accounted for less than one percent
of the Companys net sales in fiscal year 2000.

Zales Outlet builds on the Zales brand recognition and national
advertising programs. At July 31, 2000, the Company operated
 68 Zales Outlet stores in 26 states. The Company has begun
expanding its Zales Outlet concept and plans to continue its
growth over the next several years. The merchandise assortment in
 a Zales Outlet Store caters to the brand conscious and
value-oriented female shopper and includes a wide selection of
todays most fashion-forward looks, including name brand
watches and fashion items like tanzanite jewelry. Zales Outlet
accounted for less than four percent of the Companys net
sales in fiscal 2000.



| |                  
| | -----------------
| | Gordons Jewelers

Gordons is positioned as a major regional brand with an
upgraded product offering. At July 31, 2000, Gordons
had 306 stores in 34 states and Puerto Rico. Average store size
is approximately 1,400 square feet and the average selling
price per unit sold is $304. Gordons accounted for
approximately 19 percent of the Companys net sales in
fiscal year 2000.

Gordons distinguishes itself from Zales by providing a more
 upscale, contemporary product mix and tailoring a portion of
store inventory to regional tastes. A portion of the merchandise
sold by Gordons stores overlaps the Zales product
line. Regional radio broadcast campaigns that emphasize key items
 are utilized to complement printed inserts.

Gordons expects to continue to emphasize its image to match
 its customer base and further tailor key items to
customers regional preferences. The Company has taken steps
 to upgrade Gordons image, including store remodeling,
offering a more distinctive and fashion-oriented product
assortment, improved displays, and focusing on exclusive and
value oriented merchandise.



| |                                    
| | -----------------------------------
| | Bailey Banks & Biddle Fine Jewelers

Established in 1832, Bailey Banks & Biddle offers
high-end merchandise, exclusive designs and a prestigious
shopping environment for the upscale customer. The stores are
among the pre-eminent stores in their markets and carry both
exclusive and recognized designer merchandise selections to
appeal to the more affluent customer. The Bailey Banks &
 Biddle merchandise assortments emphasize the classic and
traditional look and focus on diamonds, precious stones and gold
jewelry, as well as watches and giftware. At July 31, 2000,
Bailey Banks & Biddle operated 111 upscale jewelry
stores in 29 states. The Company also utilizes the

7



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##### Table of Contents





Bailey Banks & Biddle stores rely heavily on upscale
direct mail catalogs, enabling the stores to focus on specific
products for specific customers. In fiscal year 2000, Bailey
 Banks & Biddle expanded its advertising reach with a
repetitive presence in nationally distributed newspapers such as
The New York Times and The Wall Street Journal
 and high profile magazines such as Town & Country, Vanity Fair, and Bon Appétit.



| |                  
| | -----------------
| | Peoples Jewellers

Effective May 23, 1999, the Company acquired substantially
all assets and certain operational liabilities of Peoples
Jewellers Corporation, a privately owned chain. At July 31,
2000, Peoples operated 168 stores in 9 provinces
operating throughout Canada under the Peoples and Mappins names.
Peoples offers traditional jewelry and attracts the moderate
customer segment in Canada. Peoples has the largest market share
in Canada. Its closest specialty jewelry competitor has fewer
than 40 locations. The stores have an average selling price
per unit sold of approximately $170, an average store size of
approximately 1,500 square feet and accounted for
approximately 9 percent of the Companys net sales in
fiscal year 2000.

The Company believes that Peoples is the Canadian version of the
Zales brand. Peoples has experienced significant growth and
improvement in store productivity during fiscal 2000 by employing
 a focused merchandising strategy that offers the top
250 key items or Brilliant Buys. A significant
portion of this merchandise overlaps Zales, allowing the Company
to leverage its merchandising strength. The Company increased the
 depth and breadth of both merchandising and marketing for fiscal
 year 2000.

During fiscal 2000, the Company executed an aggressive marketing
strategy for Peoples that included media campaigns similar to
those that Zales employs, including television advertising during
 key holiday periods.

Store Operations

The Companys stores are designed to create an attractive
environment, maximize operating efficiencies and make shopping
convenient and enjoyable. The Company pays careful attention to
store layout, particularly in areas such as lighting, choice of
materials and arrangement of display cases to maximize
merchandise presentation. Promotional displays are changed
periodically to provide variety, to reflect seasonal events or to
 complement a particular malls promotions.

Each of the Companys stores is led by a store manager who
is responsible for certain store-level operations, including
sales and a limited number of personnel matters. Non-sales
administrative matters, including purchasing, credit operations
and payroll are consolidated at the corporate level in an effort
to maintain low operating costs at the store level. Each of the
stores also offers standard warranties and return policies and
provides extended warranty coverage which may be purchased at the
 customers option.

The Company has implemented inventory control systems, extensive
security systems and loss prevention procedures to maintain low
inventory losses. The Company screens employment applicants and
provides all of its store personnel with training in loss
prevention. Despite such precautions, the Company experiences
losses from theft from time to time and maintains insurance to
cover such losses.

The Company believes it is important to provide knowledgeable and
 responsive customer service. The Company has implemented
employee training programs, including training in sales
techniques for new employees, on-the-job training and manager
training for store managers. Under the banner of Zale Corporation
 University, the Company offers training to employees at every
level of the organization, from store associate to buyer.

8



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##### Table of Contents



Purchasing and Inventory

The Company purchases substantially all of its merchandise in
finished form from a network of established suppliers and
manufacturers located primarily in the United States, Southeast
Asia, and Italy. All purchasing is done through buying offices at
 the corporate headquarters. The Company either purchases
merchandise from its vendors or obtains merchandise on
consignment. The Company had approximately $167.9 million
and $131.7 million (including Peoples Jewellers) of
consignment inventory on hand at July 31, 2000 and 1999,
respectively. The Company historically has not engaged in any
substantial amount of hedging activities with respect to
merchandise held in inventory, since the Company has been able to
 adjust retail prices to reflect price fluctuations in the
commodities that are used in the merchandise it sells. The
Company is not subject to substantial currency fluctuations
because most purchases are dollar denominated. During fiscal
years 2000 and 1999, the Company purchased approximately
33 percent of its merchandise from its top five vendors,
including more than 11 percent from its top vendor.

Credit Operations

The Companys private label credit card program helps
facilitate the sale of merchandise to customers who wish to
finance their purchases rather than use cash or other sources.
Approximately 44 percent of the Companys net sales
were generated by credit sales on the private label credit cards
in fiscal year 2000. The Company has found that opening a
credit account allows its sales personnel to build customer
relationships that generate customer loyalty and facilitate
repeat purchases as well as enhancing the Companys target
marketing capability. Peoples Jewellers outsources its
proprietary credit program to a third party provider. In July
2000, the Company entered into agreements for the outsourcing of
its domestic private label credit card operations to Hurley, an
affiliate of AFCC. See Current Year Events  Sale
 of Private Label Credit Card Business.

In October 1997, the Company established a national credit card
bank, Jewelers National Bank (JNB), for the granting
of credit under its private label credit cards as part of the
outsourcing of the Companys credit card operations. In
connection with the sale of the Companys private label
credit operations, JNB will merge with and into Hurley. Credit
extension, customer service, and collections for the private
label accounts has been performed by JNB in Tempe, Arizona, and
Service Centers in Clearwater, Florida, San Marcos, Texas;
and San Juan, Puerto Rico and will continue to be so
performed until JNBs merger with Hurley. Following
consummation of the Merger, Hurley will assume responsibility for
 the Companys credit operations, including issuance of the
Companys credit cards and operation of JNBs servicing
 facilities in San Marcos, Texas, Clearwater, Florida,
Tempe, Arizona and San Juan, Puerto Rico. Hurley will
also issue the Companys private label credit cards and pay
the Company for charges of authorized goods and services on such
cards in exchange for the Companys payment of a merchant
fee based upon the type of credit utilized by the credit card
holder.

The Company currently has approximately 1.7 million customer
 names on file to which it directs promotional material. The
Company uses many of these customer names in its target marketing
 programs.

The Company has a credit processing service agreement for
domestic credit operations with a third-party servicer. The
agreement requires minimum annual payments based on credit
activities. The Company has a commitment of approximately
$15.2 million to be paid over the initial term of seven
years. In connection with the sale of the Companys customer
 receivables to AFCC and the Merger, this agreement will be
terminated upon conversion to AFCCs systems, which is
expected to occur by the first calendar quarter of 2001. See
Current Year Events  Sale of Private Label
Credit Card Business.

Insurance Affiliates

The Company, through Zale Indemnity Company, Zale Life Insurance
Company and Jewel Re-Insurance Ltd., provides insurance and
reinsurance facilities for various types of insurance coverage,
which typically are marketed to the Companys private label
credit card customers. Additionally, the Company promotes the
sale of credit insurance products to customers who use the
private label credit card program. In fiscal year 2000, over
 47 percent of the Companys private label credit card
purchasers purchased some form

9



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##### Table of Contents





Employees

As of July 31, 2000, the Company had approximately
13,000 active employees, less than one percent of whom were
represented by unions. The Company usually hires a limited number
 of temporary employees during each Christmas season.

Competition

The retailing industry is highly competitive. The industry is
fragmented, and the Company competes with a large number of
independent regional and local jewelry retailers, as well as
national jewelry chains. The Company also competes with other
types of retailers who sell jewelry and gift items, such as
department stores, catalog showrooms, discounters, direct mail
suppliers, online retailers and television home shopping
programs. Certain of the Companys competitors are
non-specialty retailers which are larger and have greater
financial resources than the Company. The malls where the
Companys stores are located typically contain competing
national chains, independent jewelry stores or department store
jewelry departments. The Company believes that it is also
competing for consumers discretionary spending dollars and,
 therefore, competes with retailers who offer merchandise other
than jewelry or giftware.

Notwithstanding the national or regional reputation of its
competition, the Company believes that it must compete on a
mall-by-mall basis with other retailers of jewelry as well as
with retailers of other types of discretionary items. Therefore,
the Company competes primarily on the basis of reputation for
high quality products, brand recognition, store location,
distinctive and value-priced merchandise, personalized customer
service and its ability to offer private label credit card
programs to customers wishing to finance their purchases. The
Companys success is also dependent on its ability to react
to and create customer demand for specific merchandise
categories.

The Company holds no material patents, licenses, franchises or
concessions; however, the established trademarks and trade names
for stores and products in Zales, Gordons, Bailey
Banks & Biddle, and Peoples are important to the Company
 in maintaining its competitive position in the jewelry retailing
 industry.

As a specialty retailer of fine jewelry, the Companys
business is seasonal in nature, with its second quarter, which
includes the months of November through January, typically
representing a proportionally greater percentage of annual sales,
 earnings from operations and cash flow. Management expects such
seasonality to continue.

Management Information Systems

The Companys information systems provide information
necessary for: (i) management operating decisions;
(ii) sales and margin management; (iii) inventory
control; (iv) profitability monitoring by many measures
(merchandise category, buyer, store); and (v) expense
control programs. Data processing systems include point-of-sale
reporting, purchase order management, receiving, merchandise
planning and control, payroll, general ledger, credit card
administration, and accounts payable. Bar code ticketing is used,
 and

10



---



##### Table of Contents





The Companys information systems allow management to
monitor and control the Companys operations, and to
generate reports on a daily, monthly, quarterly and annual basis
for each store and transaction. Senior management can therefore
review and analyze activity by store, amount of sale, terms of
sale or employees who approved the sale.

The Company entered into a five-year agreement during December
1996 with a third party for the management of the Companys
mainframe processing operations, client server systems, LAN
operations and desktop support. The Company believes that by
outsourcing this portion of its management information systems it
 will be able to achieve additional efficiencies and allow the
Company to focus its internal information technology efforts on
developing new systems to enhance the performance of its core
business.

The Company has historically upgraded, and expects to continue to
 upgrade, its information systems to improve operations and
support future growth. The Company estimates it will make capital
 expenditures of approximately $35 million over the next two
 years for enhancements to its management information systems and
 expansion and development of e-commerce sites.

Regulation

The Companys operations are affected by numerous laws that
impose disclosure and other requirements upon the origination,
servicing and enforcement of credit accounts and limitations on
the maximum amount of finance charges that may be charged by a
credit provider. In addition to the Companys private label
credit cards, credit to the Companys customers is provided
primarily through bank cards such as Visa®,
MasterCard®, and Discover®, without recourse to the
Company based upon a customers failure to pay. Any change
in the regulation of credit which would materially limit the
availability of credit to the Companys traditional customer
 base could adversely affect the Companys results of
operations or financial condition.

The sale of insurance products by the Company is also highly
regulated. State laws currently impose disclosure obligations
with respect to the Companys sale of credit and other
insurance. The Companys and its competitors practices
 are also subject to review in the ordinary course of business by
 the Federal Trade Commission and Industry Canada Competition
Bureau, and the Companys and other retail companys
credit cards are currently subject to regulation by the Office of
 the Comptroller of the Currency. Following the Merger, the
Companys credit cards will be subject to regulation by the
Federal Deposit Insurance Corporation and state banking
authorities. See Business  Credit
Operations. The Company believes that it is currently in
material compliance with applicable and regulations.

Merchandise in the retail jewelry industry is frequently sold at
a discount off the regular or original
price. A number of jurisdictions in which the Company operates
have regulations which require that retailers offering
merchandise at discounted prices must offer the merchandise at
regular or original prices for stated periods of time.
Additionally, the Company is subject to certain
truth-in-advertising and other various laws, including consumer
protection regulations that regulate retailers generally and/or
the promotion and sale of jewelry in particular. The Company
undertakes to monitor changes in those laws and believes that it
is in material compliance with applicable laws with respect to
such practices.

Cautionary Notice Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking
statements, including statements regarding the Companys
objectives and expectations regarding its merchandising and
marketing strategies, store renovation, remodeling and expansion,
 inventory performance, capital expenditures, liquidity,
development of its management information systems and e-commerce
sites, productivity and profitability which are based

11



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##### Table of Contents







|        |                     
|------- | --------------------
|Item 2. | Principal Properties

The Company leases a 430,000 square foot corporate
headquarters facility, which extends through 2008. The facility
is located in Las Colinas, a planned business development in
Irving, Texas, near the Dallas/ Fort Worth International
Airport. During fiscal year 1999, the Company sold a
120,000-square foot warehouse in Dallas, Texas, leasing back
approximately 60,000 square feet of that warehouse. The
Company leases a 32,000-square foot general office facility in
Toronto, Ontario Canada for Peoples, which lease extends to April
 2001.

The Company currently leases three credit centers located in
Clearwater, Florida (30,000 square feet), Tempe, Arizona
(24,200 square feet), and San Juan, Puerto Rico
(2,900 square feet) and one national collections center
located in San Marcos, Texas (9,000 square feet). See
Current Year Events  Sale of Private Label
Credit Card Business.

The Company rents most of its retail spaces under leases that
generally range from five to ten years and may contain minimum
rent escalations. Most of the store leases provide for the
payment of base rentals plus real estate taxes, insurance, common
 area maintenance fees and merchants association dues, as well as
 percentage rents based on the stores gross sales.

The following table indicates the expiration dates of the current
 terms of the Companys leases as of July 31, 2000
(executed lease agreements, including non-stores and unopened
stores):

|                    |                        |        |     |       |  |       |   |            |  |  |     |       |  |  |     |      | 
|------------------- | ---------------------- | ------ | --- | ----- |  | ----- | - | ---------- |  |  | --- | ----- |  |  | --- | ---- | 
|                    |                        |        |     |       |  |       |   | Percentage
|Term Expires        |                        | Stores |     | Other |  | Total |   | Of Total  
|                    |                        |        |     |       |  |       |   |           
|2001 and prior      |                        |        | 165 |       |  |       |  |            |  |  | 165 |       |  |  | 12% |     
|                   
|                   
|                   
|                   
|2002                |                        |        | 131 |       |  |       | 2 |            |  |  | 133 |       |  |  | 10% |     
|                   
|                   
|                   
|                   
|2003                |                        |        | 72  |       |  |       | 1 |            |  |  | 73  |       |  |  | 5%  |     
|                   
|                   
|                   
|                   
|2004                |                        |        | 108 |       |  |       |  |            |  |  | 108 |       |  |  | 8%  |     
|                   
|                   
|                   
|                   
|2005 and thereafter |                        |        | 871 |       |  |       | 3 |            |  |  | 874 |       |  |  | 65% |     
|                    |                        |        |     |       |  |       |   |            |  |  |     |       |  |  |     |     
|                    | Total number of leases |        |     | 1,347 |  |       |   | 6          |  |  |     | 1,353 |  |  |     | 100% | 
|                    |                        |        |     |       |  |       |   |            |  |  |     |       |  |  |     |     

Management believes substantially all of the store leases
expiring in fiscal year 2001 that it wishes to renew (including
leases which expired earlier and are on month-to-month
extensions) will be renewed on terms not materially less
favorable to the Company than the terms of the expiring leases.
Management believes its facilities are suitable and adequate for
the Companys business as presently conducted and as
proposed to be conducted.

12



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##### Table of Contents





|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

The Company is involved in certain legal actions and claims
arising in the ordinary course of business. The Company currently
 believes that such litigation and claims, both individually and
in the aggregate, will be resolved without material effect on the
 Companys financial position or results of operations.

On November 3, 1999, a plaintiff amended a complaint filed
in the Circuit Court for Colbert County, State of Alabama to
commence a purported class action against the Company, Jewelers
National Bank, Zale Indemnity Company, Zale Life Insurance
Company, Jewelers Financial Services, Jewel Re-Insurance, Ltd.,
and certain employees of the Company. On July 21, 2000, the
same plaintiff commenced a purported class action in the United
States District Court for the Eastern District of Texas,
Texarkana Division against the Company, Jewelers National Bank,
Zale Indemnity Company, Zale Life Insurance Company, Jewel
Re-Insurance, Ltd. and certain employees of the Company. Both
purported class actions concern allegations that the defendants
marketed credit insurance to customers in violation of state
statutory and common laws and bring claims based on, inter
alia, fraud, breach of contract, and consumer protection
laws. The federal complaint alleges that the Companys
credit insurance practices violated federal anti-racketeering
laws. In both complaints, plaintiff seeks, among other things,
compensatory and punitive damages as well as injunctive relief.
Both actions are in the discovery stage, and neither has been
certified as a class action. The Company intends to vigorously
defend the alleged claims.



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

No matters were submitted to a vote of security holders of the
Company during the quarter ended July 31, 2000.

Executive Officers of the Registrant

The following individuals serve as executive officers of the
Company. Officers are elected by the Board of Directors annually,
 each to serve until their successor is elected and qualified, or
 until their earlier resignation, removal from office or death.

|              |  |     |    |          |  |                                                          
|------------- |  | --- | -- | -------- |  | ---------------------------------------------------------
|Name          |  | Age |    | Position
|              |  |     |    |         
|Beryl B. Raff |  |     | 49 |          |  | Chairman of the Board and Chief Executive Officer        
|             
|             
|             
|             
|Alan P. Shor  |  |     | 41 |          |  | President and Chief Operating Officer, Director          
|             
|             
|             
|             
|Sue E. Gove   |  |     | 42 |          |  | Executive Vice President and Chief Financial Officer     
|             
|             
|             
|             
|Mary L. Forté |  |     | 49 |          |  | Executive Vice President and Chief Administrative Officer



---

The following is a brief description of the business experience
of the executive officers of the Company for at least the past
five years.

Ms. Beryl B. Raff was appointed Chairman of the
Board and Chief Executive Officer effective September 6,
2000. Prior to her appointment as Chairman, Ms. Raff served
as a member of the Companys Board of Directors, and
President and Chief Executive Officer since September 1999. In
July 1998, she was appointed President and Chief Operating
Officer. From July 1997 to July 1998, she served as Executive
Vice President and Chief Operating Officer. From November 1994 to
 July 1997, she served as President of Zales. From March 1991
through October 1994, Ms. Raff served as Senior Vice
President of Macys East with responsibilities for its
jewelry business in a twelve-state region. From April 1988 to
March 1991, Ms. Raff served as Group Vice President of
Macys South/ Bullocks. Prior to 1988, Ms. Raff had
17 years of retailing and merchandising experience with the
Emporium and Macys department stores.

Mr. Alan P. Shor was named President and Chief
Operating Officer and was appointed as a member of the
Companys Board of Directors effective September 6,
2000. Prior to this time, Mr. Shor served as Executive Vice
President and Chief Operating Officer since September 1999. From
November 1997 to

13



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##### Table of Contents





Ms. Sue E. Gove was appointed Executive Vice
President and Chief Financial Officer on July 15, 1998. From
 December 1997 to July 1998, she served as Group Vice President
and Chief Financial Officer. From January 1996 to December 1997,
she served as Senior Vice President, Corporate Planning and
Analysis. From September 1996 through June 1997, Ms. Gove
also served as Senior Vice President and Treasurer, overseeing
Investor Relations and the Treasury, Tax and Control functions.
Ms. Gove joined the Company in 1980 and served in numerous
assignments until her appointment to Vice President in 1989.

Ms. Mary L. Forté was appointed Executive
Vice President and Chief Administrative Officer on
January 13, 1998. From July 1994 to January 1998,
Ms. Forté served as President of Gordons. From
January 1994 to July 1994, Ms. Forté served as Senior
Vice President of QVC  Home Shopping Network. From
July 1991 through January 1994, Ms. Forté served as
Senior Vice President of the Bon Marche, Home Division of the
Federated Department Store. From July 1989 to July 1991,
Ms. Forté was Vice President of Richs Department
Store, Housewares Division. In addition to the above,
Ms. Forté has an additional 13 years of retailing
and merchandising experience with Macys, The May Department
 Stores Company, Inc. and Federated Department Stores.




PART II



|        |                                                                            
|------- | ---------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common Equity and Related
	Stockholders Equity

The Common Stock is listed on the New York Stock Exchange
(NYSE) under the symbol ZLC. The following table sets
 forth the high and low sale prices for the Common Stock for each
 fiscal quarter during the two most recent fiscal years.

|       |  |      |        |      |  |      |         |     |  |  |         |  |  |  |         | 
|------ |  | ---- | ------ | ---- |  | ---- | ------- | --- |  |  | ------- |  |  |  | ------- | 
|       |  |      |        |     
|       |  | 2000 |        | 1999
|       |  |      |        |     
|       |  | High |        | Low  |  | High |         | Low
|       |  |      |        |      |  |      |         |    
|First  |  |      | 42 1/2 |      |  |      | 33 1/2  |     |  |  | 32      |  |  |  | 19 1/2  | 
|      
|      
|      
|      
|Second |  |      | 51 3/4 |      |  |      | 35 1/2  |     |  |  | 34 7/16 |  |  |  | 23 7/8  | 
|      
|      
|      
|      
|Third  |  |      | 51     |      |  |      | 32 1/16 |     |  |  | 40 3/16 |  |  |  | 30 5/16 | 
|      
|      
|      
|      
|Fourth |  |      | 48 1/8 |      |  |      | 35 1/4  |     |  |  | 44 5/8  |  |  |  | 34 1/2  | 

As of September 5, 2000, the outstanding shares of Common
Stock were held by approximately 1,061 holders of record. The
Company has not paid dividends on the Common Stock since its
initial issuance on July 30, 1993, and does not anticipate
paying dividends on the Common Stock in the foreseeable future.
In addition, the Companys short-term borrowings and
long-term debt limit the Companys ability to pay dividends.
 See Managements Discussion and Analysis of Financial
 Condition and Results of Operations  Liquidity and
Capital Resources.

14



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##### Table of Contents





|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected financial data is qualified in its
entirety by the Consolidated Financial Statements of the Company
(and the related Notes thereto) contained elsewhere in this
Form 10-K and should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations. The income statement
and balance sheet data for each of the years ended July 31,
2000, 1999, 1998, 1997 and 1996, have been derived from the
Companys audited Consolidated Financial Statements.

|                                                      |                               |                                                  |              |        |      |         |           |        |      |        |           |        |      |        |           |        |      |        |           |        |      |        | 
|----------------------------------------------------- | ----------------------------- | ------------------------------------------------ | ------------ | ------ | ---- | ------- | --------- | ------ | ---- | ------ | --------- | ------ | ---- | ------ | --------- | ------ | ---- | ------ | --------- | ------ | ---- | ------ | 
|                                                      |                               |                                                 
|                                                      |                               | Year Ended July 31,                             
|                                                      |                               |                                                 
|                                                      |                               | 2000                                             |              | 1999   |      | 1998    |           | 1997   |      | 1996  
|                                                      |                               |                                                  |              |        |      |         |           |        |      |       
|                                                      |                               |                                                 
|                                                      |                               | (Amounts in thousands, except per share amounts)
|                                                     
|                                                     
|                                                     
|                                                     
|Net sales                                             |                               | $                                                | 1,793,596    |        |      | $       | 1,428,868 |        |      | $      | 1,313,710 |        |      | $      | 1,253,818 |        |      | $      | 1,137,377 |       
|                                                     
|                                                     
|                                                     
|                                                     
|Cost of sales                                         |                               |                                                  | 920,003      |        |      |         | 737,188   |        |      |        | 681,908   |        |      |        | 643,318   |        |      |        | 576,764   |       
|                                                      |                               |                                                  |              |        |      |         |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|Gross margin                                          |                               |                                                  | 873,593      |        |      |         | 691,680   |        |      |        | 631,802   |        |      |        | 610,500   |        |      |        | 560,613   |       
|                                                     
|                                                     
|                                                     
|                                                     
|Selling, general and administrative expenses          |                               |                                                  | 620,744      |        |      |         | 502,279   |        |      |        | 475,846   |        |      |        | 480,522   |        |      |        | 457,371   |       
|                                                     
|                                                     
|                                                     
|                                                     
|Depreciation and amortization expense                 |                               |                                                  | 42,431       |        |      |         | 29,478    |        |      |        | 22,565    |        |      |        | 14,022    |        |      |        | 7,538     |       
|                                                     
|                                                     
|                                                     
|                                                     
|Unusual items(a)                                      |                               |                                                  |             |        |      |         |          |        |      |        | (8,947    | )      |      |        |          |        |      |        | (4,486    | )     
|                                                      |                               |                                                  |              |        |      |         |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|Operating earnings                                    |                               |                                                  | 210,418      |        |      |         | 159,923   |        |      |        | 142,338   |        |      |        | 115,956   |        |      |        | 100,190   |       
|                                                     
|                                                     
|                                                     
|                                                     
|Interest expense, net                                 |                               |                                                  | 32,178       |        |      |         | 30,488    |        |      |        | 32,039    |        |      |        | 36,098    |        |      |        | 30,102    |       
|                                                      |                               |                                                  |              |        |      |         |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|Earnings before income taxes                          |                               |                                                  | 178,240      |        |      |         | 129,435   |        |      |        | 110,299   |        |      |        | 79,858    |        |      |        | 70,088    |       
|                                                     
|                                                     
|                                                     
|                                                     
|Income taxes                                          |                               |                                                  | 66,726       |        |      |         | 48,503    |        |      |        | 41,362    |        |      |        | 29,305    |        |      |        | 25,094    |       
|                                                      |                               |                                                  |              |        |      |         |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|Earnings before extraordinary items                   |                               | $                                                | 111,514      |        |      | $       | 80,932    |        |      | $      | 68,937    |        |      | $      | 50,553    |        |      | $      | 44,994    |       
|                                                      |                               |                                                  |              |        |      |         |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                      |                               |                                                  | Net earnings |        | $    | 111,514 |           |        | $    | 80,932 |           |        | $    | 68,937 |           |        | $    | 50,553 |           |        | $    | 43,898 | 
|                                                      |                               |                                                  |              |        |      |         |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|Earnings per common share:                            |                               |                                                  |              |        |      |         |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                     
|                                                     
|                                                     
|                                                     
|Basic:                                                |                               |                                                  |              |        |      |         |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                      | Earnings before extraordinary |                                                  |              |        |      |         |           |        |      |        |           |        |      |        |           |        |      |        |           |        |     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                               | item                                             |              | $      | 3.16 |         |           | $      | 2.24 |        |           | $      | 1.96 |        |           | $      | 1.44 |        |           | $      | 1.28 |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Net earnings                  |                                                  | $            | 3.16   |      |         | $         | 2.24   |      |        | $         | 1.96   |      |        | $         | 1.44   |      |        | $         | 1.25   |     
|                                                     
|                                                     
|                                                     
|                                                     
|Diluted:                                              |                               |                                                  |              |        |      |         |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                      | Earnings before extraordinary |                                                  |              |        |      |         |           |        |      |        |           |        |      |        |           |        |      |        |           |        |     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                               | item                                             |              | $      | 3.11 |         |           | $      | 2.21 |        |           | $      | 1.84 |        |           | $      | 1.38 |        |           | $      | 1.23 |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Net earnings                  |                                                  | $            | 3.11   |      |         | $         | 2.21   |      |        | $         | 1.84   |      |        | $         | 1.38   |      |        | $         | 1.20   |     
|                                                     
|                                                     
|                                                     
|                                                     
|Weighted average number of common shares outstanding: |                               |                                                  |              |        |      |         |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Basic                         |                                                  |              | 35,326 |      |         |           | 36,137 |      |        |           | 35,201 |      |        |           | 35,054 |      |        |           | 35,068 |     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Diluted                       |                                                  |              | 35,883 |      |         |           | 36,688 |      |        |           | 37,368 |      |        |           | 36,632 |      |        |           | 36,465 |     
|                                                     
|                                                     
|                                                     
|                                                     
|Balance Sheet Data:                                   |                               |                                                  |              |        |      |         |           |        |      |        |           |        |      |        |           |        |      |        |           |       
|                                                     
|                                                     
|                                                     
|                                                     
|Working capital                                       |                               | $                                                | 666,177      |        |      | $       | 556,886   |        |      | $      | 971,495   |        |      | $      | 877,130   |        |      | $      | 775,500   |       
|                                                     
|                                                     
|                                                     
|                                                     
|Total assets                                          |                               | $                                                | 1,370,289    |        |      | $       | 1,526,932 |        |      | $      | 1,445,929 |        |      | $      | 1,281,206 |        |      | $      | 1,163,811 |       
|                                                     
|                                                     
|                                                     
|                                                     
|Total debt                                            |                               | $                                                | 109,369      |        |      | $       | 452,589   |        |      | $      | 480,275   |        |      | $      | 451,787   |        |      | $      | 404,354   |       
|                                                     
|                                                     
|                                                     
|                                                     
|Total stockholders investment                        |                               | $                                                | 781,777      |        |      | $       | 699,611   |        |      | $      | 648,061   |        |      | $      | 541,574   |        |      | $      | 476,258   |       



---



|      |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)   |  | Unusual items consist of the gain on sale of Diamond Park Fine
	Jewelers of ($1.6 million) and a gain on sale of land of
	($7.3 million) for the year ended July 31, 1998, and
	reorganization recoveries of ($4.5  million) for the year
	ended July 31, 1996.                                                                                                                                      
|     
|Note: |  | Data for 1999 includes results for Peoples Jewellers from
	May 23, 1999, the date the Company acquired substantially
	all assets and certain operational liabilities of Peoples
	Jewellers, through July 31, 1999. Data presented in fiscal
	year 2000 is inclusive of the sale of the Companys
	private label credit card business and the results for Peoples
	Jewellers for the full fiscal year.

