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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 For the fiscal year ended July 31, 2005
 Zale Corporation
 
 
      DOCUMENTS INCORPORATED BY REFERENCE.




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-KBase Salaries of Named Executive OfficersSummary of Director CompensationMaster Agreement for Information Technology ServicesSubsidiariesConsent of KPMG LLPRule 13a-14(a) Certification of CEORule 13a-14(a) Certification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO    Table of Contents  
 PART I
 
 ITEM 1. BUSINESS
 General
  www.zalecorp.com.
  Business Segments
  Fine Jewelry
 zales.com. baileybanksandbiddle.com Ò
 Zales Jewelers
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zales.com ZLC Direct
 Zales the Diamond Store Outlet
    Gordons Jewelers
     - 2 -




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Bailey Banks & Biddle Fine Jewelers
     Peoples Jewellers and Mappins Jewellers
     ZLC Direct
 zales.com baileybanksandbiddle.com,
 - 3 -




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Kiosk Jewelry
      All Other
  Business Initiatives and Strategy
  - 4 -




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Capture Market Share
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zales.com baileybanksandbiddle.com,
 Create and Enhance the Customer Experience
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Supply Chain Strategy
      Current Year Capital
 Stock Repurchase Plan.
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Industry and Competition
 United States Census Bureau
 United States Census Bureau.
   - 8 -




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Operations by Brand
  Year Ended July 31,2005
    
    
    2004
    
    
    2003Total Revenues (in thousands)Zales (including ZLC Direct)
    
    $
    1,079,230
    
    
    $
    1,070,576
    
    
    $
    1,040,537Zales Outlet
    
    
    166,000
    
    
    
    137,613
    
    
    
    119,270Gordons
    
    
    324,854
    
    
    
    313,881
    
    
    
    314,345Bailey Banks & Biddle
    
    
    320,869
    
    
    
    326,086
    
    
    
    314,886Peoples (a)
    
    
    204,909
    
    
    
    174,058
    
    
    
    150,416Piercing Pagoda
    
    
    274,296
    
    
    
    269,660
    
    
    
    256,665Insurance Revenues
    
    
    12,908
    
    
    
    12,566
    
    
    
    16,122$
    2,383,066
    
    
    $
    2,304,440
    
    
    $
    2,212,241Average sales per location (b)Zales
    
    $
    1,366,000
    
    
    $
    1,390,000
    
    
    $
    1,369,000Zales Outlet
    
    
    1,249,000
    
    
    
    1,287,000
    
    
    
    1,261,000Gordons
    
    
    1,112,000
    
    
    
    1,101,000
    
    
    
    1,084,000Bailey Banks & Biddle
    
    
    3,030,000
    
    
    
    2,848,000
    
    
    
    2,702,000Peoples
    
    
    1,140,000
    
    
    
    1,041,000
    
    
    
    878,000Piercing Pagoda
    
    
    343,000
    
    
    
    339,000
    
    
    
    322,000Locations opened during periodZales
    
    
    24
    
    
    
    9
    
    
    
    13Zales Outlet
    
    
    18
    
    
    
    25
    
    
    
    4Gordons
    
    
    13
    
    
    
    9
    
    
    
    1Bailey Banks & Biddle
    
    
    0
    
    
    
    0
    
    
    
    1Peoples
    
    
    6
    
    
    
    5
    
    
    
    3Piercing Pagoda
    
    
    50
    
    
    
    24
    
    
    
    15Peoples II
    
    
    71
    
    
    
    
    
    
    
    182
    
    
    
    72
    
    
    
    37Locations closed during periodZales
    
    
    14
    
    
    
    7
    
    
    
    15Zales Outlet
    
    
    1
    
    
    
    0
    
    
    
    0Gordons
    
    
    13
    
    
    
    9
    
    
    
    12Bailey Banks & Biddle
    
    
    4
    
    
    
    8
    
    
    
    5Peoples
    
    
    1
    
    
    
    9
    
    
    
    7Piercing Pagoda
    
    
    36
    
    
    
    39
    
    
    
    59Peoples II
    
    
    2
    
    
    
    
    
    
    
    71
    
    
    
    72
    
    
    
    98Total Locations at end of periodZales
    
    
    767
    
    
    
    757
    
    
    
    755Zales Outlet
    
    
    138
    
    
    
