The capillary instability and break-up of an annular liquid layer coating the inner surface of a cylindrical tube while surrounding another core fluid is studied. In the limiting case where the thickness of the layer is almost equal to the radius of the tube, we obtain a thread of core fluid suspended in a virtually unbounded ambient liquid. The evolution of a layer or thread with a cylindrical or unduloidal interface subject to an axisymmetric perturbation is computed using a boundary integral method. It is shown that for large and moderate layer thicknesses the instability causes the core to transform into an alternating array of primary and secondary spherical drops along the centreline of the tube. The relative volume of the drops depends primarily on the ratio of the core radius to the tube radius, a/R, and the type of initial perturbation. The evolution of thin layers with a/R > 0.82 leads to formation of an array of lobes or collars. These results are used to assess the accuracy of previous approximate analyses based on lubrication flow and minimization of interfacial area.