15



---



##### Table of Contents





|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
	Condition and Results of Operations

With respect to forward-looking statements made in this
Managements Discussion and Analysis of Financial Condition
and Results of Operations see Business 
Cautionary Notice Regarding Forward-Looking Statements.

Results of Operations

The following table sets forth certain financial information from
 the Companys audited consolidated statements of operations
 expressed as a percentage of net sales and should be read in
conjunction with the Companys Consolidated Financial
Statements and Notes thereto included elsewhere in this
Form 10-K.

|                                                           |  |                     |       |      |  |      |       |   |  |  |       |  
|---------------------------------------------------------- |  | ------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                                           |  |                    
|                                                           |  | Year Ended July 31,
|                                                           |  |                    
|                                                           |  | 2000                |       | 1999 |  | 1998
|                                                           |  |                     |       |      |  |     
|Net Sales                                                  |  |                     | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | %
|                                                          
|                                                          
|                                                          
|                                                          
|Cost of Sales                                              |  |                     | 51.3  |      |  |      | 51.6  |   |  |  | 51.9  |  
|                                                           |  |                     |       |      |  |      |       |   |  |  |       |  
|Gross Margin                                               |  |                     | 48.7  |      |  |      | 48.4  |   |  |  | 48.1  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Selling, General and Administrative Expenses               |  |                     | 34.6  |      |  |      | 35.2  |   |  |  | 36.2  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Depreciation and Amortization Expense                      |  |                     | 2.4   |      |  |      | 2.0   |   |  |  | 1.7   |  
|                                                          
|                                                          
|                                                          
|                                                          
|Unusual Item  Gain on Sale of Diamond Park Fine
	Jewelers |  |                     |      |      |  |      |      |   |  |  | (0.1  | )
|                                                          
|                                                          
|                                                          
|                                                          
|Unusual Item  Gain on Sale of Land                        |  |                     |      |      |  |      |      |   |  |  | (0.5  | )
|                                                           |  |                     |       |      |  |      |       |   |  |  |       |  
|Operating Earnings                                         |  |                     | 11.7  |      |  |      | 11.2  |   |  |  | 10.8  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Interest Expense, Net                                      |  |                     | 1.8   |      |  |      | 2.1   |   |  |  | 2.5   |  
|                                                           |  |                     |       |      |  |      |       |   |  |  |       |  
|Earnings Before Income Taxes                               |  |                     | 9.9   |      |  |      | 9.1   |   |  |  | 8.3   |  
|                                                          
|                                                          
|                                                          
|                                                          
|Income Taxes                                               |  |                     | 3.7   |      |  |      | 3.4   |   |  |  | 3.1   |  
|                                                           |  |                     |       |      |  |      |       |   |  |  |       |  
|Net Earnings                                               |  |                     | 6.2   | %    |  |      | 5.7   | % |  |  | 5.2   | %
|                                                           |  |                     |       |      |  |      |       |   |  |  |       |  

Year Ended July 31, 2000 Compared to Year Ended
July 31, 1999

Net Sales.Net Sales for the year ended July 31, 2000
 increased by $364.7 million to $1.8 billion, a
25.5 percent increase compared to the previous year.
Excluding sales from Peoples Jewellers which was acquired in
fiscal 1999, total sales for the year increased $230.6, or
16.4 percent. The sales increase primarily resulted from a
11.6 percent increase in sales from stores open for
comparable periods, 84 new stores added during the year and
twelve months of sales for Peoples which was acquired in May
1999. These factors were partially offset by 28 stores
closed during the year. The Company believes that sales growth
continues to be influenced by the execution of its merchandising,
 marketing and store operations strategies.

Gross Margin.Gross Margin as a percentage of net sales
was 48.7 percent for the year ended July 31, 2000
compared to 48.4 percent for the year ended July 31,
1999, an increase of 0.3 percent. This increase was
principally due to less promotional pricing activity at the store
 level and fewer markdowns. The LIFO benefit was
$3.0 million and $0.7 million for the years ended
July 31, 2000 and 1999.

Selling, General and Administrative Expenses.Selling,
General and Administrative Expenses decreased to
34.6 percent of sales for the year ended July 31, 2000,
 from 35.2 percent for the year ended July 31, 1999, or
 0.6 percent as a percentage of net sales. Store expenses as
 a percentage of sales increased by 0.4 percent principally
due to increased advertising to promote the Companys
brands. Net corporate expenses decreased by 1.0 percent as a
 percentage of net sales. The selling, general and administrative
 expense reduction demonstrates the Companys ability to
leverage its fixed store and corporate operating expenses while
increasing sales in its stores.

Earnings Before Interest, Taxes, Depreciation and Amortization
 Expense. Earnings Before Interest, Taxes, Depreciation and
Amortization Expense were $252.8 million and
$189.4 million for the years ended July 31, 2000 and
1999, respectively, an increase of 33.5 percent.

16



---



##### Table of Contents



Depreciation and Amortization Expense.Depreciation and
Amortization Expense increased by $13.0 million, primarily
as a result of the purchase of new assets, principally for new
store openings, renovation and refurbishment and amortization of
goodwill from the acquisition of Peoples Jewellers. In addition,
the Company refined the Peoples Jewellers goodwill amortization
period from twenty years to fifteen years, resulting in a
$0.9 million adjustment to goodwill amortization expense.
Due to fresh start reporting, the Company wrote off substantially
 all fixed assets of the Company effective July 31, 1993. As
 a result, depreciation and amortization relates to capital
expenditures since July 31, 1993.

Interest Expense, Net.Interest Expense, Net was
$32.2 million and $30.5 million for the years ended
July 31, 2000 and 1999, respectively. The increase of
$1.7 million is principally a result of lower interest
income from investments for fiscal year 2000 due to the
acquisition of Peoples Jewellers for approximately
$78 million in cash.

Income Taxes.The income tax expense for the years ended
July 31, 2000 and 1999 was $66.7 million and
$48.5 million, respectively, reflecting an effective tax
rate of 37.4 and 37.5 percent for the years ended
July 31, 2000 and 1999, respectively. The Company will
realize a cash benefit from utilization of tax net operating loss
 carryforwards (NOL) (after annual limitations)
against current and future tax liabilities. As of July 31,
2000, the Company had a remaining NOL (after limitations) of
approximately $170 million.

Year Ended July 31, 1999 Compared to Year Ended
July 31, 1998

Net Sales.Net Sales for the year ended July 31, 1999
 increased by $115.2 million to $1.4 billion, a
8.8 percent increase compared to the previous year.
Excluding sales from Diamond Park Fine Jewelers which was
divested in fiscal year 1998, total sales for the year increased
10.9 percent. The sales increase primarily resulted from a
6.0 percent increase in sales from stores open for
comparable periods, 64 new stores added during the year and
two months of sales for Peoples which was acquired in May 1999.
These factors were partially offset by 32 stores closed
during the year. The Company believes that sales growth continues
 to be influenced by the execution of its merchandising,
marketing and store operations strategies.

Gross Margin.Gross Margin as a percentage of net sales
was 48.4 percent for the year ended July 31, 1999
compared to 48.1 percent for the year ended July 31,
1998, an increase of 0.3 percent. This increase was
principally due to more efficient purchasing, resulting in lower
markdowns. The LIFO benefit was $0.7 million and
$2.5 million for the years ended July 31, 1999 and
1998.

Selling, General and Administrative Expenses.Selling,
General and Administrative Expenses decreased to
35.2 percent of sales for the year ended July 31, 1999
from 36.2 percent for the year ended July 31, 1998, or
1.0 percent as a percentage of net sales. Store expenses as
a percentage of sales decreased by 1.0 percent principally
due to productivity improvements relating to the lowering of
payroll costs as a percentage of sales. Net corporate expenses
decreased by 0.2 percent of net sales. This decrease in
expense was partially offset by Peoples, which had slightly
higher store expenses as a percentage of sales. The selling,
general and administrative expense reduction demonstrates the
Companys ability to leverage its fixed store and corporate
operating expenses while increasing sales in its stores.

Earnings Before Interest, Taxes, Depreciation and Amortization
 Expense. Earnings Before Interest, Taxes, Depreciation and
Amortization Expense were $189.4 million and
$156.0 million for the years ended July 31, 1999 and
1998, respectively, an increase of 21.4 percent.

Depreciation and Amortization Expense.Depreciation and
Amortization Expense increased by $6.9 million, primarily as
 a result of the purchase of new assets, principally for new
store openings, renovation and refurbishment and the acquisition
of Peoples. Due to fresh start reporting, the Company wrote-off
substantially all fixed assets of the Company effective
July 31, 1993. As a result, depreciation and amortization
relates to capital expenditures since July 31, 1993.

Interest Expense, Net.Interest Expense, Net was
$30.5 million and $32.0 million for the years ended
July 31, 1999 and 1998, respectively. The decrease is a
result of higher interest income from investments due to an
increase in net monthly average cash and cash equivalents for
fiscal year 1999 as compared to fiscal year 1998.

17



---



##### Table of Contents



Income Taxes.The income tax expense for the years ended
July 31, 1999 and 1998 was $48.5 million and
$41.4 million, respectively, reflecting an effective tax
rate of 37.5 percent for both years. The Company will
realize a cash benefit from utilization of tax net operating loss
 carryforwards (NOL) (after annual limitation)
against current and future tax liabilities. As of July 31,
1999, the Company had a remaining NOL (after limitations) of
approximately $189 million.

Liquidity and Capital Resources

The Companys cash requirements consist principally of
funding inventory growth, capital expenditures primarily for new
store growth and renovations, upgrading its management
information systems and debt service. As of July 31, 2000,
the Company had cash and cash equivalents of $298.2 million,
 and $3.9 million of restricted cash. The restricted cash
primarily relates to the capital requirements of the
Companys national bank and consignment arrangements from
certain vendors. The retail jewelry business is highly seasonal,
with a significant proportion of sales and operating income being
 generated in November and December of each year. Approximately
41 percent and 40 percent of the Companys annual
sales were made during the three months ended January 31,
2000 and 1999, respectively, which includes the Christmas selling
 season. The Companys working capital requirements
fluctuate during the year, increasing substantially during the
fall season as a result of higher planned seasonal inventory
levels.

Operating Activities

Set forth below is certain summary information with respect to
the Companys operations for the most recent eight fiscal
quarters.

|                   |  |                            |         |           |  |             |         |             |  |   |         |  |  |   |         | 
|------------------ |  | -------------------------- | ------- | --------- |  | ----------- | ------- | ----------- |  | - | ------- |  |  | - | ------- | 
|                   |  |                           
|                   |  | Fiscal 2000               
|                   |  | For the Three Months Ended
|                   |  |                           
|                   |  | July 31,                   |         | April 30, |  | January 31, |         | October 31,
|                   |  | 2000                       |         | 2000      |  | 2000        |         | 1999       
|                   |  |                            |         |           |  |             |         |            
|                   |  |                           
|                   |  | (In thousands)            
|                  
|                  
|                  
|                  
|Net sales          |  | $                          | 373,755 |           |  | $           | 361,273 |             |  | $ | 735,967 |  |  | $ | 322,601 | 
|                  
|                  
|                  
|                  
|Gross margin       |  |                            | 180,471 |           |  |             | 176,736 |             |  |   | 360,556 |  |  |   | 155,830 | 
|                  
|                  
|                  
|                  
|Operating earnings |  |                            | 25,594  |           |  |             | 25,150  |             |  |   | 143,217 |  |  |   | 16,457  | 
|                  
|                  
|                  
|                  
|Net earnings       |  |                            | 11,577  |           |  |             | 10,522  |             |  |   | 83,952  |  |  |   | 5,463   | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                   |  |                            |         |           |  |             |         |             |  |   |         |  |  |   |         | 
|------------------ |  | -------------------------- | ------- | --------- |  | ----------- | ------- | ----------- |  | - | ------- |  |  | - | ------- | 
|                   |  |                           
|                   |  | Fiscal 1999               
|                   |  | For the Three Months Ended
|                   |  |                           
|                   |  | July 31,                   |         | April 30, |  | January 31, |         | October 31,
|                   |  | 1999                       |         | 1999      |  | 1999        |         | 1998       
|                   |  |                            |         |           |  |             |         |            
|                   |  |                           
|                   |  | (In thousands)            
|                  
|                  
|                  
|                  
|Net sales          |  | $                          | 325,994 |           |  | $           | 280,736 |             |  | $ | 567,952 |  |  | $ | 254,186 | 
|                  
|                  
|                  
|                  
|Gross margin       |  |                            | 157,441 |           |  |             | 136,028 |             |  |   | 276,122 |  |  |   | 122,089 | 
|                  
|                  
|                  
|                  
|Operating earnings |  |                            | 21,879  |           |  |             | 17,793  |             |  |   | 109,920 |  |  |   | 10,331  | 
|                  
|                  
|                  
|                  
|Net earnings       |  |                            | 8,542   |           |  |             | 6,267   |             |  |   | 63,960  |  |  |   | 2,163   | 

Net cash provided by operating activities was
$141.9 million, $81.1 million and $112.8 million
for fiscal years 2000, 1999, and 1998 respectively. The net cash
provided by operating activities in fiscal year 2000 increased
from the prior year principally due to the increase in operating
earnings and the leveraging of accounts payable and accrued
liabilities. In fiscal 1999, net cash provided by operating
activities resulted principally from an increase in net earnings
and effective inventory management resulting in the leveraging of
 accounts payable and accrued liabilities.

There has been an increase of approximately $58.8 million in
 owned merchandise inventories at July 31, 2000 compared to
the balance at July 31, 1999. This increase resulted
principally from new store growth.

Net cash provided by investing activities was $508.3 million
 in fiscal 2000, principally related to the proceeds from the
sale of credit card receivables to AFCC, offset slightly by
higher capital expenditures. In fiscal 1999, net cash used in
investing activities was $154.3 million, principally related
 to the acquisition of Peoples, as well as expenditures for new
store growth and expenditures for remodeling existing stores. Net
 cash provided by investing activities was $12.5 million in
fiscal 1998, primarily related to proceeds from the sale of
Diamond Park Fine Jewelers and proceeds from the sale of land,
offsetting capital expenditures for new store growth and existing
 store remodeling and refurbishment.

Net cash used in financing activities was $387.4 million in
fiscal 2000, principally related to the repayment of the Variable
 Funding Notes and Revolving Credit Agreement, as well as the
stock repurchase plan approved in September 1999. Net cash used
in financing activities in fiscal 1999 was $64.6 million
principally related to the refinancing and reduction of the Zale
Funding Trust receivables securitization facility and repurchase
of the Companys common stock on the open market. Net cash
provided by financing activities

18



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##### Table of Contents





Finance Arrangements

  On July 31, 2000, the Company redeemed the then
 outstanding balance of approximately $335 million aggregate
 principal amount of Variable Notes under the Companys
securitization facility with the proceeds from the sale of its
customer receivables and terminated the facility. The Variable
Notes bore interest at the market commercial paper rate plus a
dealer fee of 0.05 percent and the Company paid a fee of
0.375 percent per annum on the funded portion of the
facility and a commitment fee of .25 percent per annum on
the unfunded portion. See Current Year Events 
Sale of Private Label Credit Card Business.

  In order to support the Companys growth plans,
 the Company amended and restated its unsecured Revolving Credit
Agreement on March 30, 2000. The Revolving Credit Agreement
provides for (i) a U.S. Revolving Credit facility to
the Company and to its operating subsidiary, Zale
Delaware, Inc., in the aggregate principal amount of up to
$215 million in commitments by certain U.S. lenders,
including a $5 million sublimit for letters of credit, and
(ii) a separate Canadian Revolving Credit facility for a
Canadian subsidiary, which provides for Canadian Dollar
denominated loans in the aggregate principal amount of up to a
U.S. Dollar equivalent of $10 million in commitments by
 a Canadian lender. The total amount of commitments under the
Revolving Credit Agreement to the Company and its subsidiaries is
 approximately $225 million and the term is five years.
Under the Revolving Credit Agreement the Company may, subject to
approval of the U.S. Agent or the Canadian Agent, as the
case may be, increase the total U.S. commitment to
$285 million and the Canadian commitment to a
U.S. Dollar equivalent of $25 million provided that the
 commitments together do not exceed the U.S. Dollar
equivalent of $300 million.

The revolving credit loans bear interest at floating rates as
follows: (A) loans outstanding under the U.S. Revolving
Credit facility bear interest, at the Companys option, at
either (i) the applicable Eurodollar Rate plus a margin
equal to 0.75 percent (subject to adjustment as described
below), or (ii) the Base Rate (which is the higher of the
annual rate of interest announced from time to time by the agent
bank under the Revolving Credit Agreement as its base rate or the
 Federal Funds Effective Rate plus 0.5 percent); and
(B) loans outstanding under the Canadian Revolving Credit
facility bear interest, at the Companys option, at either
(i) a Bankers Acceptance Discount Rate (which varies
depending upon whether the Canadian Lender is a bank named under
Schedule I or II to the Bank Act (Canada) or neither) plus a
 margin equal to 0.75 percent (subject to adjustment as
described below), or (ii) the annual rate of interest
announced from time to time by the Canadian agent bank under the
Revolving Credit Agreement as its prime rate for
commercial loans in Canadian Dollars to borrowers in Canada. At
July 31, 2000, there were no amounts outstanding under the
U.S. Revolving Credit facility. At July 31, 2000, the
U.S. Dollar equivalent of $9.7 million in revolving
credit loans was outstanding under the Canadian Revolving Credit
facility, at an applicable interest rate on such date of
7.50 percent.

  In order to support the Companys longer term
capital financing requirements, the Company issued
$100 million of Senior Notes (the Senior Notes)
on September 23, 1997. These notes bear interest at
8 1/2 percent and are due in 2007. The Senior Notes are
 unsecured and are fully and unconditionally guaranteed by ZDel.
The proceeds were utilized to repay indebtedness under the
Companys Revolving Credit Agreement and for general
corporate purposes. The indenture relating to the Senior Notes
contains certain restrictive covenants including but not limited
to limitations on indebtedness, limitations on dividends and
other restricted payments (including repurchases of the
Companys common stock), limitations on transactions with
affiliates, limitations on liens and limitations on disposition
of proceeds of asset sales, among others. Pursuant to the
Indenture, the Company and the Companys subsidiaries
subject to the Indenture, are prohibited from paying any dividend
 to the direct or indirect holders of capital stock of the
Company or such subsidiary, other than stock dividends or
dividends made to the Company or any such subsidiary.

19



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##### Table of Contents



Capital Growth

During the year ended July 31, 2000, the Company made
approximately $79 million in capital expenditures, a portion
 of which was used to open 84 new stores. Under its continued
growth strategy, the Company plans to open approximately 150 new
stores for which it will incur approximately $50 million in
capital expenditures during the combined fiscal years 2001 and
2002. These stores are expected to solidify the Companys
core mall business by further penetrating markets where the
Company is underrepresented and to expand into new markets such
as outlet malls and selected urban settings. During the combined
fiscal years 2001 and 2002, the Company anticipates spending
approximately $60 million to remodel, relocate or refurbish
approximately 250 additional stores. The Company also
estimates it will make capital expenditures of approximately
$35 million during the combined fiscal years 2001 and 2002
for enhancements to its management information systems and
expansion and development of its e-commerce sites. In total, the
Company anticipates spending approximately $190 million on
capital expenditures during the combined fiscal years 2001 and
2002. The Revolving Credit Agreement limits the Companys
capital expenditures to $110 million for fiscal year 2001.

Other Activities Affecting Liquidity

  Effective July 31, 2000, the Company sold,
without recourse, all of the outstanding accounts receivable
owned by ZFT, an indirect wholly owned subsidiary of the Company,
 to Associates and wholly owned subsidiary of AFCC. The accounts
receivable acquired by Associates constituted substantially all
of the assets of ZFT. The total purchase price for the accounts
receivable was approximately $542 million. The Company
recognized a pretax gain of $0.2 million, net of an
allowance for final settlement and transaction costs. The
purchase price is subject to post-closing adjustment for
improperly classified receivables. The transaction is accounted
for as a sale in accordance with SFAS No. 125. In connection
 with such sale, ZFT paid off all of its outstanding indebtedness
 and the Companys receivables securitization facility was
terminated.

In connection with executing the Receivables Purchase Agreement,
the Company entered into a ten year agreement whereby Hurley will
 issue private label credit cards branded with appropriate
Company trademarks, and provide financing for the Companys
customers to purchase merchandise in exchange for payment by the
Company of a merchant fee based upon a percentage of each credit
card sale. The merchant fee is a percentage per credit sale
credited to the Company under standard revolving accounts and a
percentage per credit sale charged to the Company under certain
promotional credit programs. The Company received a
$41.8 million incentive for entering into the agreement.
Portions of this payment are subject to refund for early
termination of the agreement. This incentive payment will be
recognized ratably over the term of the agreement.

In connection with the Receivables Purchase Agreement, the
Company agreed to merge JNB with and into Hurley (the
Merger). The Company anticipates that the closing of
merger will take place by the first calendar quarter of 2001.
Until consummation of the merger of JNB with and into Hurley, the
 Company will sell without recourse its credit card receivables
to Associates on a daily basis pursuant to an interim purchase
and servicing arrangement. Following consummation of the merger,
AFCC and its affiliates will assume responsibility for JNBs
 previously owned credit operations, including servicing
facilities in San Marcos, Texas; Clearwater, Florida; Tempe,
 Arizona; and San Juan, Puerto Rico.

As a result of the sale of the Companys customer
receivables to AFCC and the Merger, the Companys current
credit processing service agreement with a third-party servicer
will terminate upon conversion to AFCCs systems, which is
expected to occur by the first calendar quarter of 2001.

  Under the terms of the Indenture governing the
Senior Notes, the Company may, within 365 days of the date
of the sale of its private label credit card operations to
Associates and AFCC, invest the net cash proceeds from such sale
(other than any net proceeds required to be applied to repay
permanently any senior indebtedness of the Company) in capital
expenditures, properties and other assets that replace the
properties and assets that were the subject of such sale, in
properties and assets that will be used in the business of the
Company or in reasonably related businesses. To the extent that
all or part of such net cash proceeds are not so applied prior to
 365 days after the sale of the Companys private label
 credit card operations, the Company

20



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##### Table of Contents



pari
passu


  On July 18, 2000, the Company announced a stock
 repurchase program pursuant to which the Company, from time to
time at the discretion of management and the Board of Directors
and in accordance with the Companys usual policies and
applicable securities laws, may purchase up to an aggregate of
$50 million of the Companys common stock on the open
market through July 31, 2001. In April, 2000 the Company
completed a $50 million repurchase program, which was
authorized during September 1999. Under this program, the Company
 repurchased 1.3 million shares in fiscal 2000.

  On August 11, 2000, the Company entered into an
 Agreement and Plan of Merger with Piercing Pagoda, Inc., a
Delaware corporation, pursuant to which the Company through an
indirect wholly owned subsidiary (Jewelry Expansion Corp.) agreed
 to acquire all of the outstanding shares of Piercing Pagoda.