    121
    
    
    
    96Gordons
    
    
    287
    
    
    
    287
    
    
    
    287Bailey Banks & Biddle
    
    
    104
    
    
    
    108
    
    
    
    116Peoples
    
    
    168
    
    
    
    163
    
    
    
    167Piercing Pagoda
    
    
    812
    
    
    
    798
    
    
    
    813Peoples II
    
    
    69
    
    
    
    
    
    
    
    2,345
    
    
    
    2,234
    
    
    
    2,234
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(a)
    
    Peoples (including Mappins and Peoples II carts) reflects all revenue from Canadian
operations, which constitutes all foreign operations of the Company. Long-lived assets from
foreign operations totaled approximately $27.6 million, $23.2 million, and $ 20.0 million at
July 31, 2005, 2004, and 2003, respectively.(b)
    
    Based on merchandise sales for locations open a full twelve months during the
respective year. Business Segment Data
  Store Operations
      Purchasing and Inventory
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Proprietary Credit
    - 11 -




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Employees
  Seasonality
  Information Technology
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Regulation
     Available Information
 http://www.zalecorp.com http://www.sec.gov.
 http://www.zalecorp.com
 http://www.zalecorp.com
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Cautionary Notice Regarding Forward-Looking Statements
   If the general economy performs poorly, discretionary spending on goods that are, or are perceived
to be, luxuries may not grow and may even decrease.
  The concentration of a substantial portion of the Companys sales in three, relatively brief
selling seasons means that the Companys performance is more susceptible to disruptions.
  Most of the Companys sales are of products that include diamonds, precious metals and other
commodities, and fluctuations in the availability and pricing of commodities could impact the
Companys ability to obtain and produce products at favorable prices.
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The Companys sales are dependent upon mall traffic.
  The Company operates in a highly competitive industry
  Any failure by the Company to manage its inventory effectively will negatively impact sales and
earnings.
  Because of the Companys dependence upon a small number of landlords for a substantial number of
the Companys locations, any significant erosion of the Companys relationships with those
landlords would negatively impact the Companys ability to obtain and retain store locations.
  Changes in regulatory requirements relating to the extension of credit may increase the cost of or
adversely affect the Companys operations.
  Any disruption in, or changes to, the Companys private label credit card arrangement with Citi may
adversely affect the Companys ability to provide consumer credit and write credit insurance.
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Acquisitions involve special risks, including the possibility that the Company may not be able to
integrate acquisitions into its existing operations.
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ITEM 2. PROPERTIES
     PercentageTerm Expires
    
    Stores
    
    Kiosks
    
    Other (1)
    
    Total
    
    Of Total2006 and prior
    
    
    213
    
    
    
    375
    
    
    
    3
    
    
    
    591
    
    
    
    25.0
    %2007
    
    
    199
    
    
    
    153
    
    
    
    
    
    
    
    352
    
    
    
    14.9
    %2008
    
    
    190
    
    
    
    149
    
    
    
    
    
    
    
    339
    
    
    
    14.4
    %2009
    
    
    133
    
    
    
    75
    
    
    
    3
    
    
    
    211
    
    
    
    8.9
    %2010 and thereafter
    
    
    729
    
    
    
    129
    
    
    
    11
    
    
    
    869
    
    
    
    36.8
    %Total number of leases
    
    
    1,464
    
    
    
    881
    
    
    
    17
    
    
    
    2,362
    
    
    
    100.0
    %
   
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
  Name
    
    Age
    
    PositionExecutive Officers:Mary L. Forté
    
    
    54
    
    
    President, Chief Executive Officer and DirectorSue E. Gove
    
    
    47
    
    
    Executive Vice President, Chief Operating Officer and DirectorMark R. Lenz
    
    
    49
    
    
    Group Senior Vice President, Chief Financial OfficerPaul G. Leonard
    
    
    50
    
    
    Group Senior Vice President and President, Zales JewelersPeter Feigenbaum
    
    
    52
    
    
    Senior Vice President, Upstream Supply ChainKey Employees:Frank C. Mroczka
    
    
    47
    
    
    Senior Vice President and President, Gordons JewelersCharles E. Fieramosca
    
    
    57
    
    
    Senior Vice President and President, Bailey Banks & Biddle Fine
JewelersGilbert P. Hollander
    