The Company through its subsidiary commenced a tender offer on
August 22, 2000 to purchase all of the outstanding shares of
 Piercing Pagoda, Inc.s $0.01 par value per share
 common stock for $21.50 per share in cash. The tender offer
 expired at 12:00 midnight, New York City time, on
September 19, 2000. Based upon the report of the depository
for the tender offer, at the expiration of the tender offer
approximately 8,943,833 shares, representing
94.7 percent of the outstanding shares of Piercing Pagoda
common stock were validly tendered and not withdrawn pursuant to
the tender offer. On September 20, 2000, the Company
acquired all of the shares of Piercing Pagoda common stock
validly tendered pursuant to the tender offer at a purchase price
 of approximately $192.3 million. In order to complete its
acquisition of Piercing Pagoda, the Company intends to merge
Jewelry Expansion Corp., a wholly owned subsidiary of Zale
Delaware, with and into Piercing Pagoda as soon as practicable.
Pursuant to the merger, each share of Piercing Pagoda common
stock not previously tendered in the tender offer will be
converted into the right to receive $21.50 per share. The
merger is not subject to the approval of the remaining
outstanding shareholders of Piercing Pagoda. The total estimated
purchase price for the acquisition is approximately
$208 million plus the assumption of approximately
$55 million in debt. The acquisition will be accounted for
under the purchase method of accounting.

  The Company has an operations services agreement for
 management information systems with a third-party servicer. The
agreement, which began in December 1996, requires fixed payments
totaling $34.4 million over a 60 month term and a
variable amount based on usage.

  Future liquidity will be enhanced to the extent that
 the Company is able to realize the cash benefit from utilization
 of its NOL against current and future tax liabilities. The cash
benefit realized in fiscal year 2000 was approximately
$8.9 million. As of July 31, 2000, the Company had a
NOL (after limitations) of approximately $170 million, which
 represents up to $67 million in future tax benefits. The
utilization of this asset is subject to limitations. The most
restrictive is the Internal Revenue Code Section 382 annual
limitation. The NOL can be utilized through 2008.

Management believes that operating cash flow and amounts
available under the Revolving Credit Agreement should be
sufficient to fund the Companys current operations, debt
service and currently anticipated capital expenditure
requirements for the foreseeable future.

Year 2000

The Company did not experience any significant malfunctions or
errors in its operating or business systems when the date rolled
from December 31, 1999 to January 1, 2000. Since
January 1, 2000, the Company has not experienced and does
not expect any significant impact to its on-going business as a
result of the date change. Similarly, the Company has not had any
 Year 2000 related problems with suppliers or service
providers.

The Company expended approximately $1.7 million indirect
expenditures and $0.5 million in internal costs in fiscal
year 1998 for expenditures associated with the Year 2000.
Direct costs of $3.5 million and internal costs of
$0.9 million, for a total cost of $4.4 million, were
expended in fiscal year 1999. The Company

21



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##### Table of Contents





Inflation

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



|         |                                                           
|-------- | ----------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risk from changes in interest
rates which may adversely affect its financial position, results
of operations and cash flows. In seeking to minimize the risks
from interest rate fluctuations, the Company manages exposures
through its regular operating and financing activities. The
Company does not use financial instruments for trading or other
speculative purposes and is not party to any leveraged financial
instruments.

The Company is exposed to interest rate risk primarily through
its borrowing activities, which are described under
Short-term Borrowings and Long-term Debt
in the Notes to the Consolidated Financial Statements. The
majority of the Companys borrowings are under variable rate
 arrangements. See Short-term Borrowings and
Long-term Debt Notes to the Consolidated Financial
Statements, which are incorporated herein by reference.

The investments of the Companys insurance subsidiaries,
primarily stocks and bonds in the amount of $27.8 million,
approximate market value at July 31, 2000.

Based on the Companys market risk sensitive instruments
(including variable rate debt) outstanding at July 31, 2000,
 the Company has determined that there was no material market
risk exposure to the Companys consolidated financial
position, results of operations or cash flows as of such date.

As a result of its Canadian operations, the Company is exposed to
 market risk from currency exchange rate exposure which may
adversely affect the Companys financial position, results
of operations and cash flows. In seeking to minimize this risk,
the Company manages exposures through its regular operating and
financing activities. Based on the Companys market risk
from currency exchange rate exposure at July 31, 2000, the
Company believes that there was no material market risk exposure
to the Companys consolidated financial position, results of
 operations or cash flows on such date.

Item 8.  Financial Statements and Supplementary
Data

The following Consolidated Financial Statements of the Company
and supplementary data are included as pages F-1 through
F-30 at the end of this Annual Report on Form 10-K:

|                                                    |  |        |     | 
|--------------------------------------------------- |  | ------ | --- | 
|                                                    |  | Page  
|Index                                               |  | Number
|                                                    |  |       
|Managements Report                                 |  |        | F-2 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Report of Independent Public Accountants            |  |        | F-3 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Consolidated Statements of Operations               |  |        | F-4 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Consolidated Balance Sheets                         |  |        | F-5 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Consolidated Statements of Cash Flows               |  |        | F-6 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Consolidated Statements of Stockholders Investment |  |        | F-7 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Notes to Consolidated Financial Statements          |  |        | F-9 | 



|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on Accounting
	 and Financial Disclosure

None.

22



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##### Table of Contents






PART III

The information required to be included in Part III of this
Annual Report on Form 10-K is incorporated by reference to
the Companys Proxy Statement for the 2000 Annual Meeting of
 Stockholders.




PART IV



|         |                                                                  
|-------- | -----------------------------------------------------------------
|Item 14. | Exhibits, Financial Statements Schedules and Reports on
	Form 8-K

The following documents are filed as part of this report.

1.  Financial Statements

The list of financial statements required by this item is set
forth in Item 8.

2.  Index to Financial Statement Schedules

|                                                |  |        |    | 
|----------------------------------------------- |  | ------ | -- | 
|                                                |  | Page  
|                                                |  | Number
|                                                |  |       
|Report of Independent Public Accountants        |  |        | 27 | 
|                                               
|                                               
|                                               
|                                               
|Schedule II  Valuation and Qualifying Accounts |  |        | 28 | 

All other financial statements and financial statement schedules
for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not
required under the related instructions, are not material or are
not applicable and, therefore, have been omitted or are included
in the consolidated financial statements or notes thereto.

3.  Exhibits

|            |        |             |  |                                                                                                                                                                    
|----------- | ------ | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |        | Description
|            |        |            
|            | 2.1    |             |  |  Purchase of Assets Agreement, dated June 2,
	1999, between Zale Canada Co. and Peoples Jewellers
	Corporation.(11)                                               
|            | 2.2    |             |  |  Receivables Purchase Agreement, between Zale Funding
	Trust, as Seller, and Associates Credit Card Services, 
	Inc., as Purchaser, dated as of July 10, 2000.(14)
|            | 2.3    |             |  |  Agreement and Plan of Merger, by and among Jewelers
	National Bank, Zale Delaware, Inc. and Hurley State Bank,
	dated as of July 10, 2000.(14)                   
|            | 2.4    |             |  |  Agreement and Plan of Merger, by and among Zale
	Corporation, Jewelry Expansion Corp. And Piercing
	Pagoda, Inc., dated as of August 11, 2000.(15)               
|            | 3.1    |             |  |  Restated Certificate of Incorporation of Zale
	Corporation, dated July 30, 1993.(1)                                                                              
|            | 3.2    |             |  |  Amended and Restated Bylaws of Zale Corporation.(14)                                                                                                             
|            | 4.1    |             |  |  Amended and Restated Revolving Credit Agreement dated
	 March 30, 2000.(13)                                                                                      
|            | 4.2    |             |  |  Indenture dated September 30, 1997, by and among
	 Zale Corporation, Zale Delaware, Inc. and Bank One, N.A. as
	 Trustee.(8)                                     
|            | 10.2   |             |  |  Indemnification agreement, dated as of July 21,
	1993, between Zale Corporation and certain present and former
	directors thereof.(3)                            
|            | *10.3a |             |  |  Zale Corporation Stock Option Plan.(1)                                                                                                                           
|            | *10.3b |             |  |  Amended and Restated Omnibus Stock Incentive
	Plan.(14)                                                                                                          
|            | *10.3c |             |  |  Outside Directors 1995 Stock Option Plan.(16)                                                                                                                   
|            | *10.4  |             |  |  The Executive Severance Plan for Zale Corporation and
	 Its Affiliates, as amended and restated as of February 10,
	1994.(2)                                     

23



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##### Table of Contents



|            |         |             |  |                                                                                                                                                                                            
|----------- | ------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |         | Description
|            |         |            
|            | *10.4a  |             |  |  Amendment to The Executive Severance Plan for Zale
	Corporation and Its Affiliates effective May 20, 1995.(4)                                                                            
|            | 10.6    |             |  |  Lease Agreement Between Principal Mutual Life
	Insurance Company, As Landlord, and Zale Corporation, as Debtor
	and Debtor-In-Possession, As Tenant, dated as of September 
	17, 1992.(4)
|            | 10.6a   |             |  |  First Lease Amendment and Agreement between Principal
	 Mutual Life Insurance Company and Zale Delaware, Inc.,
	dated as of February 1, 1996.(4)                                         
|            | 10.7    |             |  |  Indemnification Agreement, executed on
	October 30, 1996, and dated as of June 6, 1996, between
	 Zale Corporation and Andrea Jung.(5)                                                   
|            | *10.8   |             |  |  Form of Change of Control Agreement dated as of
	October  30, 1996, but executed thereafter, between Zale
	Corporation and Key Employees.(6)                                             
|            | 10.8a   |             |  |  Modified list of parties to Change of Control
	Agreement.(9)                                                                                                                             
|            | 10.9    |             |  |  Asset Purchase Agreement, dated September 3,
	1997, by and among Finlay Enterprises, Inc., Finlay Fine
	Jewelry Corporation, Zale Corporation and Zale
	Delaware, Inc.(9)                
|            | 10.10   |             |  |  Seller Restrictive Covenant Agreement, dated as of
	June  2, 1999, between Peoples Jewellers Corporation, Zale
	Canada Co. and Zale Corporation.(11)                                     
|            | *10.11  |             |  |  Employment Agreement, dated as of August 1,
	1997, between Zale Corporation and Robert J. DiNicola.(9)                                                                                   
|            | *10.11a |             |  |  Amended and Restated Employment Agreement, dated
	September 7, 1999, between Zale Corporation and Robert 
	 J. DiNicola.(11)                                                             
|            | *10.11b |             |  |  Seconded Amended and Restated Employment Agreement
	dated August 1, 2000, between Zale Corporation and
	Robert J. DiNicola.(14)                                                          
|            | *10.11c |             |  |  Consulting Agreement, dated September 6, 2000,
	between Zale Corporation and Robert J. DiNicola.(14)                                                                                     
|            | *10.12  |             |  |  Employment Agreement, dated as of August 1,
	1998, between Zale Corporation and Beryl B. Raff.(9)                                                                                        
|            | *10.13  |             |  |  Employment Agreement, dated as of August 1,
	1998, between Zale Corporation and Alan P. Shor.(9)                                                                                         
|            | *10.14  |             |  |  Employment Agreement, dated as of January 15,
	1998 between Zale Corporation and Mary L. Forté.(9)                                                                                       
|            | *10.15  |             |  |  Employment Agreement, dated as of August 1,
	1998, between Zale Corporation and Sue E. Gove.(9)                                                                                          
|            | *10.16  |             |  |  Amendment to Employment Agreement, dated as of
	October  8, 1998, between Zale Corporation and
	Robert J. DiNicola.(10)                                                                  
|            | *10.17  |             |  |  Amendment to Employment Agreement, dated as of
	October  8, 1998, between Zale Corporation and Beryl B.
	 Raff.(10)                                                                      
|            | *10.18  |             |  |  Amendment to Employment Agreement, dated as of
	October  8, 1998, between Zale Corporation and Alan P.
	Shor.(10)                                                                        
|            | *10.19  |             |  |  Amendment to Employment Agreement, dated as of
	October  8, 1998, between Zale Corporation and Mary L.
	Forté.(10)                                                                       
|            | *10.20  |             |  |  Amendment to Employment Agreement, dated as of
	October  8, 1998, between Zale Corporation and Sue E.
	Gove.(10)                                                                         
|            | *10.21  |             |  |  Amendment to Employment Agreement, dated as of
	September  7, 1999, between Zale Corporation and
	Beryl B Raff.(14)                                                                      

24



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##### Table of Contents



|            |    |             |  |                                                 
|----------- | -- | ----------- |  | ------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 21 |             |  |  Subsidiaries of the registrant.(14)           
|            | 23 |             |  |  Consent of Independent Public Accountants.(14)
|            | 27 |             |  |  Financial data schedule.(14)                  



---



| |     |                                                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Previously filed as an exhibit to the registrants
	Form 10-Q (No. 1-4129) for the quarterly period ended
	September 30, 1993, and incorporated herein by reference.                       
|
| | (2) | Incorporated by reference to the corresponding exhibit to the
	registrants Registration Statement on Form S-1
	(No. 33-73310) filed with the Commission on
	December 23, 1993, as amended.
|
| | (3) | Previously filed as an exhibit to the registrants
	Form 10-K (No. 0-21526) for the fiscal year ended
	July 31, 1995, and incorporated herein by reference.                                
|
| | (4) | Previously filed as an exhibit to the registrants
	Form 10-K (No. 0-21526) for the fiscal year ended
	July 31, 1996, and incorporated herein by reference.                                
|
| | (5) | Previously filed as an exhibit to the registrants
	Form 10-Q for the quarterly period ended October 31,
	1996, and incorporated herein by reference.                                      
|
| | (6) | Previously filed as an exhibit to the registrants
	Form 10-Q for the quarterly period ended January 31,
	1997, and incorporated herein by reference.                                      
|
| | (7) | Previously filed as an exhibit to the registrants
	Form 10-K (No. 0-21526) for the fiscal year ended
	July 31, 1997, and incorporated herein by reference.                                
|
| | (8) | Incorporated by reference to Exhibit 4.1 to the
	registrants Registration Statement on Form S-4
	(No. 33-39473) filed with the Commission on November 4,
	 1997.                          
|
| | (9) | Previously filed as an exhibit to the registrants
	Form 10-K (No. 1-04129) for the fiscal year ended
	July 31, 1998, and incorporated herein by reference.                                



|     |                                                                                                                                                                                  
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Previously filed as an exhibit to the registrants
	Form 10-Q for the quarterly period ended October 31,
	1998, and incorporated herein by reference.                            
|    
|(11) | Previously filed as an exhibit to the registrants
	Form 10-K (No. 1-04129) for the fiscal year ended
	July 31, 1999, and incorporated herein by reference.                      
|    
|(12) | Previously filed as an exhibit to the registrants
	Form 10-Q for the quarterly period October 31, 1999,
	and incorporated herein by reference.                                  
|    
|(13) | Previously filed as an exhibit to the registrants
	Form 10-Q for the quarterly period April 30, 2000, and
	incorporated herein by reference.                                    
|    
|(14) | Filed herewith.                                                                                                                                                                  
|    
|(15) | Incorporated by reference to Exhibit 10.64 to Piercing
	Pagoda, Inc.s Form  10-Q for the quarter ended
	June 30, 2000, previously filed with the Commission on
	August 14, 2000.
|    
|(16) | Incorporated by reference to the corresponding exhibit to the
	Registration Statement on Form S-8 (33-01789) filed with the
	 Commission on March 18, 1996.                      



| |   |                                             
| | - | --------------------------------------------
| | * | Management Contracts and Compensatory Plans.

4.  Reports on Form 8-K

| |  |  |  |                                                                                                                                                                                                             
| |  |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |  |  The Company filed a Current Report on Form 8-K
	on July  10, 2000 reporting the sale of the Companys
	private label credit card business under Item 5 and
	enclosing a press release dated July 10, 2000.
| |  |  |  |  The Company filed a Current Report on Form 8-K
	on July  18, 2000 reporting the authorization of a stock
	repurchase program under Item 5 and enclosing a press
	release dated July 18, 2000.             

25



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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                    |  |      |     | 
|--------------------------------------------------- |  | ---- | --- | 
|                                                    |  | Page
|                                                    |  |     
|Managements Report                                 |  |      | F-2 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Report of Independent Public Accountants            |  |      | F-3 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Consolidated Statements of Operations               |  |      | F-4 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Consolidated Balance Sheets                         |  |      | F-5 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Consolidated Statements of Cash Flows               |  |      | F-6 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Consolidated Statements of Stockholders Investment |  |      | F-7 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Notes to Consolidated Financial Statements          |  |      | F-9 | 

F-1



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##### Table of Contents






MANAGEMENTS REPORT

To the Stockholders of Zale Corporation:

The integrity and consistency of the consolidated financial
statements of Zale Corporation (the Company), which
were prepared in accordance with generally accepted accounting
principles, are the responsibility of management and properly
include some amounts that are based upon estimates and judgments.

The Company maintains a system of internal accounting controls to
 provide reasonable assurance, at appropriate cost, that the
Companys assets are protected and transactions are properly
 recorded. Additionally, the integrity of the financial
accounting system is based on careful selection and training of
qualified personnel, organizational arrangements which provide
for appropriate division of responsibilities and communication of
 established written policies and procedures.

The consolidated financial statements of the Company have been
audited by Arthur Andersen LLP, independent public
accountants. Their report expresses their opinion as to the fair
presentation, in all material respects, of the financial
statements and is based upon their independent audit conducted in
 accordance with generally accepted auditing standards.

The Audit Committee, composed solely of outside directors, meets
periodically with the independent public accountants and
representatives of management to discuss auditing and financial
reporting matters. In addition, the independent public
accountants meet periodically with the Audit Committee without
management representatives present and have free access to the
Audit Committee at any time. The Audit Committee is responsible
for recommending to the Board of Directors the engagement of the
independent public accountants, which is subject to stockholder
approval, and the general oversight review of managements
discharge of its responsibilities with respect to the matters
referred to above.

|                                                                |  |                                                              |  |                                                                 
|--------------------------------------------------------------- |  | ------------------------------------------------------------ |  | ----------------------------------------------------------------
|Beryl B. RaffChairman of the Board and
	Chief Executive Officer |  | Alan P. ShorPresident and
	Chief Operating Officer, Director |  | Sue E. GoveExecutive Vice President and
	Chief Financial Officer

F-2



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##### Table of Contents






REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Zale Corporation:

We have audited the accompanying consolidated balance sheets of
Zale Corporation (a Delaware corporation) and subsidiaries as of
July 31, 2000 and 1999, and the related consolidated
statements of operations, cash flows, and stockholders
investment for each of the three years in the period ended
July 31, 2000. These consolidated financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to
 above present fairly, in all material respects, the financial
position of Zale Corporation and subsidiaries as of July 31,
 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended
July 31, 2000, in conformity with accounting principles
generally accepted in the United States.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

Dallas, Texas













F-3



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES






CONSOLIDATED STATEMENTS OF OPERATIONS


(amounts in thousands, except per share amounts)


|                                                                                    |         |            |           |            |  |            |           |        |  |   |           |        | 
|----------------------------------------------------------------------------------- | ------- | ---------- | --------- | ---------- |  | ---------- | --------- | ------ |  | - | --------- | ------ | 
|                                                                                    |         | Year Ended |           | Year Ended |  | Year Ended
|                                                                                    |         | July 31,   |           | July 31,   |  | July 31,  
|                                                                                    |         | 2000       |           | 1999       |  | 1998      
|                                                                                    |         |            |           |            |  |           
|Net Sales                                                                           |         | $          | 1,793,596 |            |  | $          | 1,428,868 |        |  | $ | 1,313,710 |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Cost of Sales                                                                       |         |            | 920,003   |            |  |            | 737,188   |        |  |   | 681,908   |       
|                                                                                    |         |            |           |            |  |            |           |        |  |   |           |       
|Gross Margin                                                                        |         |            | 873,593   |            |  |            | 691,680   |        |  |   | 631,802   |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Selling, General and Administrative Expenses                                        |         |            | 620,744   |            |  |            | 502,279   |        |  |   | 475,846   |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Depreciation and Amortization Expense                                               |         |            | 42,431    |            |  |            | 29,478    |        |  |   | 22,565    |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Unusual Item  Gain on Sale of Diamond Park Fine
	Jewelers                          |         |            |          |            |  |            |          |        |  |   | (1,634    | )     
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Unusual Item  Gain on Sale of Land                                                 |         |            |          |            |  |            |          |        |  |   | (7,313    | )     
|                                                                                    |         |            |           |            |  |            |           |        |  |   |           |       
|Operating Earnings                                                                  |         |            | 210,418   |            |  |            | 159,923   |        |  |   | 142,338   |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Interest Expense, Net                                                               |         |            | 32,178    |            |  |            | 30,488    |        |  |   | 32,039    |       
|                                                                                    |         |            |           |            |  |            |           |        |  |   |           |       
|Earnings Before Income Taxes                                                        |         |            | 178,240   |            |  |            | 129,435   |        |  |   | 110,299   |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Income Taxes                                                                        |         |            | 66,726    |            |  |            | 48,503    |        |  |   | 41,362    |       
|                                                                                    |         |            |           |            |  |            |           |        |  |   |           |       
|Net Earnings                                                                        |         | $          | 111,514   |            |  | $          | 80,932    |        |  | $ | 68,937    |       
|                                                                                    |         |            |           |            |  |            |           |        |  |   |           |       
|Earnings Per Common Share:                                                          |         |            |           |            |  |            |           |        |  |   |           |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Basic   |            | $         | 3.16       |  |            | $         | 2.24   |  |   | $         | 1.96   | 
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Diluted |            | $         | 3.11       |  |            | $         | 2.21   |  |   | $         | 1.84   | 
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Weighted Average Number of Common Shares and Common Share
	Equivalents Outstanding: |         |            |           |            |  |            |           |        |  |   |           |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Basic   |            |           | 35,326     |  |            |           | 36,137 |  |   |           | 35,201 | 
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Diluted |            |           | 35,883     |  |            |           | 36,688 |  |   |           | 37,368 | 

See Notes to the Consolidated Financial Statements.

F-4



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES






CONSOLIDATED BALANCE SHEETS


(amounts in thousands)


|                                                                   |                                          |          |           |          |   |   |           |         |  
|------------------------------------------------------------------ | ---------------------------------------- | -------- | --------- | -------- | - | - | --------- | ------- | -
|                                                                   |                                          | July 31, |           | July 31,
|                                                                   |                                          | 2000     |           | 1999    
|                                                                   |                                          |          |           |         
|ASSETS                                                            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Current Assets:                                                    |                                          |          |           |          |   |   |           |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Cash and Cash Equivalents                |          | $         | 298,234  |   |   | $         | 35,403  |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Restricted Cash                          |          |           | 3,913    |   |   |           | 6,029   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Customer Receivables, Net                |          |           |         |   |   |           | 510,714 |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Merchandise Inventories                  |          |           | 630,450  |   |   |           | 571,669 |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Other Current Assets                     |          |           | 42,551   |   |   |           | 36,827  |  
|                                                                   |                                          |          |           |          |   |   |           |        
|Total Current Assets                                               |                                          |          | 975,148   |          |   |   | 1,160,642 |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Property and Equipment, Net                                        |                                          |          | 231,255   |          |   |   | 203,841   |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other Assets                                                       |                                          |          | 100,190   |          |   |   | 99,654    |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Deferred Tax Asset, Net                                            |                                          |          | 63,696    |          |   |   | 62,795    |        
|                                                                   |                                          |          |           |          |   |   |           |        
|Total Assets                                                       |                                          | $        | 1,370,289 |          |   | $ | 1,526,932 |        
|                                                                   |                                          |          |           |          |   |   |           |        
|                                                                  
|LIABILITIES AND STOCKHOLDERS INVESTMENT                          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Current Liabilities:                                               |                                          |          |           |          |   |   |           |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Short-term Borrowings                    |          | $         |         |   |   | $         | 353,000 |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accounts Payable and Accrued Liabilities |          |           | 286,279  |   |   |           | 237,392 |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Deferred Tax Liability, Net              |          |           | 22,692   |   |   |           | 13,364  |  
|                                                                   |                                          |          |           |          |   |   |           |        
|Total Current Liabilities                                          |                                          |          | 308,971   |          |   |   | 603,756   |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Non-current Liabilities                                            |                                          |          | 122,987   |          |   |   | 70,892    |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Long-term Debt                                                     |                                          |          | 109,369   |          |   |   | 99,589    |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Excess of Revalued Net Assets Over Stockholders Investment,
	 Net |                                          |          | 47,185    |          |   |   | 53,084    |        
|Commitments and Contingencies                                      |                                          |          |           |          |   |   |           |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Stockholders Investment:                                          |                                          |          |           |          |   |   |           |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Preferred Stock                          |          |           |         |   |   |           |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Common Stock                             |          |           | 396      |   |   |           | 392     |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Additional Paid-In Capital               |          |           | 518,326  |   |   |           | 504,300 |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accumulated Other Comprehensive Income   |          |           | 411      |   |   |           | 376     |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accumulated Earnings                     |          |           | 403,787  |   |   |           | 292,273 |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Deferred Compensation                    |          |           | (1,786   | ) |   |           | (5,005  | )
|                                                                   |                                          |          |           |          |   |   |           |        
|                                                                   |                                          |          | 921,134   |          |   |   | 792,336   |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Treasury Stock                           |          |           | (139,357 | ) |   |           | (92,725 | )
|                                                                   |                                          |          |           |          |   |   |           |        
|Total Stockholders Investment                                     |                                          |          | 781,777   |          |   |   | 699,611   |        
|                                                                   |                                          |          |           |          |   |   |           |        
|Total Liabilities and Stockholders Investment                     |                                          | $        | 1,370,289 |          |   | $ | 1,526,932 |        
|                                                                   |                                          |          |           |          |   |   |           |        

See Notes to the Consolidated Financial Statements.

F-5



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES






CONSOLIDATED STATEMENTS OF CASH FLOWS


(amounts in thousands)


|                                                                                     |                                                            |            |          |            |   |            |          |         |   |   |          |         |  
|------------------------------------------------------------------------------------ | ---------------------------------------------------------- | ---------- | -------- | ---------- | - | ---------- | -------- | ------- | - | - | -------- | ------- | -
|                                                                                     |                                                            | Year Ended |          | Year Ended |   | Year Ended
|                                                                                     |                                                            | July 31,   |          | July 31,   |   | July 31,  
|                                                                                     |                                                            | 2000       |          | 1999       |   | 1998      
|                                                                                     |                                                            |            |          |            |   |           
|Net Cash Flows from Operating Activities:                                            |                                                            |            |          |            |   |            |          |         |   |   |          |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Net earnings                                                                         |                                                            | $          | 111,514  |            |   | $          | 80,932   |         |   | $ | 68,937   |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Adjustments to reconcile net earnings to net cash provided by
	operating activities: |                                                            |            |          |            |   |            |          |         |   |   |          |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Depreciation and amortization expense                      |            |          | 44,325     |   |            |          | 31,252  |   |   |          | 23,689  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Amortization of deferred compensation                      |            |          | 3,219      |   |            |          | 709     |   |   |          |        |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Deferred taxes and utilization of NOL operating losses     |            |          | 23,427     |   |            |          | 7,633   |   |   |          | 34,544  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Tax benefit associated with stock option exercises         |            |          | 4,156      |   |            |          | 6,800   |   |   |          |        |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Unusual Item  Gain on Sale of Diamond Park Fine
	Jewelers |            |          |           |   |            |          |        |   |   |          | (1,634  | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Unusual Item  Gain on Sale of Land                        |            |          |           |   |            |          |        |   |   |          | (7,313  | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Changes in assets and liabilities, net of Peoples Jewellers
	acquisition:            |                                                            |            |          |            |   |            |          |         |   |   |          |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Restricted cash                                            |            |          | 2,116      |   |            |          | 163     |   |   |          | 2,821   |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Customer receivables, net                                  |            |          | (27,036    | ) |            |          | (15,223 | ) |   |          | (41,198 | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Merchandise inventories                                    |            |          | (56,209    | ) |            |          | (57,976 | ) |   |          | (19,277 | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Other current assets                                       |            |          | (5,715     | ) |            |          | (7,966  | ) |   |          | 12,551  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Other assets                                               |            |          | (517       | ) |            |          | 367     |   |   |          | 122     |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Accounts payable and accrued liabilities                   |            |          | 43,178     |   |            |          | 34,628  |   |   |          | 45,144  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Non-current liabilities                                    |            |          | (525       | ) |            |          | (173    | ) |   |          | (5,613  | )
|                                                                                     |                                                            |            |          |            |   |            |          |         |   |   |          |        
|Net Cash Provided by Operating Activities                                            |                                                            |            | 141,933  |            |   |            | 81,146   |         |   |   | 112,773  |        
|                                                                                     |                                                            |            |          |            |   |            |          |         |   |   |          |        
|Net Cash Flows from Investing Activities:                                            |                                                            |            |          |            |   |            |          |         |   |   |          |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Additions to property and equipment                                                  |                                                            |            | (78,618  | )          |   |            | (59,538  | )       |   |   | (63,497  | )      
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Dispositions of property and equipment                                               |                                                            |            | 3,198    |            |   |            | 1,941    |         |   |   | 649      |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Proceeds from sale of credit card receivables, net of transaction
	 costs            |                                                            |            | 583,676  |            |   |            |         |         |   |   |         |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Acquisition of Peoples Jewellers, net of cash acquired                               |                                                            |            |         |            |   |            | (96,662  | )       |   |   |         |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Proceeds from Sale of Diamond Park Fine Jewelers                                     |                                                            |            |         |            |   |            |         |         |   |   | 62,443   |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Proceeds from Sale of Land                                                           |                                                            |            |         |            |   |            |         |         |   |   | 12,911   |        
|                                                                                     |                                                            |            |          |            |   |            |          |         |   |   |          |        
|Net Cash Provided by (Used in) Investing Activities                                  |                                                            |            | 508,256  |            |   |            | (154,259 | )       |   |   | 12,506   |        
|                                                                                     |                                                            |            |          |            |   |            |          |         |   |   |          |        
|Net Cash Flows from Financing Activities:                                            |                                                            |            |          |            |   |            |          |         |   |   |          |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Net (decrease) increase in short term borrowings                                     |                                                            |            | (250,000 | )          |   |            | 250,000  |         |   |   |         |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Payments on long-term debt                                                           |                                                            |            |         |            |   |            |         |         |   |   | (410     | )      
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Payments on receivables securitization facility                                      |                                                            |            |         |            |   |            | (380,760 | )       |   |   |         |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Payments on revolving credit agreement                                               |                                                            |            | (568,038 | )          |   |            | (3,500   | )       |   |   | (192,900 | )      
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Borrowings under revolving credit agreement                                          |                                                            |            | 474,782  |            |   |            | 106,500  |         |   |   | 122,200  |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Net proceeds from issuance of senior notes                                           |                                                            |            |         |            |   |            |         |         |   |   | 99,530   |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Debt issue and capitalized financing costs                                           |                                                            |            | (2,226   | )          |   |            | (1,094   | )       |   |   | (2,621   | )      
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Proceeds from exercise of stock options                                              |                                                            |            | 8,042    |            |   |            | 14,244   |         |   |   | 9,198    |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Proceeds from exercise of warrants                                                   |                                                            |            |         |            |   |            |         |         |   |   | 20,170   |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Purchase of common stock                                                             |                                                            |            | (49,997  | )          |   |            | (49,943  | )       |   |   | (40,000  | )      
|                                                                                     |                                                            |            |          |            |   |            |          |         |   |   |          |        
|Net Cash (Used in) Provided by Financing Activities                                  |                                                            |            | (387,437 | )          |   |            | (64,553  | )       |   |   | 15,167   |        
|                                                                                     |                                                            |            |          |            |   |            |          |         |   |   |          |        
|Effect of Exchange Rate Changes on Cash                                              |                                                            |            | 79       |            |   |            |         |         |   |   |         |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Net Increase (Decrease) in Cash and Cash Equivalents                                 |                                                            |            | 262,831  |            |   |            | (137,666 | )       |   |   | 140,446  |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Cash and Cash Equivalents at Beginning of Period                                     |                                                            |            | 35,403   |            |   |            | 173,069  |         |   |   | 32,623   |        
|                                                                                     |                                                            |            |          |            |   |            |          |         |   |   |          |        
|Cash and Cash Equivalents at End of Period                                           |                                                            | $          | 298,234  |            |   | $          | 35,403   |         |   | $ | 173,069  |        
|                                                                                     |                                                            |            |          |            |   |            |          |         |   |   |          |        
|Supplemental cash flow information:                                                  |                                                            |            |          |            |   |            |          |         |   |   |          |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Interest paid                                              |            | $        | 32,897     |   |            | $        | 35,956  |   |   | $        | 35,853  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Interest received                                          |            | $        | 1,465      |   |            | $        | 7,289   |   |   | $        | 7,776   |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Income taxes paid (net of refunds received)                |            | $        | 44,785     |   |            | $        | 39,403  |   |   | $        | 1,741   |  

See Notes to the Consolidated Financial Statements.

F-6



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES






CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT


(amounts in thousands)


|                                              |  |               |        |        |  |            |     |               |  |   |         |   |  |   |        |  
|--------------------------------------------- |  | ------------- | ------ | ------ |  | ---------- | --- | ------------- |  | - | ------- | - |  | - | ------ | -
|                                              |  |               |        |        |  |            |     | Accumulated  
|                                              |  | Number of     |        |        |  | Additional |     | Other        
|                                              |  | Common Shares |        | Common |  | Paid-In    |     | Comprehensive
|                                              |  | Outstanding   |        | Stock  |  | Capital    |     | Income       
|                                              |  |               |        |        |  |            |     |              
|Balance July 31, 1997                         |  |               | 35,022 |        |  | $          | 350 |               |  | $ | 401,121 |   |  | $ | 2,182  |  
|                                             
|                                             
|                                             
|                                             
|                                             
|Net Earnings                                  |  |               |       |        |  |            |    |               |  |   |        |   |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Unrealized Gain on Securities, net            |  |               |       |        |  |            |    |               |  |   |        |   |  |   | 669    |  
|                                             
|                                             
|                                             
|                                             
|Reduction of Tax Valuation Allowance          |  |               |       |        |  |            |    |               |  |   | 46,572  |   |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Exercise of Stock Options                     |  |               | 768    |        |  |            | 11  |               |  |   | 9,187   |   |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Exercise of Warrants                          |  |               | 1,945  |        |  |            | 19  |               |  |   | 20,151  |   |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Purchase of Common Stock                      |  |               | (1,365 | )      |  |            |    |               |  |   |        |   |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Recoveries of Common Stock                    |  |               | (5     | )      |  |            |    |               |  |   | 166     |   |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Contribution to 401(k) plan                   |  |               | 35     |        |  |            |    |               |  |   | 460     |   |  |   |       |  
|                                              |  |               |        |        |  |            |     |               |  |   |         |   |  |   |        |  
|Balance July 31, 1998                         |  |               | 36,400 |        |  |            | 380 |               |  |   | 477,657 |   |  |   | 2,851  |  
|                                              |  |               |        |        |  |            |     |               |  |   |         |   |  |   |        |  
|Net Earnings                                  |  |               |       |        |  |            |    |               |  |   |        |   |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Unrealized Loss on Securities, net            |  |               |       |        |  |            |    |               |  |   |        |   |  |   | (285   | )
|                                             
|                                             
|                                             
|                                             
|Cumulative Translation Adjustments            |  |               |       |        |  |            |    |               |  |   |        |   |  |   | (2,190 | )
|                                             
|                                             
|                                             
|                                             
|Exercise of Stock Options, net of tax benefit |  |               | 1,019  |        |  |            | 10  |               |  |   | 21,034  |   |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Purchase of Common Stock                      |  |               | (1,669 | )      |  |            |    |               |  |   |        |   |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Contribution to 401(k) plan                   |  |               | 52     |        |  |            |    |               |  |   | (104    | ) |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Restricted Stock Awards                       |  |               | 181    |        |  |            | 2   |               |  |   | 5,713   |   |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Deferred Compensation Amortization            |  |               |       |        |  |            |    |               |  |   |        |   |  |   |       |  
|                                              |  |               |        |        |  |            |     |               |  |   |         |   |  |   |        |  
|Balance July 31, 1999                         |  |               | 35,983 |        |  |            | 392 |               |  |   | 504,300 |   |  |   | 376    |  
|                                              |  |               |        |        |  |            |     |               |  |   |         |   |  |   |        |  
|Net Earnings                                  |  |               |       |        |  |            |    |               |  |   |        |   |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Unrealized Loss on Securities, net            |  |               |       |        |  |            |    |               |  |   |        |   |  |   | (1,578 | )
|                                             
|                                             
|                                             
|                                             
|Cumulative Translation Adjustments            |  |               |       |        |  |            |    |               |  |   |        |   |  |   | 1,613  |  
|                                             
|                                             
|                                             
|                                             
|Exercise of Stock Options, net of tax benefit |  |               | 422    |        |  |            | 4   |               |  |   | 12,194  |   |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Purchase of Common Stock                      |  |               | (1,275 | )      |  |            |    |               |  |   |        |   |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Contribution to 401(k) plan                   |  |               | 131    |        |  |            |    |               |  |   | 1,832   |   |  |   |       |  
|                                             
|                                             
|                                             
|                                             
|Deferred Compensation Amortization            |  |               |       |        |  |            |    |               |  |   |        |   |  |   |       |  
|                                              |  |               |        |        |  |            |     |               |  |   |         |   |  |   |        |  
|Balance July 31, 2000                         |  |               | 35,261 |        |  | $          | 396 |               |  | $ | 518,326 |   |  | $ | 411    |  
|                                              |  |               |        |        |  |            |     |               |  |   |         |   |  |   |        |  

See Notes to the Consolidated Financial Statements.

F-7



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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES






CONSOLIDATED STATEMENTS OF STOCKHOLDERS
INVESTMENT  (Continued)


(amounts in thousands)


|                                              |  |             |         |              |  |          |        |            |  |               |           |   |  |   |         |   |  |   |         |  
|--------------------------------------------- |  | ----------- | ------- | ------------ |  | -------- | ------ | ---------- |  | ------------- | --------- | - |  | - | ------- | - |  | - | ------- | -
|                                              |  | Accumulated |         | Deferred     |  | Treasury |        | Total      |  | Comprehensive
|                                              |  | Earnings    |         | Compensation |  | Stock    |        | Investment |  | Income       
|                                              |  |             |         |              |  |          |        |            |  |              
|Balance July 31, 1997                         |  | $           | 142,404 |              |  | $        |       |            |  | $             | (4,483    | ) |  | $ | 541,574 |   |  | $ | 51,722  |  
|                                             
|                                             
|                                             
|                                             
|                                             
|Net Earnings                                  |  |             | 68,937  |              |  |          |       |            |  |               |          |   |  |   | 68,937  |   |  |   | 68,937  |  
|                                             
|                                             
|                                             
|                                             
|Unrealized Gain on Securities, net            |  |             |        |              |  |          |       |            |  |               |          |   |  |   | 669     |   |  |   | 669     |  
|                                             
|                                             
|                                             
|                                             
|Reduction of Tax Valuation Allowance          |  |             |        |              |  |          |       |            |  |               |          |   |  |   | 46,572  |   |  |   |        |  
|                                             
|                                             
|                                             
|                                             
|Exercise of Stock Options                     |  |             |        |              |  |          |       |            |  |               |          |   |  |   | 9,198   |   |  |   |        |  
|                                             
|                                             
|                                             
|                                             
|Exercise of Warrants                          |  |             |        |              |  |          |       |            |  |               |          |   |  |   | 20,170  |   |  |   |        |  
|                                             
|                                             
|                                             
|                                             
|Purchase of Common Stock                      |  |             |        |              |  |          |       |            |  |               | (40,000   | ) |  |   | (40,000 | ) |  |   |        |  
|                                             
|                                             
|                                             
|                                             
|Recoveries of Common Stock                    |  |             |        |              |  |          |       |            |  |               | (166      | ) |  |   |        |   |  |   |        |  
|                                             
|                                             
|                                             
|                                             
|Contribution to 401(k) plan                   |  |             |        |              |  |          |       |            |  |               | 481       |   |  |   | 941     |   |  |   |        |  
|                                              |  |             |         |              |  |          |        |            |  |               |           |   |  |   |         |   |  |   |         |  
|Balance July 31, 1998                         |  |             | 211,341 |              |  |          |       |            |  |               | (44,168   | ) |  |   | 648,061 |   |  |   | 69,606  |  
|                                              |  |             |         |              |  |          |        |            |  |               |           |   |  |   |         |   |  |   |         |  
|Net Earnings                                  |  |             | 80,932  |              |  |          |       |            |  |               |          |   |  |   | 80,932  |   |  |   | 80,932  |  
|                                             
|                                             
|                                             
|                                             
|Unrealized Gain on Securities, net            |  |             |        |              |  |          |       |            |  |               |          |   |  |   | (285    | ) |  |   | (285    | )
|                                             
|                                             
|                                             
|                                             
|Cumulative Translation Adjustments            |  |             |        |              |  |          |       |            |  |               |          |   |  |   | (2,190  | ) |  |   | (2,190  | )
|                                             
|                                             
|                                             
|                                             
|Exercise of Stock Options, net of tax benefit |  |             |        |              |  |          |       |            |  |               |          |   |  |   | 21,044  |   |  |   |        |  
|                                             
|                                             
|                                             
|                                             
|Purchase of Common Stock                      |  |             |        |              |  |          |       |            |  |               | (49,943   | ) |  |   | (49,943 | ) |  |   |        |  
|                                             
|                                             
|                                             
|                                             
|Contribution to 401(k) plan                   |  |             |        |              |  |          |       |            |  |               | 1,386     |   |  |   | 1,282   |   |  |   |        |  
|                                             
|                                             
|                                             
|                                             
|Restricted Stock Awards                       |  |             |        |              |  |          | (5,715 | )          |  |               |          |   |  |   |        |   |  |   |        |  
|                                             
|                                             
|                                             
|                                             
|Deferred Compensation Amortization            |  |             |        |              |  |          | 710    |            |  |               |          |   |  |   | 710     |   |  |   |        |  
|                                              |  |             |         |              |  |          |        |            |  |               |           |   |  |   |         |   |  |   |         |  
|Balance July 31, 1999                         |  |             | 292,273 |              |  |          | (5,005 | )          |  |               | (92,725   | ) |  |   | 699,611 |   |  |   | 78,457  |  
|                                              |  |             |         |              |  |          |        |            |  |               |           |   |  |   |         |   |  |   |         |  
|Net Earnings                                  |  |             | 111,514 |              |  |          |       |            |  |               |          |   |  |   | 111,514 |   |  |   | 111,514 |  
|                                             
|                                             
|                                             
|                                             
|Unrealized Gain on Securities, net            |  |             |        |              |  |          |       |            |  |               |          |   |  |   | (1,578  | ) |  |   | (1,578  | )
|                                             
|                                             
|                                             
|                                             
|Cumulative Translation Adjustments            |  |             |        |              |  |          |       |            |  |               |          |   |  |   | 1,613   |   |  |   | 1,613   |  
|                                             
|                                             
|                                             
|                                             
|Exercise of Stock Options, net of tax benefit |  |             |        |              |  |          |       |            |  |               |          |   |  |   | 12,198  |   |  |   |        |  
|                                             
|                                             
|                                             
|                                             
|Purchase of Common Stock                      |  |             |        |              |  |          |       |            |  |               | (49,997   | ) |  |   | (49,997 | ) |  |   |        |  
|                                             
|                                             
|                                             
|                                             
|Contribution to 401(k) plan                   |  |             |        |              |  |          |       |            |  |               | 3,365     |   |  |   | 5,197   |   |  |   |        |  
|                                             
|                                             
|                                             
|                                             
|Deferred Compensation Amortization            |  |             |        |              |  |          | 3,219  |            |  |               |          |   |  |   | 3,219   |   |  |   |        |  
|                                              |  |             |         |              |  |          |        |            |  |               |           |   |  |   |         |   |  |   |         |  
|Balance July 31, 2000                         |  | $           | 403,787 |              |  | $        | (1,786 | )          |  |               | $(139,357 | ) |  | $ | 781,777 |   |  | $ | 111,549 |  
|                                              |  |             |         |              |  |          |        |            |  |               |           |   |  |   |         |   |  |   |         |  

See Notes to the Consolidated Financial Statements.

F-8



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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Summary of Significant Accounting Policies

The Accompanying Consolidated Financial Statements include
 the accounts of Zale Corporation and its wholly owned
subsidiaries (the Company or Zale). The
Company consolidates substantially all its U.S. operations
into Zale Delaware, Inc. (ZDel). ZDel is the
parent company for several subsidiaries, including three that are
 engaged primarily in providing credit insurance to credit
customers of the Company. The Company consolidates its Canadian
retail operations (see Acquisition of Peoples Jewellers) into
Zale International, Inc., which is a wholly owned subsidiary
 of Zale Corporation. All significant intercompany transactions
have been eliminated.

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

Cash and Cash Equivalents includes cash on hand, deposits
in banks and short-term marketable securities at varying interest
 rates with maturities of three months or less. The carrying
amount approximates fair value because of the short term maturity
 of those instruments. At July 31, 2000, $3.9 million
was restricted primarily by the capital requirements of Jewelers
National Bank (JNB), the Companys national
credit card bank and consignment arrangements with certain
vendors.

Customer Receivables.Effective July 31, 2000, the
Company sold, without recourse, all of its customer receivables.
See Sale of Customer Receivables. Historically
customer receivables were classified as current assets, including
 amounts which were due after one year, in accordance with
industry practices. The allowance for doubtful accounts was
$76.5 million at July 31, 1999. Finance charge income
and net earnings from credit insurance subsidiaries of
$119.9 million, $118.5 million and $113.3 million
for the years ended July 31, 2000, 1999 and 1998,
respectively, has been reflected as a reduction of Selling,
General and Administrative Expenses. Finance charge and insurance
 charge income are recorded pursuant to the calculation set forth
 in the Companys credit card agreements.

Merchandise Inventories are stated at the lower of cost or
 market. Cost for U.S. inventories is determined primarily
in accordance with the retail inventory method. Substantially all
 U.S. inventories represent finished goods which are valued
using the last-in, first-out (LIFO) method.
Merchandise inventory of Peoples Jewellers are valued using the
first-in, first-out (FIFO) method.

Long Lived Assets.Intangibles and long-lived assets are
reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount may not be
recoverable. Any impairment would be recognized in operating
results if a permanent reduction were to occur.

Depreciation and Amortization are computed using the
straight-line method over the estimated useful lives of the
assets or remaining lease life. Estimated useful lives of the
assets range from three to fifteen years. Original cost and
related accumulated depreciation or amortization are removed from
 the accounts in the year assets are retired. Gains or losses on
dispositions of property and equipment are included in operations
 in the year of disposal. Computer software costs related to the
development of major systems are capitalized as incurred and are
amortized over their useful lives.

Excess of Revalued Net Assets Over Stockholders
Investment is being amortized over fifteen years.
Amortization was $5.9 million for each of the years ended
July 31, 2000, 1999 and 1998. Accumulated amortization was
$41.3 million and $35.4 million at July 31, 2000
and 1999, respectively.

Store Closing Costs.Store closing costs are estimated and
 recognized in the period in which the Company makes the decision
 that the store will close. Such costs include the present value
of estimated future

F-9



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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

rentals net of anticipated sublease income, loss on retirement of
 property and equipment and other related occupancy costs.

Advertising Expenses are charged against operations when
incurred. Amounts charged against operations were
$66.4 million, $49.0 million and $45.8 million for
 the years ended July 31, 2000, 1999 and 1998, respectively,
 net of amounts contributed by vendors to the Company. The
amounts of prepaid advertising at July 31, 2000 and 1999,
are $6.4 million and $2.5 million, respectively.

Reclassifications.The classifications in use at
July 31, 2000, have been applied to the financial statements
 for July 31, 1999 and 1998.

Foreign Currency.Translation adjustments result from
translating foreign subsidiaries financial statements into
U.S. dollars. Balance sheet accounts are translated at
exchange rates in effect at the balance sheet date. Income
statement accounts are translated at average exchange rates
during the year. Resulting translation adjustments are included
as a component of Comprehensive Income in the Consolidated
Statements of Stockholders Investment.

Merchandise Inventories

The Companys U.S. operations use the LIFO method of
accounting for inventory, which results in a matching of current
costs with current revenues. The LIFO benefit was
$3.0 million, $0.7 million and $2.5 million for
the years ended July 31, 2000, 1999 and 1998, respectively.
The estimated cost of replacing the Companys inventories
exceeds its net LIFO cost by approximately $9.8 million and
$12.7 million at July 31, 2000 and 1999, respectively.
Domestic inventories on a FIFO basis were $588.7 million and
 $546.8 million, at July 31, 2000 and 1999,
respectively. The Company also maintained consigned inventory at
its domestic retail locations of approximately
$163.8 million and $126.3 million at July 31, 2000
 and 1999, respectively.

The Companys Canadian operations use the FIFO method of
accounting for inventory. Inventory net of reserves was
approximately $51.5 million and $37.6 million, at
July 31, 2000 and 1999, respectively and consigned inventory
 at retail locations was approximately $4.1 million and
$5.4 million at July 31, 2000 and 1999, respectively.

Consigned inventory and related contingent obligations are not
reflected in the Companys financial statements. At the time
 consigned inventory is sold, the Company records the purchase
liability in accounts payable and the related cost of merchandise
 in Cost of Sales.

Sale of Customer Receivables

On July 10, 2000, the Company announced that it had agreed
to sell its private label credit card operations to Associates
First Capital Corporation (AFCC). Effective
July 31, 2000, the Company sold, without recourse, all of
the outstanding accounts receivable owned by Zale Funding Trust,
a Delaware statutory business trust (ZFT) and
indirect wholly owned subsidiary of the Company, to Associates
Credit Card Services, Inc., a Delaware corporation
(Associates), and wholly owned subsidiary of AFCC.
The accounts receivable acquired by Associates constituted
substantially all of the assets of ZFT. The total purchase price
for the accounts receivable was approximately $542 million.
The Company recognized a pretax gain of $0.2 million, net of
 an allowance for final settlement and transaction costs. The
purchase price is subject to post-closing adjustment for
improperly classified receivables. The transaction is accounted
for as a sale in accordance with Statement of Financial
Accounting Standards No. 125, Accounting for Transfers
 and Servicing of Financial Assets and Extinguishment of
Liabilities.

In connection with executing the Receivables Purchase Agreement,
the Company entered into a ten year agreement whereby Hurley
State Bank (Hurley), a wholly-owned subsidiary of
AFCC, will issue private

F-10



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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

label credit cards branded with appropriate Company trademarks,
and provide financing for the Companys customers to
purchase merchandise in exchange for payment by the Company of a
merchant fee based upon a percentage of each credit card sale.
The merchant fee is a percentage per credit sale credited to the
Company under standard revolving accounts and a percentage per
credit sale charged to the Company under certain promotional
credit programs. The Company received a $41.8 million
incentive for entering into the agreement. Portions of this
payment are subject to refund for early termination of the
agreement. This incentive payment will be recognized ratably over
 the term of the agreement.

In connection with the Receivables Purchase Agreement, the
Company agreed pursuant to an Agreement and Plan of Merger, dated
 as of July 10, 2000, to merge Jewelers National Bank
(JNB), a wholly owned subsidiary of the Company, with
 and into Hurley State Bank (Hurley), a wholly owned
subsidiary of AFCC (the Merger). In connection with
such sale, ZFT paid off all of its outstanding indebtedness and
the Companys receivables securitization facility was
terminated. See Short-term Borrowings  Zale
Funding Trust Securitization. The Merger is subject to,
among other things, Federal Deposit Insurance Corporation
approval and approval from the Director of the Division of
Banking for the State of South Dakota. The Company anticipates
that the closing of the transactions contemplated under the
Agreement and Plan of Merger will take place by the first
calendar quarter of 2001. Until consummation of the Merger of
Jewelers National Bank with and into Hurley, the Company will
sell without recourse its credit card receivables to Associates
on a daily basis pursuant to an interim purchase and servicing
arrangement. Following consummation of the Merger, AFCC and its
affiliates will assume responsibility for JNBs previously
owned credit operations, including servicing facilities in
San Marcos, Texas; Clearwater, Florida; Tempe, Arizona; and
San Juan, Puerto Rico.

As a result of the sale of the Companys customer
receivables to AFCC and the Merger, the Companys current
credit processing service agreement with a third-party servicer
will terminate upon conversion to AFCCs systems, which is
expected to occur by the first calendar quarter of 2001.

Property And Equipment

The Companys property and equipment consists of the
following:

|                                                |  |                        |          |          |  |   |         |  
|----------------------------------------------- |  | ---------------------- | -------- | -------- |  | - | ------- | -
|                                                |  | July 31,               |          | July 31,
|                                                |  | 2000                   |          | 1999    
|                                                |  |                        |          |         
|                                                |  |                       
|                                                |  | (amounts in thousands)
|                                               
|                                               
|                                               
|                                               
|Buildings and Leasehold Improvements            |  | $                      | 133,498  |          |  | $ | 111,141 |  
|                                               
|                                               
|                                               
|                                               
|Furniture and Fixtures                          |  |                        | 218,668  |          |  |   | 176,258 |  
|                                               
|                                               
|                                               
|                                               
|Construction in Progress                        |  |                        | 9,644    |          |  |   | 10,041  |  
|                                                |  |                        |          |          |  |   |         |  
|                                                |  |                        | 361,810  |          |  |   | 297,440 |  
|                                               
|                                               
|                                               
|                                               
|Less: Accumulated Amortization and Depreciation |  |                        | (130,555 | )        |  |   | (93,599 | )
|                                                |  |                        |          |          |  |   |         |  
|Total Net Property and Equipment                |  | $                      | 231,255  |          |  | $ | 203,841 |  
|                                                |  |                        |          |          |  |   |         |  

F-11



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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Accounts Payable, Accrued Liabilities And Non-Current
Liabilities

The Companys accounts payable and accrued liabilities
consist of the following:

|                                               |  |                        |         |          |  |   |         | 
|---------------------------------------------- |  | ---------------------- | ------- | -------- |  | - | ------- | 
|                                               |  | July 31,               |         | July 31,
|                                               |  | 2000                   |         | 1999    
|                                               |  |                        |         |         
|                                               |  |                       
|                                               |  | (amounts in thousands)
|                                              
|                                              
|                                              
|                                              
|Accounts Payable                               |  | $                      | 131,664 |          |  | $ | 104,759 | 
|                                              
|                                              
|                                              
|                                              
|Accrued Payroll                                |  |                        | 27,789  |          |  |   | 25,453  | 
|                                              
|                                              
|                                              
|                                              
|Accrued Taxes                                  |  |                        | 23,503  |          |  |   | 18,210  | 
|                                              
|                                              
|                                              
|                                              
|Extended Warranty                              |  |                        | 24,081  |          |  |   | 19,419  | 
|                                              
|                                              
|                                              
|                                              
|Accrued Percentage Rent                        |  |                        | 18,571  |          |  |   | 16,162  | 
|                                              
|                                              
|                                              
|                                              
|Other Accruals                                 |  |                        | 60,671  |          |  |   | 53,389  | 
|                                               |  |                        |         |          |  |   |         | 
|Total Accounts Payable and Accrued Liabilities |  | $                      | 286,279 |          |  | $ | 237,392 | 
|                                               |  |                        |         |          |  |   |         | 

The Companys non-current liabilities consist principally of
 the accumulated obligation for postretirement benefits under
SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions, loss reserves
for insurance subsidiaries, reserves for tax contingencies and
the long-term portion of the incentive payment received from AFCC
 discussed above.