    
    52
    
    
    Senior Vice President and President, Piercing PagodaJohn A. Zimmermann
    
    
    46
    
    
    Senior Vice President and President, Peoples JewellersNancy O. Skinner
    
    
    55
    
    
    Senior Vice President and President, Zales the Diamond Store
OutletE. Ashlee Aldridge
    
    
    36
    
    
    Senior Vice President, Chief Information OfficerMary Ann Doran
    
    
    49
    
    
    Senior Vice President, Human ResourcesCynthia T. Gordon
    
    
    41
    
    
    Senior Vice President, ControllerStephen C. Massanelli
    
    
    49
    
    
    Senior Vice President, Real EstateSusann C. Mayo
    
    
    53
    
    
    Senior Vice President, Downstream Supply ChainHilary Molay
    
    
    51
    
    
    Senior Vice President, General Counsel and SecretaryBernard M. Sensale, Jr.
    
    
    43
    
    
    Senior Vice President, MarketingGeorge J. Slicho
    
    
    56
    
    
    Senior Vice President, Loss PreventionStephen L. Strong
    
    
    45
    
    
    Senior Vice President, Executive Vice President, Store
Operations, Zales JewelersCharleen R. Wuellner
    
    
    54
    
    
    Senior Vice President, Corporate Services
 Executive Officers
  Ms. Mary L. Forté
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Ms. Sue E. Gove
 Mr. Mark R. Lenz
 Mr. Paul G. Leonard
 Mr. Peter Feigenbaum
 Key Employees
 Mr. Frank C. Mroczka
 Mr. Charles E. Fieramosca
 Mr. Gilbert P. Hollander
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Mr. John A. Zimmermann
 Ms. Nancy O. Skinner
 Ms. E. Ashlee Aldridge
 Ms. Mary Ann Doran
 Ms. Cynthia T. Gordon
 Mr. Stephen C. Massanelli
 Ms. Susann C. Mayo
 Ms. Hilary Molay
 Mr. Bernard M. Sensale, Jr.
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Mr. George J. Slicho
 Mr. Stephen L. Strong
 Ms. Charleen Wuellner ales.com
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PART II
 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
  2005
    
    
    2004High
    
    
    Low
    
    
    High
    
    
    LowFirst
    
    $
    29.17
    
    
    $
    24.59
    
    
    $
    26.03
    
    
    $
    22.05Second
    
    
    31.25
    
    
    
    25.50
    
    
    
    28.05
    
    
    
    25.14Third
    
    
    30.96
    
    
    
    26.15
    
    
    
    31.30
    
    
    
    26.85Fourth
    
    
    34.28
    
    
    
    26.95
    
    
    
    28.58
    
    
    
    25.12
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ITEM 6. SELECTED FINANCIAL DATA
  Year Ended July 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(amounts in thousands, except per share amounts)Total revenues
    
    $
    2,383,066
    
    
    $
    2,304,440
    
    
    $
    2,212,241
    
    
    $
    2,191,727
    
    
    $
    2,087,199Costs and expenses:Cost of sales (a)
    
    
    1,157,226
    
    
    
    1,122,946
    
    
    
    1,101,030
    
    
    
    1,083,053
    
    
    
    1,034,913Special Inventory Charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,236Selling, General and Administrative
expenses
    
    
    982,113
    
    
    
    942,796
    
    
    
    884,069
    
    
    
    873,265
    
    
    
    818,205Cost of insurance operations
    
    
    6,084
    
    
    
    5,963
    
    
    
    8,228
    
    
    
    8,620
    
    
    
    5,589Depreciation and amortization expense
    
    
    59,840
    
    
    
    56,381
    
    
    
    55,690
    
    
    
    58,340
    
    
    
    58,290Impairment of Goodwill
    
    
    
    
    
    
    
    
    
    
    136,300
    
    
    
    
    
    
    
    Executive transactions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,298
    
    
    
    4,713Retiree medical plan curtailment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,500
    )
    
    
    Operating earnings
    
    
    177,803
    
    
    
    176,354
    
    
    
    26,924
    
    
    
    169,651
    
    
    
    140,253Interest expense, net
    
    
    7,725
    
    
    
    7,528
    
    
    
    6,319
    
    
    
    7,750
    
    
    
    6,857Costs of Early Retirement of Debt
    
    
    
    
    
    
    
    
    
    
    5,910
    
    
    
    
    
    
    
    Earnings before income taxes
    
    
    170,078
    
    
    
    168,826
    
    
    
    14,695
    
    
    
    161,901
    
    
    
    133,396Income taxes
    
    
    63,303
    
    
    
    62,353
    
    
    
    55,340
    
    
    
    59,256
    
    
    
    51,348Earnings (loss) before effect of
accounting change
    
    
    106,775
    
    
    
    106,473
    
    
    
    (40,645
    )
    
    
    102,645
    
    
    
    82,048Effect of change in accounting
principle (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,287
    )
    
    
    Net earnings (loss)
    
    $
    106,775
    
    
    $
    106,473
    
    
    ($
    40,645
    )
    
    $
    143,932
    
    
    $
    82,048Earnings (Loss) Per Common Share Basic:Before effect of change in
accounting principle
    
    $
    2.08
    
    
    $
    2.02
    
    
    ($
    0.63
    )
    
    $
    1.48
    
    
    $
    1.19Net Earnings (Loss) Per Share
    
    $
    2.08
    
    
    $
    2.02
    
    
    ($
    0.63
    )
    
    $
    2.08
    
    
    $
    1.19Earnings (Loss) Per Common Share Diluted:Before effect of change in
accounting principle
    
    $
    2.05
    
    
    $
    1.99
    
    
    ($
    0.63
    )
    
    $
    1.47
    
    
    $
    1.18Net Earnings (Loss) Per Share
    
    $
    2.05
    
    
    $
    1.99
    
    
    ($
    0.63
    )
    
    $
    2.07
    
    
    $
    1.18Weighted average number of common
shares outstanding: (c)Basic
    
    
    51,280
    
    
    
    52,650
    
    
    
    64,528
    
    
    
    69,178
    
    
    
    69,150Diluted
    
    
    51,975
    
    
    
    53,519
    
    
    
    64,528
    
    
    
    69,692
    
    
    
    69,502Balance Sheet Data:Working capital
    
    $
    590,731
    
    
    $
    582,888
    
    
    $
    532,443
    
    
    $
    561,939
    
    
    $
    512,418Total assets
    
    
    1,380,900
    
    
    
    1,342,084
    
    
    
    1,294,106
    
    
    
    1,489,265
    
    
    
    1,408,029Long-Term Debt
    
    
    129,800
    
    
    
    197,500
    
    
    
    184,400
    
    
    
    86,749
    
    
    
    109,463Total stockholders investment
    
    $
    817,588
    
    
    $
    726,114
    
    
    $
    652,323
    
    
    $
    939,807
    
    
    $
    840,563
 
 a)
    
    In fiscal year 2002, the Company changed its method of determining price indices used in the
valuation of last-in, first-out (LIFO) inventories. The effect of using the internal indices
instead of the Bureau of Labor Statistics price indices was to
increase fiscal year 2002 net income by approximately $4.8 million.
The impact on the individual prior years presented and the cumulative
effect of this change on earnings at the beginning of fiscal year
2002 is not determinable.b)
    
    Change in accounting principle for the write off of the excess of revalued net assets over
stockholders equity (negative goodwill).c)
    
    Outstanding share amounts have been adjusted to give retroactive effect to a two-for-one stock
split completed on June 8, 2004.  - 23 -




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ITEM 6. SELECTED FINANCIAL DATA (continued)
 Segment Data
 Year Ended July 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Selected Financial Data by Segment
    
    (amounts in thousands, except per share amounts)RevenuesFine Jewelry (a)
    
    $
    2,089,261
    
    
    $
    2,022,214
    
    
    $
    1,939,454
    
    
    $
    1,900,177
    
    
    $
    1,813,733Kiosk (b)
    
    
    280,897
    
    
    
    269,660
    
    
    
    256,665
    
    
    
    273,225
    
    
    
    254,511All Other
    
    
    12,908
    
    
    
    12,566
    
    
    
    16,122
    
    
    
    18,325
    
    
    
    18,955Total Revenues
    
    $
    2,383,066
    
    
    $
    2,304,440
    
    
    $
    2,212,241
    
    
    $
    2,191,727
    
    
    $
    2,087,199Depreciation & Amortization ExpenseFine Jewelry
    
    $
    44,410
    
    
    $
    41,757
    
    
    $
    40,915
    
    
    $
    40,453
    
    
    $
    40,407Kiosk
    
    
    4,708
    
    
    