Postretirement Benefits.The Company provides medical and
dental insurance benefits for all eligible retirees and spouses
with benefits to the latter continuing after the death of the
retiree. Substantially all of the Companys full-time
employees, who were hired on or before November 14, 1994,
become eligible for those benefits upon reaching age 55
while working for the Company and having ten years continuous
service. The medical and dental benefits are provided under two
plans. The lifetime maximum on medical benefits is $500,000 up to
 the age of 65 and $50,000 thereafter. These benefits include
deductibles, retiree contributions and co-insurance provisions
that are assumed to grow with the health care cost trend rate.
The costs of the postretirement benefits are recognized in the
financial statements over an employees active career on an
accrual basis. The Company funds actual claims as they occur.

|                                        |                                |                        |         |          |   |   |         |        |  
|--------------------------------------- | ------------------------------ | ---------------------- | ------- | -------- | - | - | ------- | ------ | -
|                                        |                                | July 31,               |         | July 31,
|                                        |                                | 2000                   |         | 1999    
|                                        |                                |                        |         |         
|                                        |                                |                       
|                                        |                                | (amounts in thousands)
|                                       
|                                       
|                                       
|                                       
|Change in Benefit Obligation:           |                                |                        |         |          |   |   |         |       
|                                       
|                                       
|                                       
|                                       
|Benefit obligation at beginning of year |                                | $                      | 13,590  |          |   | $ | 15,310  |       
|                                       
|                                       
|                                       
|                                       
|                                        | Service cost                   |                        |         | 306      |   |   |         | 339    |  
|                                       
|                                       
|                                       
|                                       
|                                        | Interest cost                  |                        |         | 1,018    |   |   |         | 1,053  |  
|                                       
|                                       
|                                       
|                                       
|                                        | Plan participant contributions |                        |         | 984      |   |   |         | 971    |  
|                                       
|                                       
|                                       
|                                       
|                                        | Amendments                     |                        |         |         |   |   |         | (1,467 | )
|                                       
|                                       
|                                       
|                                       
|                                        | Actuarial gain                 |                        |         | (45      | ) |   |         | (1,048 | )
|                                       
|                                       
|                                       
|                                       
|                                        | Benefits paid                  |                        |         | (1,659   | ) |   |         | (1,568 | )
|                                        |                                |                        |         |          |   |   |         |       
|Benefit obligation at end of year       |                                | $                      | 14,194  |          |   | $ | 13,590  |       
|                                        |                                |                        |         |          |   |   |         |       
|Change in Plan Assets:                  |                                |                        |         |          |   |   |         |       
|                                       
|                                       
|                                       
|                                       
|Market value at beginning of year       |                                | $                      |        |          |   | $ |        |       
|                                       
|                                       
|                                       
|                                       
|                                        | Employer contributions         |                        |         | 675      |   |   |         | 597    |  
|                                       
|                                       
|                                       
|                                       
|                                        | Plan participant contributions |                        |         | 984      |   |   |         | 971    |  
|                                       
|                                       
|                                       
|                                       
|                                        | Benefit payments               |                        |         | (1,659   | ) |   |         | (1,568 | )
|                                        |                                |                        |         |          |   |   |         |       
|Market value at end of year             |                                | $                      |        |          |   | $ |        |       
|                                        |                                |                        |         |          |   |   |         |       
|Funded Status:                          |                                | $                      | (14,194 | )        |   | $ | (13,590 | )     
|                                       
|                                       
|                                       
|                                       
|Unrecognized net actuarial gain         |                                |                        | (5,638  | )        |   |   | (6,160  | )     
|                                       
|                                       
|                                       
|                                       
|Unrecognized prior service cost         |                                |                        | (1,079  | )        |   |   | (1,338  | )     
|                                        |                                |                        |         |          |   |   |         |       
|Adjusted Prepaid (accrued) benefit cost |                                | $                      | (20,911 | )        |   | $ | (21,088 | )     
|                                        |                                |                        |         |          |   |   |         |       

F-12



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The weighted average assumption of the discount rate is
7.75 percent as of July 31, 2000 and 1999,
respectively. For measurement purposes, a 9 percent and
10 percent annual rate of increase in the per capita cost
covered health care benefits was assumed for July 31, 2000
and July 31, 1999, respectively. The rate was assumed to
decrease gradually to 6 percent for 2004 and remain at that
level thereafter.

Components of net periodic benefit cost:

|                                   |  |                        |       |          |  |          |       |   |  |   |      |  
|---------------------------------- |  | ---------------------- | ----- | -------- |  | -------- | ----- | - |  | - | ---- | -
|                                   |  | July 31,               |       | July 31, |  | July 31,
|                                   |  | 2000                   |       | 1999     |  | 1998    
|                                   |  |                        |       |          |  |         
|                                   |  |                       
|                                   |  | (amounts in thousands)
|                                  
|                                  
|                                  
|                                  
|Service Cost                       |  | $                      | 306   |          |  | $        | 339   |   |  | $ | 440  |  
|                                  
|                                  
|                                  
|                                  
|Interest Cost                      |  |                        | 1,018 |          |  |          | 1,053 |   |  |   | 936  |  
|                                  
|                                  
|                                  
|                                  
|Amortization of Prior Service Cost |  |                        | (855  | )        |  |          | (572  | ) |  |   | (743 | )
|                                   |  |                        |       |          |  |          |       |   |  |   |      |  
|Net Periodic Benefit Cost          |  | $                      | 469   |          |  | $        | 820   |   |  | $ | 633  |  
|                                   |  |                        |       |          |  |          |       |   |  |   |      |  

Assumed health care cost trend rates have a significant effect on
 the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend
rates would have the following effects:

|                                                     |  |                        |     |                |  |  |     |   |  |   |      |   |  |  |      |   
|---------------------------------------------------- |  | ---------------------- | --- | -------------- |  |  | --- | - |  | - | ---- | - |  |  | ---- | --
|                                                     |  |                        |     |               
|                                                     |  | 1-Percentage-          |     | 1-Percentage- 
|                                                     |  | Point Increase         |     | Point Decrease
|                                                     |  |                        |     |               
|                                                     |  |                        |     |                |  |  |     |  
|                                                     |  |                       
|                                                     |  | (amounts in thousands)
|                                                    
|                                                    
|                                                    
|                                                    
|Effect on total service and interest cost components |  | $                      | 85  |                |  |  | 6.4 | % |  | $ | (95  | ) |  |  | (7.2 | %)
|                                                    
|                                                    
|                                                    
|                                                    
|Effect on post retirement benefit obligation         |  | $                      | 849 |                |  |  | 6.0 | % |  | $ | (780 | ) |  |  | (5.5 | %)

Short-term Borrowings

The Companys Short-term Borrowings consist of the
following:

|                                  |  |                        |   |          |  |   |         | 
|--------------------------------- |  | ---------------------- | - | -------- |  | - | ------- | 
|                                  |  | July 31,               |   | July 31,
|                                  |  | 2000                   |   | 1999    
|                                  |  |                        |   |         
|                                  |  |                       
|                                  |  | (amounts in thousands)
|                                 
|                                 
|                                 
|                                 
|Revolving Credit Agreement        |  | $                      |  |          |  | $ | 103,000 | 
|                                 
|                                 
|                                 
|                                 
|Zale Funding Trust Securitization |  |                        |  |          |  |   | 250,000 | 
|                                  |  |                        |   |          |  |   |         | 
|                                  |  | $                      |  |          |  | $ | 353,000 | 
|                                  |  |                        |   |          |  |   |         | 

There were no short term borrowings as of July 31, 2000.

Revolving Credit Agreement.The Company and ZDel (the
Borrowers) entered into a three year unsecured
revolving credit agreement (the Revolving Credit
Agreement) with a group of banks on March 31, 1997.
The Revolving Credit Agreement provided for revolving credit
loans in an aggregate amount of up to $225.0 million,
including a $30.0 million sublimit for letters of credit. At
 July 31, 1999, approximately $103 million was
outstanding under the Revolving Credit Agreement with a
Eurodollar Rate of 6.4 percent. In addition, letters of
credit in the amount of approximately $0.6 million were
outstanding at July 31, 1999. In March 2000, the Company
amended and restated its unsecured revolving credit agreement.
See Long Term Debt  Revolving Credit
Agreement.

F-13



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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Zale Funding Trust Securitization.On July 15, 1999,
the Company redeemed approximately $380.8 million, net of
discount, aggregate principal amount of Receivables Backed Notes
(Receivables Notes) issued by ZFT to finance customer
 accounts receivable. The Receivables Notes were redeemed with
available cash and proceeds of advances under the Companys
Revolving Credit Agreement and through the issuance of Variable
Funding Notes (Variable Notes) to a purchaser group
under a new securitization facility in the initial aggregate
principal amount of $250 million. The Variable Notes were
part of a 364-day liquidity facility and were secured by a lien
on customer accounts receivable. In September 1999, the Company
amended the original facility to increase the total aggregate
amount to $350 million. On July 31, 2000, the Company
redeemed the then outstanding balance of approximately
$335 million aggregate principal amount of Variable Notes
with the proceeds from the sale of its customer receivables and
terminated its securitization facility. See Sale of
Customer Receivables. The Variable Notes bore interest at
the market commercial paper rate plus a dealer fee of
0.05 percent. In addition, the Company paid a fee of
0.375 percent per annum on the funded portion of the
facility and a commitment fee of .25 percent per annum on
the unfunded portion.

Long-term Debt

The Companys long-term debt consists of the following:

|                           |  |                        |         |          |  |   |        | 
|-------------------------- |  | ---------------------- | ------- | -------- |  | - | ------ | 
|                           |  | July 31,               |         | July 31,
|                           |  | 2000                   |         | 1999    
|                           |  |                        |         |         
|                           |  |                       
|                           |  | (amounts in thousands)
|                          
|                          
|                          
|                          
|Revolving Credit Agreement |  | $                      | 9,744   |          |  | $ |       | 
|                          
|                          
|                          
|                          
|Senior Notes               |  |                        | 99,625  |          |  |   | 99,589 | 
|                           |  |                        |         |          |  |   |        | 
|Total Long-Term Debt       |  | $                      | 109,369 |          |  | $ | 99,589 | 
|                           |  |                        |         |          |  |   |        | 

Revolving Credit Agreement. In order to support the
Companys growth plans, the Company amended and restated its
 unsecured revolving credit agreement with a group of banks on
March 30, 2000. The amended and restated revolving credit
agreement (the Revolving Credit Agreement) provides
for (i) a revolving credit loan facility to the Company and
to its operating subsidiary, Zale Delaware, Inc. (such
facility, the U.S. Revolving Credit Facility),
in the aggregate principal amount of up to $215 million in
commitments by certain U.S. lenders (the
U.S. Commitments), including a $5 million
sublimit for letters of credit, and (ii) a separate
revolving credit facility for a Canadian subsidiary (the
Canadian Revolving Credit Facility), which provides
for Canadian Dollar denominated loans in the aggregate principal
amount of up to a U.S. Dollar equivalent of $10 million
 in commitments by a Canadian lender (the Canadian
Commitment). The total amount of commitments under the
Revolving Credit Agreement to the Company and its subsidiaries is
 approximately $225 million. The Revolving Credit Agreement
term is five years. Under the Revolving Credit Agreement the
Company may, subject to approval of the U.S. Agent or the
Canadian Agent, as the case may be, increase the total
U.S. commitment to $285 million and the Canadian
commitment to the U.S. Dollar equivalent of $25 million
 provided that the commitments together do not exceed a
U.S. Dollar equivalent of $300 million. The increase
can come from within or outside the bank group.

The revolving credit loans bear interest at floating rates as
follows: (A) loans outstanding under the U.S. Revolving
 Credit Facility bear interest, at the Companys option, at
either (i) the applicable Eurodollar Rate plus a margin
equal to 0.75 percent (subject to adjustment as described
below), or (ii) the Base Rate (which is the higher of the
annual rate of interest announced from time to time by the agent
bank under the Revolving Credit Agreement as its base rate or the
 Federal Funds Effective Rate plus 0.5 percent); and
(B) loans outstanding under the Canadian Revolving Credit
Facility bear interest, at the Companys option, at either
(i) a Bankers Acceptance Discount Rate (which varies
depending upon whether the Canadian Lender is a bank named under
Schedule I or II to the Bank Act (Canada) or neither)
plus a margin equal to 0.75 percent (subject to adjustment
as described below), or (ii) the annual rate of interest
announced from time to time by the Canadian agent bank under the
Revolving Credit Agreement as its prime rate for

F-14



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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

commercial loans in Canadian Dollars to borrowers in Canada. The
margin applicable to Eurodollar Rates and Bankers
Acceptance Discount Rates and letter of credit commission rates
will be automatically reduced or increased from time to time
based on certain future performance levels attained by the
Company and its subsidiaries. Such margin will also be reduced if
 the debt of the Company and its subsidiaries under the Revolving
 Credit Agreement achieves an investment grade rating, and
thereafter will be reduced or increased based upon changes in
such rating. A utilization fee of 0.125 percent is to be
paid on the average daily amount during each calendar quarter to
the extent that the outstanding amount of loans under the
U.S. Revolving Credit Facility exceeds 50 percent of
the total U.S. Commitments during the preceding quarter,
and/or if and to the extent that the outstanding amount of loans
under the Canadian Revolving Credit Facility exceeds
50 percent of the total Canadian Commitments during the
preceding fiscal quarter, such utilization fee being payable in
each case on the average daily amount of such excess. The Company
 currently pays a commitment fee of 0.25 percent per annum
on the preceding months unused U.S. Commitments and
Canadian Commitment, which commitment fee is also subject to
reduction or increase based on future performance and upon
changes in the Companys debt rating. The Company and its
subsidiaries may repay the revolving credit loans under the
Revolving Credit Agreement at any time without penalty prior to
the maturity date. At July 31, 2000, there were no
outstanding amounts under the U.S. Revolving Credit
Facility. At July 31, 2000, the U.S. dollar equivalent
of $9.7 million in revolving credit loans was outstanding
under the Canadian Revolving Credit Facility, at an applicable
interest rate on such date of 7.50 percent. The Revolving
Credit Agreement contains certain restrictive covenants, which,
among other things, requires the Company to comply with certain
financial covenants including limitations on indebtedness,
investments and capital expenditures. The Company is currently in
 compliance with all of its obligations under the Revolving
Credit Agreement and the instruments governing its other
indebtedness.

Senior Notes.On September 23, 1997, the Company sold
 $100 million in aggregate principal amount of
8 1/2 percent Senior Notes (the Senior
Notes) due 2007 by means of an offering memorandum to
qualified institutional buyers under Rule 144A promulgated
under the Securities Act of 1933, as amended. All proceeds from
the sale of the Senior Notes were used by the Company to repay
outstanding indebtedness under its Revolving Credit Agreement and
 for general corporate purposes. The Senior Notes are unsecured
and are fully and unconditionally guaranteed by ZDel. The Senior
Notes are redeemable for cash at any time on or after
October 1, 2002, at the option of the Company, in whole or
in part, at redemption prices starting at 104.25 percent of
the principal amount.

The indenture relating to the Senior Notes contains certain
restrictive covenants including, but not limited to, limitations
on indebtedness, limitations on dividends and other restricted
payments (including repurchases of the Companys common
stock), limitation on transactions with affiliates, limitations
on liens and limitations on disposition proceeds of asset sales,
among others. Pursuant to a registration rights agreement
relating to the Senior Notes, the Company has exchanged for the
Senior Notes new notes of the Company registered with the
Securities and Exchange Commission and with terms identical in
all material respects to the Senior Notes. The Senior Notes are
included in Long-term Debt on the accompanying balance sheet.

Lease Commitments

The Company rents most of its retail space under leases that
generally range from five to ten years and may contain base rent
escalations. The Company amended and extended its corporate
headquarters lease for ten and  1/2 years starting in
September 1997. The Company has the option to extend the lease
for up to ten years beyond the expiration of the current lease.
Lease incentives of approximately $3.4 million for
reimbursement of certain leasehold improvement expenditures are
being amortized against lease payments over the life of the
lease. All existing real estate leases are treated as operating
leases. Sublease rental income under noncancelable leases is not
material.

F-15



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Rent expense is as follows:

|                                     |                        |                        |         |            |         |            |         |        |         |  |        |        |        | 
|------------------------------------ | ---------------------- | ---------------------- | ------- | ---------- | ------- | ---------- | ------- | ------ | ------- |  | ------ | ------ | ------ | 
|                                     |                        | Year Ended             |         | Year Ended |         | Year Ended
|                                     |                        | July 31,               |         | July 31,   |         | July 31,  
|                                     |                        | 2000                   |         | 1999       |         | 1998      
|                                     |                        |                        |         |            |         |           
|                                     |                        |                       
|                                     |                        | (amounts in thousands)
|                                    
|                                    
|                                    
|                                    
|Retail Space:                        |                        |                        |         |            |         |            |         |        |         |  |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Minimum Rentals        |                        | $       | 105,802    |         |            | $       | 88,943 |         |  | $      | 79,181 |       
|                                    
|                                    
|                                    
|                                    
|                                     | Rentals Based on Sales |                        |         | 14,192     |         |            |         | 12,069 |         |  |        | 13,046 |       
|                                     |                        |                        |         |            |         |            |         |        |         |  |        |       
|                                     |                        |                        | 119,994 |            |         |            | 101,012 |        |         |  | 92,227 |       
|                                    
|                                    
|                                    
|                                    
|Equipment and Corporate Headquarters |                        |                        | 3,017   |            |         |            | 2,770   |        |         |  | 2,643  |       
|                                     |                        |                        |         |            |         |            |         |        |         |  |        |       
|                                     |                        | Total Rent Expense     |         | $          | 123,011 |            |         | $      | 103,782 |  |        | $      | 94,870 | 
|                                     |                        |                        |         |            |         |            |         |        |         |  |        |       

Contingent rentals paid to lessors of certain store facilities
are determined principally on the basis of a percentage of sales
in excess of contractual limits.

Future minimum rent commitments as of July 31, 2000, for all
 noncancelable leases of ongoing operations were as follows:
2001  $108.1 million; 2002 
$100.0 million; 2003  $95.8 million;
2004  $91.5 million; 2005 
$85.2 million; thereafter  $221.2 million;
for a total of $701.8 million.

Interest

Interest expense for the years ended July 31, 2000, 1999 and
 1998 was approximately $33.7 million, $37.5 million
and $37.2 million, respectively.

Interest income for the years ended July 31, 2000, 1999 and
1998 was approximately $1.5 million, $7.0 million and
$5.2 million, respectively.

Income Taxes

Currently, the Company files a consolidated income tax return.
The effective income tax rate varies from the federal statutory
rate as follows:

|                                                      |                          |                        |        |            |   |            |        |        |   |   |        |        |  
|----------------------------------------------------- | ------------------------ | ---------------------- | ------ | ---------- | - | ---------- | ------ | ------ | - | - | ------ | ------ | -
|                                                      |                          | Year Ended             |        | Year Ended |   | Year Ended
|                                                      |                          | July 31,               |        | July 31,   |   | July 31,  
|                                                      |                          | 2000                   |        | 1999       |   | 1998      
|                                                      |                          |                        |        |            |   |           
|                                                      |                          |                       
|                                                      |                          | (amounts in thousands)
|                                                     
|                                                     
|                                                     
|                                                     
|Domestic Federal Income Tax Expense at Statutory Rate |                          | $                      | 61,242 |            |   | $          | 45,495 |        |   | $ | 38,605 |       
|Amortization of Excess of Revalued Net Assets Over    |                          |                        |        |            |   |            |        |        |   |   |        |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Stockholders Investment |                        |        | (2,064     | ) |            |        | (2,064 | ) |   |        | (2,064 | )
|                                                     
|                                                     
|                                                     
|                                                     
|State Income Taxes, Net of Federal Income Tax Benefit |                          |                        | 6,044  |            |   |            | 5,128  |        |   |   | 4,635  |       
|                                                     
|                                                     
|                                                     
|                                                     
|Other                                                 |                          |                        | 1,504  |            |   |            | (56    | )      |   |   | 186    |       
|                                                      |                          |                        |        |            |   |            |        |        |   |   |        |       
|Total Income Tax Expense                              |                          | $                      | 66,726 |            |   | $          | 48,503 |        |   | $ | 41,362 |       
|                                                      |                          |                        |        |            |   |            |        |        |   |   |        |       
|Effective Income Tax Rate                             |                          |                        | 37.4   | %          |   |            | 37.5   | %      |   |   | 37.5   | %     
|                                                      |                          |                        |        |            |   |            |        |        |   |   |        |       

F-16



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

|                           |         |                        |        |            |  |            |        |        |  |   |        |        | 
|-------------------------- | ------- | ---------------------- | ------ | ---------- |  | ---------- | ------ | ------ |  | - | ------ | ------ | 
|                           |         | Year Ended             |        | Year Ended |  | Year Ended
|                           |         | July 31,               |        | July 31,   |  | July 31,  
|                           |         | 2000                   |        | 1999       |  | 1998      
|                           |         |                        |        |            |  |           
|                           |         |                       
|                           |         | (amounts in thousands)
|                          
|                          
|                          
|                          
|Current Provision:         |         |                        |        |            |  |            |        |        |  |   |        |       
|                          
|                          
|                          
|                          
|                           | Federal |                        | $      | 39,547     |  |            | $      | 37,746 |  |   | $      | 6,405  | 
|                          
|                          
|                          
|                          
|                           | State   |                        |        | 3,752      |  |            |        | 3,124  |  |   |        | 413    | 
|                           |         |                        |        |            |  |            |        |        |  |   |        |       
|Total Current Provision    |         |                        | 43,299 |            |  |            | 40,870 |        |  |   | 6,818  |       
|                           |         |                        |        |            |  |            |        |        |  |   |        |       
|Deferred Provision:        |         |                        |        |            |  |            |        |        |  |   |        |       
|                          
|                          
|                          
|                          
|                           | Federal |                        |        | 20,401     |  |            |        | 5,629  |  |   |        | 30,322 | 
|                          
|                          
|                          
|                          
|                           | State   |                        |        | 3,026      |  |            |        | 2,004  |  |   |        | 4,222  | 
|                           |         |                        |        |            |  |            |        |        |  |   |        |       
|Total Deferred Provision   |         |                        | 23,427 |            |  |            | 7,633  |        |  |   | 34,544 |       
|                           |         |                        |        |            |  |            |        |        |  |   |        |       
|Total Income Tax Provision |         | $                      | 66,726 |            |  | $          | 48,503 |        |  | $ | 41,362 |       
|                           |         |                        |        |            |  |            |        |        |  |   |        |       

Pursuant to the guidance provided by the American Institute of
Certified Public Accountants in Statement of Position 90-7,
Financial Reporting by Entities in Reorganization Under the
 Bankruptcy Code (SOP 90-7), the Company
adopted fresh-start reporting as of the close of business on
July 31, 1993. In connection with the adoption of
fresh-start reporting, the net book values of substantially all
non-current assets existing at July 30, 1993 (the
Effective Date) were eliminated. As a consequence,
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS
No. 109), in conjunction with SOP 90-7, requires
that any tax benefits realized for book purposes after the
Effective Date, from the reduction of the valuation allowance
existing as of the Effective Date be reported as an increase to
additional paid-in capital rather than as a reduction in the tax
provision in the Consolidated Statements of Operations. However,
the Company will realize the cash benefit from utilization of its
 tax net operating loss (NOL) against current and
future tax liabilities. The cash benefit realized was
approximately $8.9 million and $13.0 million for the
years ended July 31, 2000 and 1999, respectively.

As of July 31, 2000, the Company has a NOL carryforward
(after limitations) of approximately $170 million. A
majority of the tax basis NOL carryforward, which will be
available to offset future taxable income of the Company, was
determined based upon the initial equity valuation of the Company
 as determined upon the Effective Date. The utilization of this
asset is subject to limitations. The most restrictive is the
Internal Revenue Code Section 382 annual limitation. The NOL
 carryforward can be utilized through 2008.

Deferred tax assets and liabilities are determined based on
estimated future tax effects of the difference between the
financial statement and tax basis of assets and liabilities using
 enacted tax rates. Tax effects of

F-17



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

temporary differences that give rise to significant components of
 the deferred tax assets and deferred tax liabilities at
July 31, 2000 and 1999 are presented below.

|                                    |               |                                                          |         |          |         |   |         |        |         |  
|----------------------------------- | ------------- | -------------------------------------------------------- | ------- | -------- | ------- | - | ------- | ------ | ------- | -
|                                    |               | July 31,                                                 |         | July 31,
|                                    |               | 2000                                                     |         | 1999    
|                                    |               |                                                          |         |         
|                                    |               |                                                         
|                                    |               | (amounts in thousands)                                  
|                                   
|                                   
|                                   
|                                   
|Current Deferred Taxes:             |               |                                                          |         |          |         |   |         |       
|                                    | Assets       |                                                          |         |          |         |   |         |        |        
|                                   
|                                   
|                                   
|                                   
|                                    |               | Customer receivables                                     |         | $        |        |   |         | $      | 19,632  |  
|                                   
|                                   
|                                   
|                                   
|                                    |               | Accrued liabilities                                      |         |          | 47,933  |   |         |        | 25,438  |  
|                                   
|                                   
|                                   
|                                   
|                                    |               | State and local taxes                                    |         |          | 1,720   |   |         |        | 1,291   |  
|                                   
|                                   
|                                   
|                                   
|                                    |               | Net operating loss carryforward                          |         |          | 7,601   |   |         |        | 9,957   |  
|                                   
|                                   
|                                   
|                                   
|                                    |               | Other                                                    |         |          | 262     |   |         |        | 771     |  
|                                    |               |                                                          |         |          |         |   |         |       
|                                    |               | Total Assets                                             |         |          | 57,516  |   |         |        | 57,089  |  
|                                   
|                                   
|                                   
|                                   
|                                    |               | Less  Valuation Allowance                               |         |          |        |   |         |        | (6,381  | )
|                                    |               |                                                          |         |          |         |   |         |       
|                                    |               |                                                          | 57,516  |          |         |   | 50,708  |       
|                                    | Liabilities  |                                                          |         |          |         |   |         |        |        
|                                   
|                                   
|                                   
|                                   
|                                    |               | Customer receivables                                     |         |          | (5,252  | ) |         |        |        |  
|                                   
|                                   
|                                   
|                                   
|                                    |               | Merchandise inventories, principally due to LIFO reserve |         |          | (74,956 | ) |         |        | (64,072 | )
|                                   
|                                   
|                                   
|                                   
|                                    |               | Other                                                    |         |          |        |   |         |        |        |  
|                                    |               |                                                          |         |          |         |   |         |       
|Deferred Current Tax Liability, Net |               | $                                                        | (22,692 | )        |         | $ | (13,364 | )     
|                                    |               |                                                          |         |          |         |   |         |       
|Non-Current Deferred Taxes:         |               |                                                          |         |          |         |   |         |       
|                                    | Assets       |                                                          |         |          |         |   |         |        |        
|                                   
|                                   
|                                   
|                                   
|                                    |               | Property and equipment,                                  |         | $        | 4,635   |   |         | $      | 6,001   |  
|                                   
|                                   
|                                   
|                                   
|                                    |               | Net operating loss carryforward                          |         |          | 59,708  |   |         |        | 63,960  |  
|                                   
|                                   
|                                   
|                                   
|                                    |               | Postretirement benefits                                  |         |          | 7,137   |   |         |        | 8,828   |  
|                                   
|                                   
|                                   
|                                   
|                                    |               | Other                                                    |         |          | 3,098   |   |         |        | 1,850   |  
|                                    |               |                                                          |         |          |         |   |         |       
|                                    |               | Total Assets                                             |         |          | 74,578  |   |         |        | 80,639  |  
|                                   
|                                   
|                                   
|                                   
|                                    |               | Less  Valuation Allowance                               |         |          |        |   |         |        | (8,619  | )
|                                    |               |                                                          |         |          |         |   |         |       
|                                    | Liabilities  |                                                          |         | 74,578   |         |   |         | 72,020 |        
|                                   
|                                   
|                                   
|                                   
|                                    |               | Goodwill                                                 |         |          | (10,882 | ) |         |        | (9,225  | )
|                                    |               |                                                          |         |          |         |   |         |       
|Deferred Non-Current Tax Asset, Net |               | $                                                        | 63,696  |          |         | $ | 62,795  |       
|                                    |               |                                                          |         |          |         |   |         |       

Pursuant to the requirements of SFAS No. 109, a valuation
allowance must be provided when it is more likely than not that
the deferred income tax asset will not be realized. The valuation
 reserve was reduced to zero at July 31, 2000 and was
$15 million as of July 31, 1999. The Company believes
that, as of July 31, 2000, a sufficient history of earnings
has been established to make realization of the deferred income
tax asset more likely than not. The change in valuation allowance
 from July 31, 1999, to July 31, 2000 was approximately
 $15 million.