    4,199
    
    
    
    4,653
    
    
    
    5,618
    
    
    
    12,069All Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unallocated
    
    
    10,722
    
    
    
    10,425
    
    
    
    10,122
    
    
    
    12,269
    
    
    
    5,814Total Depreciation & Amortization
Expense
    
    $
    59,840
    
    
    $
    56,381
    
    
    $
    55,690
    
    
    $
    58,340
    
    
    $
    58,290Operating Earnings (Loss)Fine Jewelry
    
    $
    147,414
    
    
    $
    153,739
    
    
    $
    151,650
    
    
    $
    145,816
    
    
    $
    137,001Kiosk (c)
    
    
    29,030
    
    
    
    25,951
    
    
    
    (125,629
    )
    
    
    20,335
    
    
    
    25,492All Other
    
    
    6,824
    
    
    
    6,603
    
    
    
    7,894
    
    
    
    9,705
    
    
    
    13,366Unallocated (d)
    
    
    (5,465
    )
    
    
    (9,939
    )
    
    
    (6,991
    )
    
    
    (6,205
    )
    
    
    (35,606
    )Total Operating Earnings
    
    $
    177,803
    
    
    $
    176,354
    
    
    $
    26,924
    
    
    $
    169,651
    
    
    $
    140,253Assets (e)Fine Jewelry (f)
    
    $
    1,103,142
    
    
    $
    1,055,755
    
    
    $
    1,036,080
    
    
    $
    1,022,790
    
    
    $
    987,099Kiosk (g)
    
    
    117,125
    
    
    
    111,238
    
    
    
    96,485
    
    
    
    238,048
    
    
    
    227,583All Other
    
    
    35,670
    
    
    
    37,737
    
    
    
    38,217
    
    
    
    38,788
    
    
    
    45,245Unallocated (d)
    
    
    124,963
    
    
    
    137,354
    
    
    
    123,324
    
    
    
    189,639
    
    
    
    148,102Total Assets
    
    $
    1,380,900
    
    
    $
    1,342,084
    
    
    $
    1,294,106
    
    
    $
    1,489,265
    
    
    $
    1,408,029Capital ExpendituresFine Jewelry
    
    $
    59,587
    
    
    $
    42,535
    
    
    $
    27,064
    
    
    $
    41,602
    
    
    $
    65,427Kiosk
    
    
    8,650
    
    
    
    6,038
    
    
    
    6,383
    
    
    
    3,644
    
    
    
    All Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unallocated
    
    
    14,887
    
    
    
    12,215
    
    
    
    10,132
    
    
    
    8,913
    
    
    
    22,229Total Capital
    
    $
    83,124
    
    
    $
    60,788
    
    
    $
    43,579
    
    
    $
    54,159
    
    
    $
    87,656
 
 a)
    
    Includes $198.3, $174.1 and $150.4 million in fiscal years 2005, 2004, and 2003, respectively,
related to foreign operations.b)
    
    Includes $6.6 million in fiscal year 2005 related to foreign operations.c)
    
    Includes impairment of goodwill of $136.3 million in fiscal year 2003.d)
    
    Includes $71.0, $65.9, and $63.3 million in fiscal years 2005, 2004, and 2003,
respectively, to offset internal carrying costs charged to the segments.e)
    
    Assets allocated to segments include fixed assets, inventories and goodwill. Unallocated
assets include cash, prepaid assets such as rent, corporate office improvements, and technology
infrastructure.f)
    
    Includes $27.2, $23.2 and $20.0 million of fixed assets in fiscal years 2005, 2004, and
2003, respectively, related to foreign operations.g)
    
    Includes $390,000 of fixed assets in fiscal years 2005 related to foreign operations. There
were no foreign operations in segment prior to 2005.  - 24 -




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Executive Overview
   
    
    Achieved $2.4 billion in revenues
    
    Expansion of internally sourced product in Peoples Jewellers, and introduction to
Gordons Jewelers and Zales the Diamond Store Outlet
    
    Increased direct importing of finished merchandise from overseas vendors
    
    Expansion of opening price point merchandise including charms, earrings, and body
jewelry in Canada with 69 Peoples II cart locations
    
    Focused real estate strategy on both traditional malls and off-mall growth in the U.S.
    