Capital Stock

Common Stock.At July 31, 2000 and 1999,
70,000,000 shares of Common Stock, par value of
$0.01 per share, were authorized, 39,683,674 shares and
 39,261,005 shares, respectively, were issued, of which
35,260,814 shares and 35,982,708 shares, respectively,
were outstanding. The Company held 4,422,860 and 3,278,297
treasury shares at July 31, 2000 and 1999, respectively.

Preferred Stock.At July 31, 2000 and 1999,
5,000,000 shares of Preferred Stock, par value of $0.01,
were authorized. None were issued or outstanding.

Warrants.During 1998, 1,945,420 Series A Warrants
were exercised. The remaining 27,330 Series A Warrants
expired July 30, 1998. Accordingly, at July 31, 2000
and July 31, 1999 there were no warrants

F-18



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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

outstanding. Each Series A Warrant entitled the holder to
purchase one share of Zale common stock for $10.368 per
share (subject to certain anti-dilution adjustments).

Treasury Stock.During fiscal 1998, the Company
repurchased approximately 1.4 million shares at an aggregate
 cost of $40 million, related to a stock repurchase program
authorized in February 1998. In June 1999, the Company completed
a $50 million repurchase program, which was authorized
during August 1998. Under this program, the Company repurchased
1.7 million shares in fiscal 1999.

During September 1999, the Board of Directors approved a stock
repurchase program pursuant to which the Company, from time to
time and at managements discretion, may purchase through
fiscal year 2000, up to an aggregate of $50 million of
common stock on the open market. Under this program, the Company
repurchased 1.3 million shares at an aggregate cost of
$50 million.

On July 18, 2000, the Company announced a stock repurchase
program pursuant to which the Company, from time to time at the
discretion of management and the Board of Directors and in
accordance with the Companys usual policies and applicable
securities laws, may purchase up to an aggregate of
$50 million of Zale Corporation common stock on the open
market through July 31, 2001.

Incentive Stock Plan.As of July 31, 2000, the
Company had two stock incentive plans. On July 30, 1993, the
 Company adopted an incentive stock option plan (the
Incentive Stock Plan) to enable the Company to
attract, retain and motivate officers and key employees by
providing for proprietary interest of such individuals in the
Company. Stock awards to purchase an aggregate of
6,555,000 shares of common stock may be granted under the
Incentive Stock Plan to eligible employees. The Incentive Stock
Plan allows for the granting of restricted stock, stock options,
stock bonuses and stock appreciation rights subject to the
provisions of the Incentive Stock Plan. Restricted Stock granted
under the Incentive Stock Plan vests ratably over a four year
vesting period except for 103,846 shares granted which vest
ratably over a period of less than three years, and are
non-transferable prior to vesting. Options granted under the
Incentive Stock Plan (i) must be granted at an exercise
price not less than the fair market value of the shares of common
 stock into which such options are exercisable, (ii) vest
ratably over a four-year vesting period and (iii) expire ten
 years from the date of grant. The Outside Director 1995 Stock
Option Plan, (the Director Plan) authorizes the
Company to grant common stock to non-employee directors at fair
market value of the Company common stock on the date of grant.
The options vest over a four year period and expire ten years
from the date of grant. The maximum number of shares which may
currently be granted under the Director Plan is
150,000 shares.

During February 1999, 180,692 shares of restricted Common
Stock were granted to certain key employees valued at
$5.7 million as of the grant date. The shares will vest
ratably on each of the anniversaries ranging from two to four
years from the date of grant and are subject to restrictions on
their sale or transfer. The total cost of restricted stock is
amortized to income as compensation expense ratably over the
vesting period and amounted to $3.2 million and
$0.7 million for the twelve month periods ended
July 31, 2000 and 1999, respectively.

Stock option transactions are summarized as follows:

|                                |  |        |           |             |  |        |            |        |  |        |           |        |  |   |             |  |  |   |             |  |  |   |             | 
|------------------------------- |  | ------ | --------- | ----------- |  | ------ | ---------- | ------ |  | ------ | --------- | ------ |  | - | ----------- |  |  | - | ----------- |  |  | - | ----------- | 
|                                |  |        |           |            
|                                |  | Shares |           | Grant Price
|                                |  |        |           |            
|                                |  | Fiscal |           | Fiscal      |  | Fiscal |            | Fiscal |  | Fiscal |           | Fiscal
|                                |  | 2000   |           | 1999        |  | 1998   |            | 2000   |  | 1999   |           | 1998  
|                                |  |        |           |             |  |        |            |        |  |        |           |       
|Outstanding, beginning of
	year |  |        | 2,912,157 |             |  |        | 3,365,757  |        |  |        | 3,088,425 |        |  | $ | 8.68-43.50  |  |  | $ | 8.68-33.44  |  |  | $ | 8.68-21.81  | 
|                               
|                               
|                               
|                               
|Granted                         |  |        | 816,500   |             |  |        | 643,500    |        |  |        | 1,295,000 |        |  |   | 33.91-45.56 |  |  |   | 23.88-43.50 |  |  |   | 25.13-33.44 | 
|                               
|                               
|                               
|                               
|Exercised                       |  |        | (422,669  | )           |  |        | (1,018,775 | )      |  |        | (767,968  | )      |  |   | 9.00-33.44  |  |  |   | 8.68-33.44  |  |  |   | 8.68-19.31  | 
|                               
|                               
|                               
|                               
|Canceled                        |  |        | (64,675   | )           |  |        | (78,325    | )      |  |        | (249,700  | )      |  |   | 9.74-43.50  |  |  |   | 9.74-33.44  |  |  |   | 9.00-21.81  | 
|                                |  |        |           |             |  |        |            |        |  |        |           |        |  |   |             |  |  |   |             |  |  |   |             | 
|Outstanding, end of year        |  |        | 3,241,313 |             |  |        | 2,912,157  |        |  |        | 3,365,757 |        |  | $ | 8.68-45.56  |  |  | $ | 8.68-43.50  |  |  | $ | 8.68-33.44  | 
|                                |  |        |           |             |  |        |            |        |  |        |           |        |  |   |             |  |  |   |             |  |  |   |             | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                |  |                  |       |        |  |        |       |  |  |   |       | 
|------------------------------- |  | ---------------- | ----- | ------ |  | ------ | ----- |  |  | - | ----- | 
|                                |  |                 
|                                |  | Weighted Average
|                                |  | Exercise Price  
|                                |  |                 
|                                |  | Fiscal           |       | Fiscal |  | Fiscal
|                                |  | 2000             |       | 1999   |  | 1998  
|                                |  |                  |       |        |  |       
|Outstanding, beginning of
	year |  | $                | 30.01 |        |  | $      | 22.65 |  |  | $ | 15.16 | 
|                               
|                               
|                               
|                               
|Granted                         |  |                  | 42.97 |        |  |        | 42.17 |  |  |   | 33.24 | 
|                               
|                               
|                               
|                               
|Exercised                       |  |                  | 18.90 |        |  |        | 14.00 |  |  |   | 11.72 | 
|                               
|                               
|                               
|                               
|Canceled                        |  |                  | 31.17 |        |  |        | 20.22 |  |  |   | 17.67 | 
|                                |  |                  |       |        |  |        |       |  |  |   |       | 
|Outstanding, end of year        |  | $                | 34.70 |        |  | $      | 30.01 |  |  | $ | 22.65 | 
|                                |  |                  |       |        |  |        |       |  |  |   |       | 

F-19



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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

As of July 31, 2000, 1999, and 1998, 1,315,021, 918,448, and
 1,155,257, respectively, of options outstanding were
exercisable.

In fiscal year 1997, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation. The Company
accounts for the Stock Option Plan under Accounting Principles
Bulletin Opinion No. 25, under which no compensation cost
has been recognized. Had compensation cost for this plan been
determined pursuant to the provisions of SFAS No. 123, the
Companys pro-forma net earnings for fiscal years 2000, 1999
 and 1998 would have been (amounts in thousands) $106,643,
$77,149, and $67,002 respectively, resulting in diluted earnings
per share of $2.97, $2.10 and $1.79, respectively. The fair value
 of each option grant is estimated on the date of grant using the
 Black Scholes option pricing model with the following
weighted-average assumptions used for options granted in fiscal
years 2000, 1999, and 1998 respectively: risk-free interest rate
of 6.3 percent, 5.3 percent, and 5.8 percent,
expected dividend yield of zero, expected lives of 5 years,
and expected volatility of 36.0 percent, 34.0 percent,
and 32.2 percent. The weighted average fair value of options
 granted for fiscal years 2000, 1999 and 1998 is $18.60, $17.34
and $12.74, respectively.

Because the SFAS No. 123 method of accounting has not been
applied to options granted prior to August 1, 1996, the
resulting pro forma compensation cost may not be representative
of that to be expected in future years.

Earnings per Common Share

Basic earnings per share is computed by dividing income available
 to common shareholders by the weighted average number of common
shares outstanding for the reporting period. Diluted earnings per
 share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised or converted into common stock. Outstanding stock
options and warrants issued by the Company represent the only
dilutive effect reflected in diluted weighted average shares. For
 the years ended July 31, 2000, 1999 and 1998, there were
antidilutive common stock equivalents of 1,386,500, 593,000, and
1,266,000, respectively.

|                                                                 |               |                           |         |      |  |      |        |     |  |   |        |       | 
|---------------------------------------------------------------- | ------------- | ------------------------- | ------- | ---- |  | ---- | ------ | --- |  | - | ------ | ----- | 
|                                                                 |               |                          
|                                                                 |               | Year Ended July 31,      
|                                                                 |               |                          
|                                                                 |               | 2000                      |         | 1999 |  | 1998
|                                                                 |               |                           |         |      |  |     
|                                                                 |               |                          
|                                                                 |               | (amounts in thousands,   
|                                                                 |               | except per share amounts)
|                                                                
|                                                                
|                                                                
|                                                                
|Net earnings available to shareholders                           |               | $                         | 111,514 |      |  | $    | 80,932 |     |  | $ | 68,937 |      
|                                                                
|                                                                
|                                                                
|                                                                
|Basic:                                                           |               |                           |         |      |  |      |        |     |  |   |        |      
|                                                                
|                                                                
|                                                                
|                                                                
|Weighted average number of common shares outstanding             |               |                           | 35,326  |      |  |      | 36,137 |     |  |   | 35,201 |      
|                                                                
|                                                                
|                                                                
|                                                                
|Earnings per common share  basic                                |               | $                         | 3.16    |      |  | $    | 2.24   |     |  | $ | 1.96   |      
|                                                                 |               |                           |         |      |  |      |        |     |  |   |        |      
|Diluted:                                                         |               |                           |         |      |  |      |        |     |  |   |        |      
|                                                                
|                                                                
|                                                                
|                                                                
|Weighted average number of common shares outstanding             |               |                           | 35,326  |      |  |      | 36,137 |     |  |   | 35,201 |      
|                                                                
|                                                                
|                                                                
|                                                                
|Effect of dilutive securities:                                   |               |                           |         |      |  |      |        |     |  |   |        |      
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Stock options |                           |         | 557  |  |      |        | 551 |  |   |        | 980   | 
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Warrants      |                           |         |     |  |      |        |    |  |   |        | 1,187 | 
|                                                                 |               |                           |         |      |  |      |        |     |  |   |        |      
|Weighted average number of common shares outstanding as adjusted |               |                           | 35,883  |      |  |      | 36,688 |     |  |   | 37,368 |      
|                                                                
|                                                                
|                                                                
|                                                                
|Earnings per common share-diluted                                |               | $                         | 3.11    |      |  | $    | 2.21   |     |  | $ | 1.84   |      
|                                                                 |               |                           |         |      |  |      |        |     |  |   |        |      

Comprehensive Income

Comprehensive income is defined as the change in equity during a
period from transactions and other events, except those resulting
 from investments by and distributions to stockholders. The
components of comprehensive income are reported in the
consolidated statements of stockholders investment.

F-20



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Segments

The Company has one reportable segment given the similarities of
economic characteristics and products offered between the
operations represented by the Companys four brands.
Revenues of international retail operations represent
approximately 8.7 percent and 1.5 percent of the
Companys revenues for fiscal 2000 and fiscal 1999,
respectively. Net property and equipment of international
operations, represents approximately 5.4 percent and
8.0 percent of the Companys net property and equipment
 for fiscal 2000 and fiscal 1999, respectively. The
Companys international retail operations commenced with the
 acquisition of Peoples Jewellers effective May 23, 1999.

Acquisition of Peoples Jewellers

Effective May 23, 1999, the Company acquired substantially
all assets and certain operational liabilities of Peoples
Jewellers Corporation, a privately owned chain consisting
principally of 176 fine jewelry stores operating throughout
Canada, for approximately $78 million cash, payment of
approximately $18 million to pay down existing bank debt and
 assumption of certain liabilities.

The excess of the purchase price over the fair value of the net
assets acquired of approximately $63.6 million as of
July 31, 2000 is classified as goodwill, which includes
fiscal 2000 refinements to the purchase price. The goodwill is
included in other assets in the accompanying balance sheet and is
 being amortized on a straight line basis. The Company refined
during fiscal year 2000, the goodwill amortization period
from twenty years to fifteen years, resulting in a
$0.9 million adjustment to goodwill amortization expense.
Accumulated amortization at July 31, 2000 was
$4.6 million, while total amortization expense for the
twelve months ended July 31, 2000 and 1999 was
$4.2 million and $0.5 million, respectively.

The acquisition described above was accounted for by the purchase
 method of accounting for business combinations. Accordingly, the
 accompanying consolidated statements of operations do not
include any revenues or expenses related to the acquisition prior
 to May 23, 1999. The entire cost of the acquisition was
funded through the Companys available cash.

The following unaudited pro forma information presents a summary
of our consolidated results of operations including Peoples
Jewellers as if the acquisition was effective on August 1,
1997:

|                           |         |                           |           |            |  |   |           |      | 
|-------------------------- | ------- | ------------------------- | --------- | ---------- |  | - | --------- | ---- | 
|                           |         | Year Ended                |           | Year Ended
|                           |         | July 31,                  |           | July 31,  
|                           |         | 1999                      |           | 1998      
|                           |         |                           |           |           
|                           |         |                          
|                           |         | (unaudited)              
|                           |         |                          
|                           |         | (amounts in thousands,   
|                           |         | except per share amounts)
|                          
|                          
|                          
|                          
|Sales                      |         | $                         | 1,542,645 |            |  | $ | 1,452,326 |     
|                          
|                          
|                          
|                          
|Net Earnings               |         |                           | 81,203    |            |  |   | 69,086    |     
|                          
|                          
|                          
|                          
|Earnings Per Common Share: |         |                           |           |            |  |   |           |     
|                          
|                          
|                          
|                          
|                           | Diluted |                           |           | 2.21       |  |   |           | 1.85 | 

The unaudited pro forma information does not purport to represent
 what the results of operations of the Company would actually
have been if the aforementioned transaction had occurred on
August 1, 1997, nor do they project the results of
operations or financial position for any future periods or at any
 future date.

Unusual Item  Gain on Sale of Diamond Park

On September 3, 1997, the Company signed an agreement to
sell Diamond Park Fine Jewelers (the Diamond Park
Sale). Diamond Park Fine Jewelers, which managed leased
fine jewelry departments in major department store chains
including Marshall Fields, Dillards, Mercantile and
Parisian, had net sales of $125.3 million in fiscal year
1997. On October 6, 1997, the Company closed the Diamond
Park Sale resulting

F-21



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

in a gain of $1.6 million. The Company received
$58.0 million in October 1997 and approximately
$4.8 million was received in February 1998.

Unusual Item  Gain on Sale of Land

In fiscal 1998, the Company closed the sale of excess land
surrounding the corporate headquarters facility for
$12.9 million, resulting in a gain of $7.3 million.

Commitments and Contingencies

The Company is involved in certain legal actions and claims
arising in the ordinary course of business. Management believes
that such litigation and claims will be resolved without material
 effect on the Companys financial position or results of
operations.

In July of 2000, the Company was notified that a suit was filed
seeking class action status relating to certain policies of its
credit insurance operations. Management intends to vigorously
defend itself against such actions. Management believes that such
 litigation and claims will be resolved without material effect
on the Companys financial position or results of
operations.

The Company has an operations services agreement for management
information systems with a third-party servicer. The agreement,
which began in December 1996, requires fixed payments totaling
$34.4 million over a 60 month term and a variable
amount based on usage.

The Company has a credit processing service agreement for
domestic credit operations with a third-party servicer. The
agreement requires minimum annual payments based on credit
activities. The Company has a commitment of approximately
$15.2 million to be paid over the initial term of seven
years. In connection with the sale of the Companys customer
 receivables to AFCC and the Merger, this agreement will be
terminated upon conversion to AFCCs systems, which is
expected to occur by the first calendar quarter of 2001. See
Current Year Events  Sale of Private Label
Credit Card Business.

Benefit Plans



| |                                     
| | ------------------------------------
| | Defined Contribution Retirement Plan

At July 31, 2000, the Company maintained the Zale
Corporation Savings & Investment Plan (the
401(k) Plan). Substantially all employees who
are at least age 21 are eligible to participate in the plan.
 Effective August 1, 1998, new employees are required to
complete one year of continuous service with the Company to be
eligible to participate in the plan. Each employee can contribute
 from one percent to fifteen percent of their annual salary.
Under this plan, the Company matches one dollar in Zale stock for
 every dollar an employee contributes up to four percent of
annual earnings, subject to Internal Revenue Service limitations.
 In order for an employee to be eligible for the Company match,
the employee must have worked at least 1,000 hours during
the plan.

Matching contributions are made on a monthly basis, and are
100 percent vested immediately. The Companys matching
contributions were $5.2 million, $1.3 million and
$1.2 million for fiscal years 2000, 1999 and 1998,
respectively. The Company contributed 130,449 and 52,594 treasury
 shares to its 401(k) Plan in fiscal year 2000 and
1999, respectively.



| |                              
| | -----------------------------
| | Non-Qualified Retirement Plan

On September 14, 1995, the Boards of Directors of Zale and
ZDel approved the preparation and implementation of the Zale
Delaware, Inc. Supplemental Executive Retirement Plan (the
Plan), which was executed on behalf of the Company
February 23, 1996, to be effective as of September 15,
1995. The purpose of the Plan is to provide eligible executives
with the opportunity to receive payments each year after
retirement

F-22



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

equal to a portion of their final average pay as defined.
Effective August 1, 2000, the eligibility requirements were
changed to include corporate vice-presidents, division
presidents, and division senior vice-presidents.

Financial Instruments

As cash and short-term cash investments, customer receivables,
the revolving credit agreement, trade payables and certain other
short-term financial instruments are all short-term in nature,
their carrying amount approximates fair value. Also, the carrying
 amount of the $99.6 million, net of discount, Senior Notes
approximates fair value.

The investments of the Companys insurance subsidiaries,
primarily stocks and bonds in the amount of $27.8 million
and $27.7 million, approximate market value at July 31,
 2000 and July 31, 1999 respectively and are reflected in
Other Assets on the Consolidated Balance Sheets. Investments are
classified as available for sale and are carried at fair value.
Changes in unrealized gains and losses are recorded directly to
stockholders investment. Net realized gains recognized for
the years ended July 31, 2000, 1999 and 1998 were
$2.1 million, $1.6 million, and $0.8 million,
respectively.

Concentrations of Credit Risk.Financial instruments which
 potentially subject the Company to significant concentrations of
 credit risk consist principally of cash investments. The Company
 maintains cash and cash equivalents, short and long-term
investments and certain other financial instruments with various
financial institutions. These financial institutions are located
throughout the country. As of July 31, 2000 and 1999, the
Company had no significant concentrations of credit risk.

Related-Party Transactions

One of the Companys directors serves as a director of a
company from which the Company purchased approximately
$2.8 million and $2.6 million of jewelry merchandise
during fiscal year 2000 and 1999, respectively. The Company
believes the terms were equivalent to those of unrelated parties.

New Financial Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, Accounting for
 Derivative Instruments and Hedging Activities, which was
amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities  Deferral of the
Effective Date of SFAS No. 133, which is effective for
 fiscal years beginning after June 15, 2000. The Company has
 limited involvement with derivative financial instruments and
only uses them to manage well-defined interest rate and foreign
exchange risks. Forward foreign exchange contracts are used to
hedge the impact of fluctuations of foreign exchange on inventory
 purchases. The amount of interest rate and foreign exchange
contracts outstanding at July 31, 2000 or in place during
fiscal 2000 was immaterial to both the Companys results of
operations and its financial position.

In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, Revenue Recognition
 in Financial Statements (SAB 101).
SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial
statements. The Company will adopt SAB 101 as required in
the fourth quarter of fiscal 2001. The Company is currently
assessing the impact of SAB 101 on its results of operations
 and financial position.

In April, 2000, the Financial Accounting Standards Board issued
FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation  An
Interpretation of APB Opinion No. 25 which provides
guidance on accounting for certain stock option transactions,
including stock options issued in a business combination, stock
option repricings, and other equity arrangements. This statement
is effective July 1, 2000. Management will periodically
evaluate the impact of this interpretation on other equity
arrangements. Management believes that this interpretation will
not have a significant effect on our consolidated financial
position or results of operations.

F-23



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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Subsequent Event

Acquisition of Piercing Pagoda, Inc. On
August 11, 2000, the Company entered into an Agreement and
Plan of Merger with Piercing Pagoda, Inc., a Delaware
corporation, pursuant to which the Company through an indirect
wholly owned subsidiary (Jewelry Expansion Corp.) agreed to
acquire all of the outstanding shares of Piercing Pagoda.

The Company through its subsidiary commenced a tender offer on
August 22, 2000 to purchase all of the outstanding shares of
 Piercing Pagoda, Inc.s $0.01 par value per share
 common stock for $21.50 per share in cash. The tender offer
 expired at 12:00 midnight, New York City time, on
September 19, 2000. Based upon the report of the depository
for the tender offer, at the expiration of the tender offer
approximately 8,943,833 shares, representing
94.7 percent of the outstanding shares of Piercing Pagoda
common stock, were validly tendered and not withdrawn pursuant to
 the tender offer. On September 20, 2000, the Company
acquired all of the shares of Piercing Pagoda common stock
validly tendered pursuant to the tender offer at a purchase price
 of approximately $192.3 million. In order to complete its
acquisition of Piercing Pagoda, the Company intends to merge
Jewelry Expansion Corp., a wholly owned subsidiary of Zale
Delaware, with and into Piercing Pagoda as soon as practicable.
Pursuant to the merger, each share of Piercing Pagoda common
stock not previously tendered in the tender offer will be
converted into the right to receive $21.50 per share. The
merger is not subject to the approval of the remaining
outstanding shareholders of Piercing Pagoda. The total estimated
purchase price for the acquisition is approximately
$208 million plus the assumption of approximately
$55 million in debt. The acquisition will be accounted for
under the purchase method of accounting.

Supplemental Condensed Consolidating Financial Information

On September 23, 1997, the Company sold $100 million in
 aggregate principal amount of 8 1/2 percent Senior
Notes (the Senior Notes) due 2007 by means of an
offering memorandum to qualified institutional buyers under
Rule 144A promulgated under the Securities Act of 1933, as
amended.

The Companys payment obligations under the Senior Notes are
 guaranteed by ZDel (the Guarantor Subsidiary). Such
guarantee is full and unconditional with respect to ZDel. ZFT, a
limited purpose Delaware business trust wholly owned by ZDel
which owns the customer accounts receivable of ZDel, is not a
guarantor of the obligations under the Senior Notes. Separate
financial statements of the Guarantor Subsidiary are not
presented because the Companys management has determined
that they would not be material to investors. Effective
August 1, 1999 ZDel declared a $750 million dividend to
 its Parent, Zale Corporation. In order to fulfill the
obligations of this dividend, ZDel issued a $750 million
note payable to its parent. The following supplemental financial
information sets forth, on an unconsolidated basis, statements of
 operations, balance sheets, and statements of cash flow
information for the Company (Parent Company Only),
for the Guarantor Subsidiary and for the Companys other
subsidiaries (the Non-Guarantor Subsidiaries). The
supplemental financial information reflects the investments of
the Company and the Guarantor Subsidiary in the Guarantor and
Non-Guarantor Subsidiaries using the equity method of accounting.
 Certain reclassifications have been made to provide for uniform
disclosure of all periods presented. These reclassifications are
not material.

F-24



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)






SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS


Year Ended July 31, 2000

(amounts in thousands)


|                                                   |  |         |         |            |  |               |           |              |  |              |         |  |  |   |         |   |  |   |           | 
|-------------------------------------------------- |  | ------- | ------- | ---------- |  | ------------- | --------- | ------------ |  | ------------ | ------- |  |  | - | ------- | - |  | - | --------- | 
|                                                   |  | Parent  |         |            |  |               |           |              |  |             
|                                                   |  | Company |         | Guarantor  |  | Non-Guarantor |           |              |  |             
|                                                   |  | Only    |         | Subsidiary |  | Subsidiaries  |           | Eliminations |  | Consolidated
|                                                   |  |         |         |            |  |               |           |              |  |             
|Net Sales                                          |  | $       |        |            |  | $             | 1,604,700 |              |  | $            | 188,896 |  |  | $ |        |   |  | $ | 1,793,596 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Cost of Sales                                      |  |         |        |            |  |               | 825,271   |              |  |              | 94,732  |  |  |   |        |   |  |   | 920,003   | 
|                                                   |  |         |         |            |  |               |           |              |  |              |         |  |  |   |         |   |  |   |           | 
|Gross Margin                                       |  |         |        |            |  |               | 779,429   |              |  |              | 94,164  |  |  |   |        |   |  |   | 873,593   | 
|                                                  
|                                                  
|                                                  
|                                                  
|Selling, General and Administrative Expenses       |  |         | 150     |            |  |               | 601,596   |              |  |              | 18,998  |  |  |   |        |   |  |   | 620,744   | 
|                                                  
|                                                  
|                                                  
|                                                  
|Depreciation and Amortization Expense              |  |         |        |            |  |               | 31,678    |              |  |              | 10,753  |  |  |   |        |   |  |   | 42,431    | 
|                                                   |  |         |         |            |  |               |           |              |  |              |         |  |  |   |         |   |  |   |           | 
|Operating Earnings (Loss)                          |  |         | (150    | )          |  |               | 146,155   |              |  |              | 64,413  |  |  |   |        |   |  |   | 210,418   | 
|                                                  
|                                                  
|                                                  
|                                                  
|Interest Expense (Income), Net                     |  |         | (67,500 | )          |  |               | 77,435    |              |  |              | 22,243  |  |  |   |        |   |  |   | 32,178    | 
|                                                   |  |         |         |            |  |               |           |              |  |              |         |  |  |   |         |   |  |   |           | 
|Income Before Income Taxes                         |  |         | 67,350  |            |  |               | 68,720    |              |  |              | 42,170  |  |  |   |        |   |  |   | 178,240   | 
|                                                  
|                                                  
|                                                  
|                                                  
|Income Taxes                                       |  |         | 25,408  |            |  |               | 25,926    |              |  |              | 15,392  |  |  |   |        |   |  |   | 66,726    | 
|                                                   |  |         |         |            |  |               |           |              |  |              |         |  |  |   |         |   |  |   |           | 
|Earnings Before Equity in Earnings of Subsidiaries |  |         | 41,942  |            |  |               | 42,794    |              |  |              | 26,778  |  |  |   |        |   |  |   | 111,514   | 
|                                                  
|                                                  
|                                                  
|                                                  
|Equity in Earnings of Subsidiaries                 |  |         | 69,572  |            |  |               | 23,231    |              |  |              |        |  |  |   | (92,803 | ) |  |   |          | 
|                                                   |  |         |         |            |  |               |           |              |  |              |         |  |  |   |         |   |  |   |           | 
|Net Earnings                                       |  | $       | 111,514 |            |  | $             | 66,025    |              |  | $            | 26,778  |  |  | $ | (92,803 | ) |  | $ | 111,514   | 
|                                                   |  |         |         |            |  |               |           |              |  |              |         |  |  |   |         |   |  |   |           | 

F-25



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS  (Continued)

Year Ended July 31, 1999

(amounts in thousands)


|                                                          |  |         |        |            |  |               |           |              |  |              |         |   |  |   |         |   |  |   |           | 
|--------------------------------------------------------- |  | ------- | ------ | ---------- |  | ------------- | --------- | ------------ |  | ------------ | ------- | - |  | - | ------- | - |  | - | --------- | 
|                                                          |  | Parent  |        |            |  |               |           |              |  |             
|                                                          |  | Company |        | Guarantor  |  | Non-Guarantor |           |              |  |             
|                                                          |  | Only    |        | Subsidiary |  | Subsidiaries  |           | Eliminations |  | Consolidated
|                                                          |  |         |        |            |  |               |           |              |  |             
|Net Sales                                                 |  | $       |       |            |  | $             | 1,378,670 |              |  | $            | 50,198  |   |  | $ |        |   |  | $ | 1,428,868 | 
|                                                         
|                                                         
|                                                         
|                                                         
|Cost of Sales                                             |  |         |       |            |  |               | 712,072   |              |  |              | 25,116  |   |  |   |        |   |  |   | 737,188   | 
|                                                          |  |         |        |            |  |               |           |              |  |              |         |   |  |   |         |   |  |   |           | 
|Gross Margin                                              |  |         |       |            |  |               | 666,598   |              |  |              | 25,082  |   |  |   |        |   |  |   | 691,680   | 
|                                                         
|                                                         
|                                                         
|                                                         
|Selling, General and Administrative Expenses (Income)     |  |         | 150    |            |  |               | 529,119   |              |  |              | (26,990 | ) |  |   |        |   |  |   | 502,279   | 
|                                                         
|                                                         
|                                                         
|                                                         
|Depreciation and Amortization Expense                     |  |         |       |            |  |               | 26,193    |              |  |              | 3,285   |   |  |   |        |   |  |   | 29,478    | 
|                                                          |  |         |        |            |  |               |           |              |  |              |         |   |  |   |         |   |  |   |           | 
|Operating Earnings (Loss)                                 |  |         | (150   | )          |  |               | 111,286   |              |  |              | 48,787  |   |  |   |        |   |  |   | 159,923   | 
|                                                         
|                                                         
|                                                         
|                                                         
|Interest Expense (Income), Net                            |  |         |       |            |  |               | (11,718   | )            |  |              | 42,206  |   |  |   |        |   |  |   | 30,488    | 
|                                                          |  |         |        |            |  |               |           |              |  |              |         |   |  |   |         |   |  |   |           | 
|Income (Loss) Before Income Taxes                         |  |         | (150   | )          |  |               | 123,004   |              |  |              | 6,581   |   |  |   |        |   |  |   | 129,435   | 
|                                                         
|                                                         
|                                                         
|                                                         
|Income Taxes                                              |  |         | (56    | )          |  |               | 46,254    |              |  |              | 2,305   |   |  |   |        |   |  |   | 48,503    | 
|                                                          |  |         |        |            |  |               |           |              |  |              |         |   |  |   |         |   |  |   |           | 
|Earnings (Loss) Before Equity in Earnings of Subsidiaries |  |         | (94    | )          |  |               | 76,750    |              |  |              | 4,276   |   |  |   |        |   |  |   | 80,932    | 
|                                                         
|                                                         
|                                                         
|                                                         
|Equity in Earnings of Subsidiaries                        |  |         | 81,026 |            |  |               | 4,459     |              |  |              |        |   |  |   | (85,485 | ) |  |   |          | 
|                                                          |  |         |        |            |  |               |           |              |  |              |         |   |  |   |         |   |  |   |           | 
|Net Earnings                                              |  | $       | 80,932 |            |  | $             | 81,209    |              |  | $            | 4,276   |   |  | $ | (85,485 | ) |  | $ | 80,932    | 
|                                                          |  |         |        |            |  |               |           |              |  |              |         |   |  |   |         |   |  |   |           | 

F-26



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS  (Continued)

Year Ended July 31, 1998

(amounts in thousands)


|                                                           |  |         |        |            |  |               |           |              |  |              |         |   |  |   |         |   |  |   |           |  
|---------------------------------------------------------- |  | ------- | ------ | ---------- |  | ------------- | --------- | ------------ |  | ------------ | ------- | - |  | - | ------- | - |  | - | --------- | -
|                                                           |  | Parent  |        |            |  |               |           |              |  |             
|                                                           |  | Company |        | Guarantor  |  | Non-Guarantor |           |              |  |             
|                                                           |  | Only    |        | Subsidiary |  | Subsidiaries  |           | Eliminations |  | Consolidated
|                                                           |  |         |        |            |  |               |           |              |  |             
|Net Sales                                                  |  | $       |       |            |  | $             | 1,291,146 |              |  | $            | 22,564  |   |  | $ |        |   |  | $ | 1,313,710 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Cost of Sales                                              |  |         |       |            |  |               | 670,776   |              |  |              | 11,132  |   |  |   |        |   |  |   | 681,908   |  
|                                                           |  |         |        |            |  |               |           |              |  |              |         |   |  |   |         |   |  |   |           |  
|Gross Margin                                               |  |         |       |            |  |               | 620,370   |              |  |              | 11,432  |   |  |   |        |   |  |   | 631,802   |  
|                                                          
|                                                          
|                                                          
|                                                          
|Selling, General and Administrative Expenses (Income)      |  |         | 158    |            |  |               | 509,123   |              |  |              | (33,435 | ) |  |   |        |   |  |   | 475,846   |  
|                                                          
|                                                          
|                                                          
|                                                          
|Depreciation and Amortization Expense                      |  |         |       |            |  |               | 21,352    |              |  |              | 1,213   |   |  |   |        |   |  |   | 22,565    |  
|                                                          
|                                                          
|                                                          
|                                                          
|Unusual Item  Gain on Sale of Diamond Park Fine
	Jewelers |  |         |       |            |  |               | (1,634    | )            |  |              |        |   |  |   |        |   |  |   | (1,634    | )
|                                                          
|                                                          
|                                                          
|                                                          
|Unusual Item  Gain on Sale of Land                        |  |         |       |            |  |               | (7,313    | )            |  |              |        |   |  |   |        |   |  |   | (7,313    | )
|                                                           |  |         |        |            |  |               |           |              |  |              |         |   |  |   |         |   |  |   |           |  
|Operating Earnings (Loss)                                  |  |         | (158   | )          |  |               | 98,842    |              |  |              | 43,654  |   |  |   |        |   |  |   | 142,338   |  
|                                                          
|                                                          
|                                                          
|                                                          
|Interest Expense, Net                                      |  |         |       |            |  |               | (7,327    | )            |  |              | 39,366  |   |  |   |        |   |  |   | 32,039    |  
|                                                           |  |         |        |            |  |               |           |              |  |              |         |   |  |   |         |   |  |   |           |  
|Income (Loss) Before Income Taxes                          |  |         | (158   | )          |  |               | 106,169   |              |  |              | 4,288   |   |  |   |        |   |  |   | 110,299   |  
|                                                          
|                                                          
|                                                          
|                                                          
|Income Taxes                                               |  |         | (59    | )          |  |               | 39,812    |              |  |              | 1,609   |   |  |   |        |   |  |   | 41,362    |  
|                                                           |  |         |        |            |  |               |           |              |  |              |         |   |  |   |         |   |  |   |           |  
|Earnings (Loss) Before Equity in Earnings of Subsidiaries  |  |         | (99    | )          |  |               | 66,357    |              |  |              | 2,679   |   |  |   |        |   |  |   | 68,937    |  
|                                                          
|                                                          
|                                                          
|                                                          
|Equity in Earnings of Subsidiaries                         |  |         | 69,036 |            |  |               | 2,619     |              |  |              |        |   |  |   | (71,655 | ) |  |   |          |  
|                                                           |  |         |        |            |  |               |           |              |  |              |         |   |  |   |         |   |  |   |           |  
|Net Earnings                                               |  | $       | 68,937 |            |  | $             | 68,976    |              |  | $            | 2,679   |   |  | $ | (71,655 | ) |  | $ | 68,937    |  
|                                                           |  |         |        |            |  |               |           |              |  |              |         |   |  |   |         |   |  |   |           |  

F-27



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)






SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET


July 31, 2000

(amounts in thousands)


|                                                                   |                                          |         |         |            |  |               |           |              |  |              |         |        |   |   |          |   |  |   |           |         | 
|------------------------------------------------------------------ | ---------------------------------------- | ------- | ------- | ---------- |  | ------------- | --------- | ------------ |  | ------------ | ------- | ------ | - | - | -------- | - |  | - | --------- | ------- | 
|                                                                   |                                          | Parent  |         |            |  |               |           |              |  |             
|                                                                   |                                          | Company |         | Guarantor  |  | Non-Guarantor |           |              |  |             
|                                                                   |                                          | Only    |         | Subsidiary |  | Subsidiaries  |           | Eliminations |  | Consolidated
|                                                                   |                                          |         |         |            |  |               |           |              |  |             
|ASSETS                                                            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Current Assets:                                                    |                                          |         |         |            |  |               |           |              |  |              |         |        |   |   |          |   |  |   |           |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Cash and Cash Equivalents                |         | $       |           |  |               | $         | 281,213      |  |              | $       | 17,021 |   |   | $        |  |  |   | $         | 298,234 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Restricted Cash                          |         |         |           |  |               |           | 193          |  |              |         | 3,720  |   |   |          |  |  |   |           | 3,913   | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Merchandise Inventories                  |         |         |           |  |               |           | 566,958      |  |              |         | 63,492 |   |   |          |  |  |   |           | 630,450 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Other Current Assets                     |         |         |           |  |               |           | 47,336       |  |              |         | (4,785 | ) |   |          |  |  |   |           | 42,551  | 
|                                                                   |                                          |         |         |            |  |               |           |              |  |              |         |        |   |   |          |   |  |   |           |        
|Total Current Assets                                               |                                          |         |        |            |  |               | 895,700   |              |  |              | 79,448  |        |   |   |         |   |  |   | 975,148   |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Investment in Subsidiaries                                         |                                          |         | (20,229 | )          |  |               | 66,268    |              |  |              |        |        |   |   | (46,039  | ) |  |   |          |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Property and Equipment, Net                                        |                                          |         |        |            |  |               | 214,721   |              |  |              | 16,534  |        |   |   |         |   |  |   | 231,255   |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Intercompany Receivable                                            |                                          |         | 903,825 |            |  |               |          |              |  |              | 24,396  |        |   |   | (928,221 | ) |  |   |          |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other Assets                                                       |                                          |         |        |            |  |               | 8,013     |              |  |              | 92,177  |        |   |   |         |   |  |   | 100,190   |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Deferred Tax Assets, Net                                           |                                          |         | 59      |            |  |               | 63,667    |              |  |              | (30     | )      |   |   |         |   |  |   | 63,696    |        
|                                                                   |                                          |         |         |            |  |               |           |              |  |              |         |        |   |   |          |   |  |   |           |        
|Total Assets                                                       |                                          | $       | 883,655 |            |  | $             | 1,248,369 |              |  | $            | 212,525 |        |   | $ | (974,260 | ) |  | $ | 1,370,289 |        
|                                                                   |                                          |         |         |            |  |               |           |              |  |              |         |        |   |   |          |   |  |   |           |        
|                                                                  
|LIABILITIES AND STOCKHOLDERS INVESTMENT                          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Current Liabilities:                                               |                                          |         |         |            |  |               |           |              |  |              |         |        |   |   |          |   |  |   |           |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accounts Payable and Accrued Liabilities |         | $       | 2,819      |  |               | $         | 265,190      |  |              | $       | 18,270 |   |   | $        |  |  |   | $         | 286,279 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Deferred Tax Liability, Net              |         |         | 646        |  |               |           | 22,942       |  |              |         | (896   | ) |   |          |  |  |   |           | 22,692  | 
|                                                                   |                                          |         |         |            |  |               |           |              |  |              |         |        |   |   |          |   |  |   |           |        
|Total Current Liabilities                                          |                                          |         | 3,465   |            |  |               | 288,132   |              |  |              | 17,374  |        |   |   |         |   |  |   | 308,971   |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Non-current Liabilities                                            |                                          |         |        |            |  |               | 112,846   |              |  |              | 10,141  |        |   |   |         |   |  |   | 122,987   |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Intercompany Payable                                               |                                          |         |        |            |  |               | 924,011   |              |  |              | 4,229   |        |   |   | (928,240 | ) |  |   |          |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Long-term Debt                                                     |                                          |         | 99,625  |            |  |               |          |              |  |              | 9,744   |        |   |   |         |   |  |   | 109,369   |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Excess of Revalued Net Assets Over Stockholders Investment,
	 Net |                                          |         |        |            |  |               | 47,185    |              |  |              |        |        |   |   |         |   |  |   | 47,185    |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Total Stockholders Investment                                     |                                          |         | 780,565 |            |  |               | (123,805  | )            |  |              | 171,037 |        |   |   | (46,020  | ) |  |   | 781,777   |        
|                                                                   |                                          |         |         |            |  |               |           |              |  |              |         |        |   |   |          |   |  |   |           |        
|Total Liabilities and Stockholders Investment                     |                                          | $       | 883,655 |            |  | $             | 1,248,369 |              |  | $            | 212,525 |        |   | $ | (974,260 | ) |  | $ | 1,370,289 |        
|                                                                   |                                          |         |         |            |  |               |           |              |  |              |         |        |   |   |          |   |  |   |           |        

F-28



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET 
 (Continued)

July 31, 1999

(amounts in thousands)


|                                                                   |                                          |         |         |            |  |               |           |              |  |              |         |         |   |   |            |   |  |   |           |         | 
|------------------------------------------------------------------ | ---------------------------------------- | ------- | ------- | ---------- |  | ------------- | --------- | ------------ |  | ------------ | ------- | ------- | - | - | ---------- | - |  | - | --------- | ------- | 
|                                                                   |                                          | Parent  |         |            |  |               |           |              |  |             
|                                                                   |                                          | Company |         | Guarantor  |  | Non-Guarantor |           |              |  |             
|                                                                   |                                          | Only    |         | Subsidiary |  | Subsidiaries  |           | Eliminations |  | Consolidated
|                                                                   |                                          |         |         |            |  |               |           |              |  |             
|ASSETS                                                            
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Current Assets:                                                    |                                          |         |         |            |  |               |           |              |  |              |         |         |   |   |            |   |  |   |           |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Cash and Cash Equivalents                |         | $       |           |  |               | $         | 22,294       |  |              | $       | 13,109  |   |   | $          |  |  |   | $         | 35,403  | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Restricted Cash                          |         |         |           |  |               |           | 1,533        |  |              |         | 4,496   |   |   |            |  |  |   |           | 6,029   | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Customer Receivables, Net                |         |         |           |  |               |           |             |  |              |         | 510,714 |   |   |            |  |  |   |           | 510,714 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Merchandise Inventories                  |         |         |           |  |               |           | 524,184      |  |              |         | 47,485  |   |   |            |  |  |   |           | 571,669 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Other Current Assets                     |         |         |           |  |               |           | 33,869       |  |              |         | 2,958   |   |   |            |  |  |   |           | 36,827  | 
|                                                                   |                                          |         |         |            |  |               |           |              |  |              |         |         |   |   |            |   |  |   |           |        
|Total Current Assets                                               |                                          |         |        |            |  |               | 581,880   |              |  |              | 578,762 |         |   |   |           |   |  |   | 1,160,642 |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Investment in Subsidiaries                                         |                                          |         | 698,197 |            |  |               | 47,880    |              |  |              |        |         |   |   | (746,077   | ) |  |   |          |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Property and Equipment, Net                                        |                                          |         |        |            |  |               | 183,789   |              |  |              | 20,052  |         |   |   |           |   |  |   | 203,841   |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Intercompany Receivable                                            |                                          |         | 102,768 |            |  |               | 151,287   |              |  |              |        |         |   |   | (254,055   | ) |  |   |          |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other Assets                                                       |                                          |         |        |            |  |               | 8,393     |              |  |              | 91,261  |         |   |   |           |   |  |   | 99,654    |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Deferred Tax Assets, Net                                           |                                          |         | 58      |            |  |               | 67,335    |              |  |              | (4,598  | )       |   |   |           |   |  |   | 62,795    |        
|                                                                   |                                          |         |         |            |  |               |           |              |  |              |         |         |   |   |            |   |  |   |           |        
|Total Assets                                                       |                                          | $       | 801,023 |            |  | $             | 1,040,564 |              |  | $            | 685,477 |         |   | $ | (1,000,132 | ) |  | $ | 1,526,932 |        
|                                                                   |                                          |         |         |            |  |               |           |              |  |              |         |         |   |   |            |   |  |   |           |        
|                                                                  
|LIABILITIES AND STOCKHOLDERS INVESTMENT                          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Current Liabilities:                                               |                                          |         |         |            |  |               |           |              |  |              |         |         |   |   |            |   |  |   |           |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Short-term borrowings                    |         | $       |           |  |               | $         | 103,000      |  |              | $       | 250,000 |   |   | $          |  |  |   | $         | 353,000 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accounts Payable and Accrued Liabilities |         |         | 2,784      |  |               |           | 216,101      |  |              |         | 18,507  |   |   |            |  |  |   |           | 237,392 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Deferred Tax Liability, Net              |         |         | 646        |  |               |           | 17,954       |  |              |         | (5,236  | ) |   |            |  |  |   |           | 13,364  | 
|                                                                   |                                          |         |         |            |  |               |           |              |  |              |         |         |   |   |            |   |  |   |           |        
|Total Current Liabilities                                          |                                          |         | 3,430   |            |  |               | 337,055   |              |  |              | 263,271 |         |   |   |           |   |  |   | 603,756   |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Non-current Liabilities                                            |                                          |         |        |            |  |               | 59,294    |              |  |              | 11,598  |         |   |   |           |   |  |   | 70,892    |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Intercompany Payable                                               |                                          |         |        |            |  |               |          |              |  |              | 254,055 |         |   |   | (254,055   | ) |  |   |          |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Long-term Debt                                                     |                                          |         | 99,589  |            |  |               |          |              |  |              |        |         |   |   |           |   |  |   | 99,589    |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Excess of Revalued Net Assets Over Stockholders Investment,
	 Net |                                          |         |        |            |  |               | 53,084    |              |  |              |        |         |   |   |           |   |  |   | 53,084    |        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Total Stockholders Investment                                     |                                          |         | 698,004 |            |  |               | 591,131   |              |  |              | 156,553 |         |   |   | (746,077   | ) |  |   | 699,611   |        
|                                                                   |                                          |         |         |            |  |               |           |              |  |              |         |         |   |   |            |   |  |   |           |        
|Total Liabilities and Stockholders Investment                     |                                          | $       | 801,023 |            |  | $             | 1,040,564 |              |  | $            | 685,477 |         |   | $ | (1,000,132 | ) |  | $ | 1,526,932 |        
|                                                                   |                                          |         |         |            |  |               |           |              |  |              |         |         |   |   |            |   |  |   |           |        

F-29



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended July 31, 2000

(amounts in thousands)


|                                                    |  |         |         |            |  |               |          |              |  |              |          |   |  |   |        |   |  |   |          |  
|--------------------------------------------------- |  | ------- | ------- | ---------- |  | ------------- | -------- | ------------ |  | ------------ | -------- | - |  | - | ------ | - |  | - | -------- | -
|                                                    |  | Parent  |         |            |  |               |          |              |  |             
|                                                    |  | Company |         | Guarantor  |  | Non-Guarantor |          |              |  |             
|                                                    |  | Only    |         | Subsidiary |  | Subsidiaries  |          | Eliminations |  | Consolidated
|                                                    |  |         |         |            |  |               |          |              |  |             
|Net Cash Provided by Operating Activities           |  | $       | 41,955  |            |  | $             | 422,579  |              |  | $            | (314,428 | ) |  | $ | (8,173 | ) |  | $ | 141,933  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Net Cash Flows from Investing Activities:           |  |         |         |            |  |               |          |              |  |              |          |   |  |   |        |   |  |   |          |  
|                                                   
|                                                   
|                                                   
|                                                   
|Additions to property and equipment                 |  |         |        |            |  |               | (71,164  | )            |  |              | (7,454   | ) |  |   |       |   |  |   | (78,618  | )
|                                                   
|                                                   
|                                                   
|                                                   
|Dispositions of property and equipment              |  |         |        |            |  |               | 2,986    |              |  |              | 212      |   |  |   |       |   |  |   | 3,198    |  
|                                                   
|                                                   
|                                                   
|                                                   
|Proceeds from Sale of Credit Card Receivables       |  |         |        |            |  |               |         |              |  |              | 583,676  |   |  |   |       |   |  |   | 583,676  |  
|                                                    |  |         |         |            |  |               |          |              |  |              |          |   |  |   |        |   |  |   |          |  
|Net Cash Provided by (Used in) Investing Activities |  |         |        |            |  |               | (68,178  | )            |  |              | 576,434  |   |  |   |       |   |  |   | 508,256  |  
|                                                    |  |         |         |            |  |               |          |              |  |              |          |   |  |   |        |   |  |   |          |  
|Net Cash Flows from Financing Activities:           |  |         |         |            |  |               |          |              |  |              |          |   |  |   |        |   |  |   |          |  
|                                                   
|                                                   
|                                                   
|                                                   
|Net increase in short-term borrowings               |  |         |        |            |  |               |         |              |  |              | (250,000 | ) |  |   |       |   |  |   | (250,000 | )
|                                                   
|                                                   
|                                                   
|                                                   
|Payments on revolving credit agreement              |  |         |        |            |  |               | (568,038 | )            |  |              |         |   |  |   |       |   |  |   | (568,038 | )
|                                                   
|                                                   
|                                                   
|                                                   
|Borrowings under revolving credit agreement         |  |         |        |            |  |               | 474,782  |              |  |              |         |   |  |   |       |   |  |   | 474,782  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Debt issue and capitalized financing costs          |  |         |        |            |  |               | (2,226   | )            |  |              |         |   |  |   |       |   |  |   | (2,226   | )
|                                                   
|                                                   
|                                                   
|                                                   
|Proceeds from exercise of stock options             |  |         | 8,042   |            |  |               |         |              |  |              |         |   |  |   |       |   |  |   | 8,042    |  
|                                                   
|                                                   
|                                                   
|                                                   
|Purchase of common stock                            |  |         | (49,997 | )          |  |               |         |              |  |              |         |   |  |   |       |   |  |   | (49,997  | )
|                                                   
|                                                   
|                                                   
|                                                   
|Dividends paid                                      |  |         |        |            |  |               |         |              |  |              | (8,173   | ) |  |   | 8,173  |   |  |   |         |  
|                                                    |  |         |         |            |  |               |          |              |  |              |          |   |  |   |        |   |  |   |          |  
|Net Cash Used in Financing Activities               |  |         | (41,955 | )          |  |               | (95,482  | )            |  |              | (258,173 | ) |  |   | 8,173  |   |  |   | (387,437 | )
|                                                    |  |         |         |            |  |               |          |              |  |              |          |   |  |   |        |   |  |   |          |  
|Effect of Exchange Rate Changes on Cash             |  |         |        |            |  |               |         |              |  |              | 79       |   |  |   |       |   |  |   | 79       |  
|                                                   
|                                                   
|                                                   
|                                                   
|Net Increase in Cash and Cash Equivalents           |  |         |        |            |  |               | 258,919  |              |  |              | 3,912    |   |  |   |       |   |  |   | 262,831  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Cash and Cash Equivalents at Beginning of Period    |  |         |        |            |  |               | 22,294   |              |  |              | 13,109   |   |  |   |       |   |  |   | 35,403   |  
|                                                    |  |         |         |            |  |               |          |              |  |              |          |   |  |   |        |   |  |   |          |  
|Cash and Cash Equivalents at End of Period          |  | $       |        |            |  | $             | 281,213  |              |  | $            | 17,021   |   |  | $ |       |   |  | $ | 298,234  |  
|                                                    |  |         |         |            |  |               |          |              |  |              |          |   |  |   |        |   |  |   |          |  

F-30



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS  (Continued)