    Introduced database marketing capabilities and statistical modeling techniques to
continue to improve the effectiveness of its marketing function and enhance communication
with customers
    
    Implemented new Human Resources management solution
  
    
    Enhancing the customer experience by implementing the following:
 
 
    
    Increase market share through the following:
 
 
    
    Implement supply chain strategy improvements with the following:
 
   
    
    Zales Jewelers (including zales.com), the Companys national brand in the U.S.,
provides traditional, moderately priced jewelry to a broad range of customers.
    
    Zales the Diamond Store Outlet focuses on the brand conscious, value oriented shopper
in outlet malls and neighborhood power centers.
    
    Gordons Jewelers focuses on the individual preferences of its customers through
merchandising by store, strengthening its position as a relationship jeweler.
    
    Bailey Banks & Biddle Fine Jewelers (including baileybanksandbiddle.com)operates
jewelry stores that are considered among the finest luxury jewelry stores in their
markets, offering designer jewelry and watches to attract more affluent customers.
    
    Peoples Jewellers, the Companys national brand in Canada offers traditional,
moderately priced jewelry to customers throughout Canada.
    
    Mappins Jewellers in Canada targets the moderate and more discerning customer with
merchandise assortments designed to promote slightly higher priced purchases.
 - 25 -




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##### Table of Contents



Results of Operations
  Year Ended July 31,2005
    
    2004
    
    2003Total Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of Sales
    
    
    48.6
    
    
    
    48.7
    
    
    
    49.8Selling, General and Administrative Expenses
    
    
    41.2
    
    
    
    40.9
    
    
    
    39.9Cost of Insurance Operations
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.4Depreciation and Amortization Expense
    
    
    2.5
    
    
    
    2.5
    
    
    
    2.5Impairment of Goodwill
    
    
    
    
    
    
    
    
    
    
    6.2Operating Earnings
    
    
    7.4
    
    
    
    7.6
    
    
    
    1.2Interest Expense, Net
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3Costs of Early Retirement of Debt
    
    
    
    
    
    
    
    
    
    
    0.2Earnings Before Income Taxes
    
    
    7.1
    
    
    
    7.3
    
    
    
    0.7Income Taxes
    
    
    2.6
    
    
    
    2.7
    
    
    
    2.5Net Earnings (Loss)
    
    
    4.5
    %
    
    
    4.6
    %
    
    
    (1.8
    )%
 Year Ended July 31, 2005 Compared to Year Ended July 31, 2004
 Total Revenues.
    - 26 -




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##### Table of Contents



Cost of Sales
  Selling General and Administrative Expenses.
  Depreciation and Amortization Expense.
 Income Taxes.
 Year Ended July 31, 2004 Compared to Year Ended July 31, 2003
 Total Revenues.
    - 27 -




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##### Table of Contents



Cost of Sales
  Selling General and Administrative Expenses.
 Cost of Insurance Operations.
 Depreciation and Amortization Expense.
 Interest Expense, Net.
 Income Taxes.
 Liquidity and Capital Resources
   - 28 -




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Cash Flow Activities
    Finance Arrangements
    - 29 -




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##### Table of Contents



Capital Growth
  Other Activities Affecting Liquidity
 
    
    Stock Repurchase Plan
    - 30 -




---



##### Table of Contents




    
    Sale of Buildings
  
    
    Off-Balance Sheet Arrangements
      
    
    Contractual Obligations
  - 31 -




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##### Table of Contents



Contractual Obligations (continued)
 Payments Due by PeriodLess
    
    
    
    
    
    
    
    
    
    MoreContractual Cash
    
    
    
    
    
    than
    
    1-3
    
    4-5
    
    thanObligations ($ in millions) (e,f)
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 Years
    
    OtherLong-Term Debt (a)
    
    $
    130
    
    
    
    
    
    
    
    
    
    
    $
    130
    
    
    
    
    
    
    
    Operating Leases (b)
    
    
    1,001
    
    
    
    191
    
    
    
    437
    
    
    
    104
    
    
    
    269
    
    
    
    Operation
Services Agreement
(c)
    
    
    30
    
    
    
    5
    
    
    
    13
    
    
    
    8
    
    
    
    4
    
    
    
    Other Long-term Liabilities (d)
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21Total
    