Year Ended July 31, 1999

(amounts in thousands)


|                                                       |  |         |         |            |  |               |          |              |  |              |          |   |  |   |          |   |  |   |          |  
|------------------------------------------------------ |  | ------- | ------- | ---------- |  | ------------- | -------- | ------------ |  | ------------ | -------- | - |  | - | -------- | - |  | - | -------- | -
|                                                       |  | Parent  |         |            |  |               |          |              |  |             
|                                                       |  | Company |         | Guarantor  |  | Non-Guarantor |          |              |  |             
|                                                       |  | Only    |         | Subsidiary |  | Subsidiaries  |          | Eliminations |  | Consolidated
|                                                       |  |         |         |            |  |               |          |              |  |             
|Net Cash Provided by (Used in) Operating Activities    |  | $       | 132,361 |            |  | $             | (86,411  | )            |  | $            | 47,435   |   |  | $ | (12,239  | ) |  | $ | 81,146   |  
|                                                      
|                                                      
|                                                      
|                                                      
|Net Cash Flows from Investing Activities:              |  |         |         |            |  |               |          |              |  |              |          |   |  |   |          |   |  |   |          |  
|                                                      
|                                                      
|                                                      
|                                                      
|Additions to property and equipment                    |  |         |        |            |  |               | (58,418  | )            |  |              | (1,120   | ) |  |   |         |   |  |   | (59,538  | )
|                                                      
|                                                      
|                                                      
|                                                      
|Dispositions of property and equipment                 |  |         |        |            |  |               | 1,875    |              |  |              | 66       |   |  |   |         |   |  |   | 1,941    |  
|                                                      
|                                                      
|                                                      
|                                                      
|Acquisition of Peoples Jewellers, net of cash acquired |  |         | (96,662 | )          |  |               |         |              |  |              |         |   |  |   |         |   |  |   | (96,662  | )
|                                                       |  |         |         |            |  |               |          |              |  |              |          |   |  |   |          |   |  |   |          |  
|Net Cash Used in Investing Activities                  |  |         | (96,662 | )          |  |               | (56,543  | )            |  |              | (1,054   | ) |  |   |         |   |  |   | (154,259 | )
|                                                       |  |         |         |            |  |               |          |              |  |              |          |   |  |   |          |   |  |   |          |  
|Net Cash Flows from Financing Activities:              |  |         |         |            |  |               |          |              |  |              |          |   |  |   |          |   |  |   |          |  
|                                                      
|                                                      
|                                                      
|                                                      
|Net increase in short-term borrowings                  |  |         |        |            |  |               |         |              |  |              | 250,000  |   |  |   |         |   |  |   | 250,000  |  
|                                                      
|                                                      
|                                                      
|                                                      
|Payments on receivables securitization facility        |  |         |        |            |  |               |         |              |  |              | (380,760 | ) |  |   |         |   |  |   | (380,760 | )
|                                                      
|                                                      
|                                                      
|                                                      
|Payments on revolving credit agreement                 |  |         |        |            |  |               | (3,500   | )            |  |              |         |   |  |   |         |   |  |   | (3,500   | )
|                                                      
|                                                      
|                                                      
|                                                      
|Borrowings under revolving credit agreement            |  |         |        |            |  |               | 106,500  |              |  |              |         |   |  |   |         |   |  |   | 106,500  |  
|                                                      
|                                                      
|                                                      
|                                                      
|Debt issue and capitalized financing costs             |  |         |        |            |  |               |         |              |  |              | (1,094   | ) |  |   |         |   |  |   | (1,094   | )
|                                                      
|                                                      
|                                                      
|                                                      
|Proceeds from exercise of stock options                |  |         | 14,244  |            |  |               |         |              |  |              |         |   |  |   |         |   |  |   | 14,244   |  
|                                                      
|                                                      
|                                                      
|                                                      
|Purchase of common stock                               |  |         | (49,943 | )          |  |               |         |              |  |              |         |   |  |   |         |   |  |   | (49,943  | )
|                                                      
|                                                      
|                                                      
|                                                      
|Proceeds from issuance of Common Stock                 |  |         |        |            |  |               |         |              |  |              | 103,000  |   |  |   | (103,000 | ) |  |   |         |  
|                                                      
|                                                      
|                                                      
|                                                      
|Dividends paid                                         |  |         |        |            |  |               | (103,000 | )            |  |              | (12,239  | ) |  |   | 115,239  |   |  |   |         |  
|                                                       |  |         |         |            |  |               |          |              |  |              |          |   |  |   |          |   |  |   |          |  
|Net Cash Used in Financing Activities                  |  |         | (35,699 | )          |  |               |         |              |  |              | (41,093  | ) |  |   | 12,239   |   |  |   | (64,553  | )
|                                                       |  |         |         |            |  |               |          |              |  |              |          |   |  |   |          |   |  |   |          |  
|Net (Decrease) Increase in Cash and Cash Equivalents   |  |         |        |            |  |               | (142,954 | )            |  |              | 5,288    |   |  |   |         |   |  |   | (137,666 | )
|                                                      
|                                                      
|                                                      
|                                                      
|Cash and Cash Equivalents at Beginning of Period       |  |         |        |            |  |               | 165,248  |              |  |              | 7,821    |   |  |   |         |   |  |   | 173,069  |  
|                                                       |  |         |         |            |  |               |          |              |  |              |          |   |  |   |          |   |  |   |          |  
|Cash and Cash Equivalents at End of Period             |  | $       |        |            |  | $             | 22,294   |              |  | $            | 13,109   |   |  | $ |         |   |  | $ | 35,403   |  
|                                                       |  |         |         |            |  |               |          |              |  |              |          |   |  |   |          |   |  |   |          |  

F-31



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS  (Continued)

Year Ended July 31, 1998

(amounts in thousands)


|                                                     |  |         |         |            |  |               |          |              |  |              |         |   |  |   |         |   |  |   |          |  
|---------------------------------------------------- |  | ------- | ------- | ---------- |  | ------------- | -------- | ------------ |  | ------------ | ------- | - |  | - | ------- | - |  | - | -------- | -
|                                                     |  | Parent  |         |            |  |               |          |              |  |             
|                                                     |  | Company |         | Guarantor  |  | Non-Guarantor |          |              |  |             
|                                                     |  | Only    |         | Subsidiary |  | Subsidiaries  |          | Eliminations |  | Consolidated
|                                                     |  |         |         |            |  |               |          |              |  |             
|Net Cash Provided by Operating Activities            |  | $       | 10,632  |            |  | $             | 101,492  |              |  | $            | 13,922  |   |  | $ | (13,273 | ) |  | $ | 112,773  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Net Cash Flows from Investing Activities:            |  |         |         |            |  |               |          |              |  |              |         |   |  |   |         |   |  |   |          |  
|                                                    
|                                                    
|                                                    
|                                                    
|Additions to property and equipment                  |  |         |        |            |  |               | (61,959  | )            |  |              | (1,538  | ) |  |   |        |   |  |   | (63,497  | )
|                                                    
|                                                    
|                                                    
|                                                    
|Dispositions of property and equipment               |  |         |        |            |  |               | 548      |              |  |              | 101     |   |  |   |        |   |  |   | 649      |  
|                                                    
|                                                    
|                                                    
|                                                    
|Proceeds from Sale of Diamond Park Fine Jewelers     |  |         |        |            |  |               | 62,443   |              |  |              |        |   |  |   |        |   |  |   | 62,443   |  
|                                                    
|                                                    
|                                                    
|                                                    
|Proceeds from Sale of Land                           |  |         |        |            |  |               | 12,911   |              |  |              |        |   |  |   |        |   |  |   | 12,911   |  
|                                                     |  |         |         |            |  |               |          |              |  |              |         |   |  |   |         |   |  |   |          |  
|Net Cash Provided by (Used in) Investing Activities  |  |         |        |            |  |               | 13,943   |              |  |              | (1,437  | ) |  |   |        |   |  |   | 12,506   |  
|                                                     |  |         |         |            |  |               |          |              |  |              |         |   |  |   |         |   |  |   |          |  
|Net Cash Flows from Financing Activities:            |  |         |         |            |  |               |          |              |  |              |         |   |  |   |         |   |  |   |          |  
|                                                    
|                                                    
|                                                    
|                                                    
|Proceeds from long-term debt                         |  |         |        |            |  |               | (410     | )            |  |              |        |   |  |   |        |   |  |   | (410     | )
|                                                    
|                                                    
|                                                    
|                                                    
|Payments on revolving credit agreement               |  |         |        |            |  |               | (192,900 | )            |  |              |        |   |  |   |        |   |  |   | (192,900 | )
|                                                    
|                                                    
|                                                    
|                                                    
|Borrowings under revolving credit agreement          |  |         |        |            |  |               | 122,200  |              |  |              |        |   |  |   |        |   |  |   | 122,200  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Issuance of Senior Notes                             |  |         | 99,530  |            |  |               |         |              |  |              |        |   |  |   |        |   |  |   | 99,530   |  
|                                                    
|                                                    
|                                                    
|                                                    
|Loan from Zale Corporation to Zale Delaware, Inc.    |  |         | (99,530 | )          |  |               | 99,530   |              |  |              |        |   |  |   |        |   |  |   |         |  
|                                                    
|                                                    
|                                                    
|                                                    
|Debt issue and capitalized financing costs           |  |         |        |            |  |               | (2,621   | )            |  |              |        |   |  |   |        |   |  |   | (2,621   | )
|                                                    
|                                                    
|                                                    
|                                                    
|Proceeds from exercise of stock options              |  |         | 9,198   |            |  |               |         |              |  |              |        |   |  |   |        |   |  |   | 9,198    |  
|                                                    
|                                                    
|                                                    
|                                                    
|Proceeds from exercise of warrants                   |  |         | 20,170  |            |  |               |         |              |  |              |        |   |  |   |        |   |  |   | 20,170   |  
|                                                    
|                                                    
|                                                    
|                                                    
|Purchase of common stock                             |  |         | (40,000 | )          |  |               |         |              |  |              |        |   |  |   |        |   |  |   | (40,000  | )
|                                                    
|                                                    
|                                                    
|                                                    
|Proceeds from issuance of common stock               |  |         |        |            |  |               |         |              |  |              | 2,500   |   |  |   | (2,500  | ) |  |   |         |  
|                                                    
|                                                    
|                                                    
|                                                    
|Dividends paid                                       |  |         |        |            |  |               |         |              |  |              | (15,773 | ) |  |   | 15,773  |   |  |   |         |  
|                                                     |  |         |         |            |  |               |          |              |  |              |         |   |  |   |         |   |  |   |          |  
|Net Cash (Used in) Provided by Financing Activities  |  |         | (10,632 | )          |  |               | 25,799   |              |  |              | (13,273 | ) |  |   | 13,273  |   |  |   | 15,167   |  
|                                                     |  |         |         |            |  |               |          |              |  |              |         |   |  |   |         |   |  |   |          |  
|Net Increase (Decrease) in Cash and Cash Equivalents |  |         |        |            |  |               | 141,234  |              |  |              | (788    | ) |  |   |        |   |  |   | 140,446  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and Cash Equivalents at Beginning of Period     |  |         |        |            |  |               | 24,014   |              |  |              | 8,609   |   |  |   |        |   |  |   | 32,623   |  
|                                                     |  |         |         |            |  |               |          |              |  |              |         |   |  |   |         |   |  |   |          |  
|Cash and Cash Equivalents at End of Period           |  | $       |        |            |  | $             | 165,248  |              |  | $            | 7,821   |   |  | $ |        |   |  | $ | 173,069  |  
|                                                     |  |         |         |            |  |               |          |              |  |              |         |   |  |   |         |   |  |   |          |  

F-32



---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Quarterly Results Of Operations (Unaudited)

Unaudited quarterly results of operations for the years ended
July 31, 2000 and 1999 were as follows (amounts in thousands
 except per share data):

|                                      |  |                            |         |           |  |             |         |             |  |   |         |  |  |   |         | 
|------------------------------------- |  | -------------------------- | ------- | --------- |  | ----------- | ------- | ----------- |  | - | ------- |  |  | - | ------- | 
|                                      |  |                           
|                                      |  | Fiscal 2000               
|                                      |  | For the Three Months Ended
|                                      |  |                           
|                                      |  | July 31,                   |         | April 30, |  | January 31, |         | October 31,
|                                      |  | 2000                       |         | 2000      |  | 2000        |         | 1999       
|                                      |  |                            |         |           |  |             |         |            
|Net sales                             |  | $                          | 373,755 |           |  | $           | 361,273 |             |  | $ | 735,967 |  |  | $ | 322,601 | 
|                                     
|                                     
|                                     
|                                     
|Gross margin                          |  |                            | 180,471 |           |  |             | 176,736 |             |  |   | 360,556 |  |  |   | 155,830 | 
|                                     
|                                     
|                                     
|                                     
|Net earnings                          |  |                            | 11,577  |           |  |             | 10,522  |             |  |   | 83,952  |  |  |   | 5,463   | 
|                                     
|                                     
|                                     
|                                     
|Net earnings per diluted common share |  | $                          | 0.32    |           |  | $           | 0.30    |             |  | $ | 2.33    |  |  | $ | 0.15    | 

|                                      |  |                            |         |           |  |             |         |             |  |   |         |  |  |   |         | 
|------------------------------------- |  | -------------------------- | ------- | --------- |  | ----------- | ------- | ----------- |  | - | ------- |  |  | - | ------- | 
|                                      |  |                           
|                                      |  | Fiscal 1999               
|                                      |  | For the Three Months Ended
|                                      |  |                           
|                                      |  | July 31,                   |         | April 30, |  | January 31, |         | October 31,
|                                      |  | 1999                       |         | 1999      |  | 1999        |         | 1998       
|                                      |  |                            |         |           |  |             |         |            
|Net sales                             |  | $                          | 325,994 |           |  | $           | 280,736 |             |  | $ | 567,952 |  |  | $ | 254,186 | 
|                                     
|                                     
|                                     
|                                     
|Gross margin                          |  |                            | 157,441 |           |  |             | 136,028 |             |  |   | 276,122 |  |  |   | 122,089 | 
|                                     
|                                     
|                                     
|                                     
|Net earnings                          |  |                            | 8,542   |           |  |             | 6,267   |             |  |   | 63,960  |  |  |   | 2,163   | 
|                                     
|                                     
|                                     
|                                     
|Net earnings per diluted common share |  | $                          | 0.23    |           |  | $           | 0.17    |             |  | $ | 1.75    |  |  | $ | 0.06    | 

F-33



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of the 29th day of September, 2000.



| |                 
| | ----------------
| | ZALE CORPORATION



| |     |                  
| | --- | -----------------
| | By: | /s/ BERYL B. RAFF

| |                            
| | ---------------------------
| | Beryl B. Raff              
| | Chairman of the Board      
| | and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.

|                                                 |  |                                                                                                              |  |                   
|------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------ |  | ------------------
|Signature                                        |  | Title                                                                                                        |  | Date              
|                                                 |  |                                                                                                              |  |                   
|/s/ BERYL B. RAFFBeryl B. Raff                   |  | Chairman of the Board and Chief Executive Officer (principal
        executive officer of the registrant)    |  | September 29, 2000
|                                                
|/s/ ALAN P. SHORAlan P. Shor                     |  | President and Chief Operating Officer, Director                                                              |  | September 29, 2000
|                                                
|/s/ SUE E. GOVESue E. Gove                       |  | Executive Vice President and Chief Financial Officer (principal
        financial officer of the registrant) |  | September 29, 2000
|                                                
|/s/ MARK R. LENZMark R. Lenz                     |  | Senior Vice President, Controller (principal accounting officer
        of the registrant)                   |  | September 29, 2000
|/s/ GLEN ADAMSGlen Adams                         |  | Director                                                                                                     |  | September 29, 2000
|/s/ A. DAVID BROWNA. David Brown                 |  | Director                                                                                                     |  | September 29, 2000
|/s/ PETER P. COPSESPeter P. Copses               |  | Director                                                                                                     |  | September 29, 2000
|/s/ ROBERT J. DINICOLARobert J. DiNicola         |  | Director                                                                                                     |  | September 29, 2000
|/s/ RICHARD C. MARCUSRichard C. Marcus           |  | Director                                                                                                     |  | September 29, 2000
|                                                
|/s/ CHARLES H. PISTOR, JR.Charles H. Pistor, Jr. |  | Director                                                                                                     |  | September 29, 2000
|/s/ ANDREW H. TISCHAndrew H. Tisch               |  | Director                                                                                                     |  | September 29, 2000

26



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##### Table of Contents






REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Zale Corporation:

We have audited in accordance with generally accepted auditing
standards, the financial statements of Zale Corporation (a
Delaware corporation) and subsidiaries included in this
Form 10-K, and have issued our report thereon dated
August 29, 2000 (except with respect to the matter discussed
 in the Subsequent Event footnote, as to which the date is
September 20, 2000). Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a
whole. Schedule II is the responsibility of the
Companys management and is presented for the purpose of
complying with the Securities and Exchange Commissions
rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in
 the audit of the basic financial statements and, in our opinion,
 fairly states in all material respects the financial data
required to be set forth therein in relation to the basic
financial statements taken as a whole.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

Dallas, Texas,



27



---



##### Table of Contents



SCHEDULE II

ZALE CORPORATION AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

|                                |                                 |                        |   |            |  |            |   |            |  |  |   |         |     |  |   |        | 
|------------------------------- | ------------------------------- | ---------------------- | - | ---------- |  | ---------- | - | ---------- |  |  | - | ------- | --- |  | - | ------ | 
|                                |                                 | Balance At             |   | Additions  |  |            |   | Balance At
|                                |                                 | Beginning              |   | Charged to |  |            |   | End of    
|                                |                                 | of Period              |   | Earnings   |  | Deductions |   | Period    
|                                |                                 |                        |   |            |  |            |   |           
|                                |                                 |                       
|                                |                                 | (amounts in thousands)
|Fiscal year ended July 31, 2000 |                                 |                        |   |            |  |            |   |            |  |  |   |         |     |  |   |       
|                               
|                               
|                               
|                               
|                                | Allowance for doubtful accounts |                        | $ | 76,534     |  |            | $ | 71,593     |  |  | $ | 148,127 | (2) |  | $ |       | 
|Fiscal year ended July 31, 1999 |                                 |                        |   |            |  |            |   |            |  |  |   |         |     |  |   |       
|                               
|                               
|                               
|                               
|                                | Allowance for doubtful accounts |                        | $ | 67,285     |  |            | $ | 72,126     |  |  | $ | 62,877  | (1) |  | $ | 76,534 | 
|Fiscal year ended July 31, 1998 |                                 |                        |   |            |  |            |   |            |  |  |   |         |     |  |   |       
|                               
|                               
|                               
|                               
|                                | Allowance for doubtful accounts |                        | $ | 57,819     |  |            | $ | 66,066     |  |  | $ | 56,600  | (1) |  | $ | 67,285 | 



---



|    |                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Accounts written off, less recoveries and other adjustments.                                                                                                                                         
|   
|(2) | Includes accounts written off, less recoveries and other
	adjustments and approximately $78 million in allowance
	eliminated in conjunction with the Sale of the Private Label
	Credit Card Business.

28



---



##### Table of Contents






INDEX TO EXHIBITS

|            |         |             |  |                                                                                                                                                                                            
|----------- | ------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |         | Description
|            |         |            
|            | 2.1     |             |  |  Purchase of Assets Agreement, dated June 2,
	1999, between Zale Canada Co. and Peoples Jewellers
	Corporation.(11)                                                                       
|            | 2.2     |             |  |  Receivables Purchase Agreement, between Zale Funding
	Trust, as Seller, and Associates Credit Card Services, 
	Inc., as Purchaser, dated as of July 10, 2000.(14)                        
|            | 2.3     |             |  |  Agreement and Plan of Merger, by and among Jewelers
	National Bank, Zale Delaware, Inc. and Hurley State Bank,
	dated as of July 10, 2000.(14)                                           
|            | 2.4     |             |  |  Agreement and Plan of Merger, by and among Zale
	Corporation, Jewelry Expansion Corp. And Piercing
	Pagoda, Inc., dated as of August 11, 2000.(15)                                       
|            | 3.1     |             |  |  Restated Certificate of Incorporation of Zale
	Corporation, dated July 30, 1993.(1)                                                                                                      
|            | 3.2     |             |  |  Amended and Restated Bylaws of Zale Corporation.(14)                                                                                                                                     
|            | 4.1     |             |  |  Amended and Restated Revolving Credit Agreement dated
	 March 30, 2000.(13)                                                                                                              
|            | 4.2     |             |  |  Indenture dated September 30, 1997, by and among
	 Zale Corporation, Zale Delaware, Inc. and Bank One, N.A. as
	 Trustee.(8)                                                             
|            | 10.2    |             |  |  Indemnification agreement, dated as of July 21,
	1993, between Zale Corporation and certain present and former
	directors thereof.(3)                                                    
|            | *10.3a  |             |  |  Zale Corporation Stock Option Plan.(1)                                                                                                                                                   
|            | *10.3b  |             |  |  Amended and Restated Omnibus Stock Incentive
	Plan.(14)                                                                                                                                  
|            | *10.3c  |             |  |  Outside Directors 1995 Stock Option Plan.(16)                                                                                                                                           
|            | *10.4   |             |  |  The Executive Severance Plan for Zale Corporation and
	 Its Affiliates, as amended and restated as of February 10,
	1994.(2)                                                             
|            | *10.4a  |             |  |  Amendment to The Executive Severance Plan for Zale
	Corporation and Its Affiliates effective May 20, 1995.(4)                                                                            
|            | 10.6    |             |  |  Lease Agreement Between Principal Mutual Life
	Insurance Company, As Landlord, and Zale Corporation, as Debtor
	and Debtor-In-Possession, As Tenant, dated as of September 
	17, 1992.(4)
|            | 10.6a   |             |  |  First Lease Amendment and Agreement between Principal
	 Mutual Life Insurance Company and Zale Delaware, Inc.,
	dated as of February 1, 1996.(4)                                         
|            | 10.7    |             |  |  Indemnification Agreement, executed on
	October 30, 1996, and dated as of June 6, 1996, between
	 Zale Corporation and Andrea Jung.(5)                                                   
|            | *10.8   |             |  |  Form of Change of Control Agreement dated as of
	October  30, 1996, but executed thereafter, between Zale
	Corporation and Key Employees.(6)                                             
|            | 10.8a   |             |  |  Modified list of parties to Change of Control
	Agreement.(9)                                                                                                                             
|            | 10.9    |             |  |  Asset Purchase Agreement, dated September 3,
	1997, by and among Finlay Enterprises, Inc., Finlay Fine
	Jewelry Corporation, Zale Corporation and Zale
	Delaware, Inc.(9)                
|            | 10.10   |             |  |  Seller Restrictive Covenant Agreement, dated as of
	June  2, 1999, between Peoples Jewellers Corporation, Zale
	Canada Co. and Zale Corporation.(11)                                     
|            | *10.11  |             |  |  Employment Agreement, dated as of August 1,
	1997, between Zale Corporation and Robert J. DiNicola.(9)                                                                                   
|            | *10.11a |             |  |  Amended and Restated Employment Agreement, dated
	September 7, 1999, between Zale Corporation and Robert 
	 J. DiNicola.(11)                                                             
|            | *10.11b |             |  |  Seconded Amended and Restated Employment Agreement
	dated August 1, 2000, between Zale Corporation and
	Robert J. DiNicola.(14)                                                          



---



##### Table of Contents



|            |         |             |  |                                                                                                                          
|----------- | ------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |         | Description
|            |         |            
|            | *10.11c |             |  |  Consulting Agreement, dated September 6, 2000,
	between Zale Corporation and Robert J. DiNicola.(14)                   
|            | *10.12  |             |  |  Employment Agreement, dated as of August 1,
	1998, between Zale Corporation and Beryl B. Raff.(9)                      
|            | *10.13  |             |  |  Employment Agreement, dated as of August 1,
	1998, between Zale Corporation and Alan P. Shor.(9)                       
|            | *10.14  |             |  |  Employment Agreement, dated as of January 15,
	1998 between Zale Corporation and Mary L. Forté.(9)                     
|            | *10.15  |             |  |  Employment Agreement, dated as of August 1,
	1998, between Zale Corporation and Sue E. Gove.(9)                        
|            | *10.16  |             |  |  Amendment to Employment Agreement, dated as of
	October  8, 1998, between Zale Corporation and
	Robert J. DiNicola.(10)
|            | *10.17  |             |  |  Amendment to Employment Agreement, dated as of
	October  8, 1998, between Zale Corporation and Beryl B.
	 Raff.(10)    
|            | *10.18  |             |  |  Amendment to Employment Agreement, dated as of
	October  8, 1998, between Zale Corporation and Alan P.
	Shor.(10)      
|            | *10.19  |             |  |  Amendment to Employment Agreement, dated as of
	October  8, 1998, between Zale Corporation and Mary L.
	Forté.(10)     
|            | *10.20  |             |  |  Amendment to Employment Agreement, dated as of
	October  8, 1998, between Zale Corporation and Sue E.
	Gove.(10)       
|            | *10.21  |             |  |  Amendment to Employment Agreement, dated as of
	September  7, 1999, between Zale Corporation and
	Beryl B Raff.(14)    
|            | 21      |             |  |  Subsidiaries of the registrant.(14)                                                                                    
|            | 23      |             |  |  Consent of Independent Public Accountants.(14)                                                                         
|            | 27      |             |  |  Financial data schedule.(14)                                                                                           



---



| |     |                                                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Previously filed as an exhibit to the registrants
	Form 10-Q (No. 1-4129) for the quarterly period ended
	September 30, 1993, and incorporated herein by reference.                       
|
| | (2) | Incorporated by reference to the corresponding exhibit to the
	registrants Registration Statement on Form S-1
	(No. 33-73310) filed with the Commission on
	December 23, 1993, as amended.
|
| | (3) | Previously filed as an exhibit to the registrants
	Form 10-K (No. 0-21526) for the fiscal year ended
	July 31, 1995, and incorporated herein by reference.                                
|
| | (4) | Previously filed as an exhibit to the registrants
	Form 10-K (No. 0-21526) for the fiscal year ended
	July 31, 1996, and incorporated herein by reference.                                
|
| | (5) | Previously filed as an exhibit to the registrants
	Form 10-Q for the quarterly period ended October 31,
	1996, and incorporated herein by reference.                                      
|
| | (6) | Previously filed as an exhibit to the registrants
	Form 10-Q for the quarterly period ended January 31,
	1997, and incorporated herein by reference.                                      
|
| | (7) | Previously filed as an exhibit to the registrants
	Form 10-K (No. 0-21526) for the fiscal year ended
	July 31, 1997, and incorporated herein by reference.                                
|
| | (8) | Incorporated by reference to Exhibit 4.1 to the
	registrants Registration Statement on Form S-4
	(No. 33-39473) filed with the Commission on November 4,
	 1997.                          
|
| | (9) | Previously filed as an exhibit to the registrants
	Form 10-K (No. 1-04129) for the fiscal year ended
	July 31, 1998, and incorporated herein by reference.                                



|     |                                                                                                                                                      
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Previously filed as an exhibit to the registrants
	Form 10-Q for the quarterly period ended October 31,
	1998, and incorporated herein by reference.



---



##### Table of Contents





|     |                                                                                                                                                                                  
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(11) | Previously filed as an exhibit to the registrants
	Form 10-K (No. 1-04129) for the fiscal year ended
	July 31, 1999, and incorporated herein by reference.                      
|    
|(12) | Previously filed as an exhibit to the registrants
	Form 10-Q for the quarterly period October 31, 1999.                                                                         
|    
|(13) | Previously filed as an exhibit to the registrants
	Form 10-Q for the quarterly period April 30, 2000.                                                                           
|    
|(14) | Filed herewith.                                                                                                                                                                  
|    
|(15) | Incorporated by reference to Exhibit 10.64 to Piercing
	Pagoda, Inc.s Form  10-Q for the quarter ended
	June 30, 2000, previously filed with the Commission on
	August 14, 2000.
|    
|(16) | Incorporated by reference to the corresponding exhibit to the
	Registration Statement of Form S-8 (33-01789) filed with the
	 Commission on March 18, 1996.                      



| |   |                                             
| | - | --------------------------------------------
| | * | Management Contracts and Compensatory Plans.