    $
    1,182
    
    
    $
    196
    
    
    $
    450
    
    
    $
    242
    
    
    $
    273
    
    
    $
    21
 
 (a)
    
    Long-term debt relates to principal payments due under the Companys Amended Revolving Credit
Agreement. This amount does not reflect any interest, which would be based on the current
effective rate, which was 4.79 percent at July 31, 2005 and assuming no prepayments.(b)
    
    Operating lease obligations relate to minimum payments due under store lease agreements. Most
of the store operating leases provide for the payment of base rentals plus real estate taxes,
insurance, common area maintenance fees and merchant association dues. For fiscal year 2005,
these costs represented approximately 20 percent of fixed rent payments. (See Notes to
Consolidated Financial Statements-Lease Commitments for further discussion).(c)
    
    The Company has an operations services agreement with a third party for the management of the
Companys mainframe processing operations, client server systems, Local Area Network
operations, Wide Area Network management and e-commerce hosting. The current agreement expired
July 31, 2005 and was renegotiated (see Notes to Consolidated Financial Statements 
Commitments and Contingencies for further discussion).(d)
    
    Other long-term liabilities reflect future payments relating to the Companys Post Retirement
Benefits Plan. (See Notes to Consolidated Financial Statements-Post Retirement Benefits for
further discussion) and loss reserves related to credit insurance. The Company has reflected
these payments under Other, as the timing of these future payments is dependent on the
actual processing of the claims.(e)
    
    Not included in the above table is the long-term portion ($16.7 million) of the incentive
payment received from Citi Commerce Solutions of $41.8 million. The incentive is amortized
over the life of the contract and is included in long-term liabilities on the accompanying
Consolidated Balance Sheet but does not impact cash payments in future periods. (See Notes to
Consolidated Financial Statements-Deferred Credit for further discussion).(f)
    
    Not included in the table above as purchase obligations are the Companys ordinary course
purchase orders for merchandise and obligations under employment agreements. Inflation
  - 32 -




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##### Table of Contents



Critical Accounting Policies and Estimates
   Merchandise
Inventories
    Long-lived
Assets and Goodwill
 33




---



##### Table of Contents



Revenue
Recognition 
 Other
Reserves 
  Other Matters
    34




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##### Table of Contents



35




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     Commodity
Risk 
  Foreign
Currency Contracts 
 Foreign Exchange Contracts  (As of July 31, 2005)
 ContractContract
    
    
    Contract
    
    
    Contract
    
    
    Fair MarketCurrency
    
    Settlement Date
    
    
    Amount
    
    
    Exchange Rate
    
    
    ValueUSD
    
    
    08-05
    
    
    $
    3,124,834
    
    
    
    1.3107
    
    
    $
    (223,430
    )USD
    
    
    09-05
    
    
    
    1,906,066
    
    
    
    1.3111
    
    
    
    (138,644
    )$
    5,030,900
    
    
    
    
    
    
    $
    (362,074
    )
  36




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  PageIndex
    
    NumberManagements Report
    
    
    F-2Report of Independent Registered Public Accounting Firm
    
    
    F-3Report of Independent Registered Public Accounting Firm
    
    
    F-4Consolidated Statements of Operations
    
    
    F-5Consolidated Balance Sheets
    
    
    F-6Consolidated Statements of Cash Flows
    
    
    F-7Consolidated Statements of Stockholders Investment
    
    
    F-9Notes to Consolidated Financial Statements
    
    
    F-11
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Internal Control Over Financial Reporting
   
 ITEM 9B. OTHER INFORMATION
  37




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  
 ITEM 11. EXECUTIVE COMPENSATION
  38




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##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Equity Compensation Plan Information
  Equity Compensation Plan Information
 Number of shares ofNumber of shares
    
    
    
    
    
    
    common stock remainingof common stock
    
    
    Weighted-
    
    
    available for future issuanceto be issued upon
    
    
    average exercise
    
    
    under equity compensationexercise of
    
    
    price of
    
    
    plans (excluding sharesoutstanding
    
    
    outstanding
    
    
    reflected in 1st column) (2),Plan Category
    
    options (1), (3)
    
    
    options
    
    
    (3)Equity
compensation
plans approved
by
stockholders
    
    
    2,873,610
    
    
    $
    20.23
    
    
    
    5,138,163Equity
compensation
plans not
approved by
stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,873,610
    
    
    $
    20.23
    
    
    
    5,138,163
 
 (1)
    
    Includes shares of common stock to be issued upon the exercise of outstanding options under
the Zale Corporation Omnibus Stock Incentive Plan, the Zale Corporation 2003 Stock Incentive
Plan and the Zale Corporation Outside Directors 1995 Stock Option Plan.(2)
    
    Includes shares of common stock available for future issuance under the Zale Corporation 2003
Stock Incentive Plan.(3)
    
    The number of shares to be issued upon exercise of outstanding options and the number of
securities available for future issuance under the equity compensation plans were
proportionally adjusted to give effect to the Companys two-for-one stock split completed on
June 8, 2004. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  39




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
  1. Financial Statements
  2. Index to Financial Statement Schedules
  40




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##### Table of Contents



3. Exhibits
  The filings referencedfor incorporation by reference areExhibit
    
    
    
    Zale Corporation filings (File No.Number
    
    Description of Exhibit
    
    1-04129) unless otherwise noted3.1
    
    Restated Certificate of Incorporation of Zale Corporation
    
    October 31, 2001 Form 10-Q,
Exhibit 3.13.1b
    
    Certificate of Amendment to Restated Certificate of
Incorporation of Zale Corporation
    
    October 31, 2004, Form 10-Q,
Exhibit 3.13.2
    
    Bylaws of Zale Corporation
    
    July 31, 2000 Form 10-K,
Exhibit 3.24.1
    
    Revolving Credit Agreement, dated as of July 23, 2003
    
    July 31, 2003 Form 10-K,
Exhibit 4.14.2
    
    Amendment to Revolving Credit Agreement, dated as of
December 10, 2004
    
    December 10, 2004 Form 8-K,
Exhibit 99.110.1a*
    
    Zale Corporation Savings and Investment Plan
    
    July 31, 2000 Form 11-K,
Exhibit 9910.1b*
    
    Amendment to Zale Corporation Savings and Investment Plan
    
    July 31, 2001  Form 11-K, Exhibit 9910.2*
    
    Form of Indemnification Agreement between Zale
Corporation and its directors
    
    July 31, 1995 Form 10-K
Exhibit 10.210.3*
    
    Zale Corporation Omnibus Stock Incentive Plan
    
    July 31, 2000 Form 10-K,
Exhibit 10.3a10.4a*
    
    Zale Corporation 2003 Stock Incentive Plan
    
    July 31, 2003 Form 10-K,
Exhibit 10.410.4b*
    
    Form of Stock Option Award Agreement
    
    July 31, 2004 Form 10-K, Exhibit
10.4b10.4c*
    
    Form of Restricted Stock Award
Agreement
    
    July 31, 2004 Form 10-K, Exhibit
10.4c10.5*
    
    Outside Directors 1995 Stock Option Plan
    
    July 31, 2001 Form 10-K,
Exhibit 10.3c10.6a*
    
    Executive Severance Plan
    
    Form S-1 (Reg. No. 33-27225),
Exhibit 10.2310.6b*
    
    Amendment to Executive Severance Plan
    
    July 31, 1996 Form 10-K,
Exhibit 10.8a10.7a
    
    Lease Agreement for Corporate Headquarters
    
    July 31, 1996 Form 10-K,
Exhibit 10.11
 41




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##### Table of Contents



The filings referencedfor incorporation by reference areExhibit
    
    
    
    Zale Corporation filings (File No.Number
    
    Description of Exhibit
    
    1-04129) unless otherwise noted10.7b
    
    First Amendment to Lease Agreement for Corporate
Headquarters
    
    July 31, 1996 Form 10-K,
Exhibit 10.11a10.7c
    
    Second Amendment to Lease Agreement for Corporate
Headquarters
    
    July 31, 2004, Form 10-K, Exhibit
10.7c10.8*
    
    Employment Agreement with Mary L. Forté, dated as of
September 21, 2005
    
    September 27, 2005, Form 8-K,
Exhibit 10.110.9*
    
    Employment Agreement with Sue E. Gove, dated as of
September 21, 2005
    
    September 27, 2005, Form 8-K,
Exhibit 10.210.10*
    
    Employment Agreement with Mark R. Lenz dated as of
August 1, 2003
    
    July 31, 2003 Form 10-K,
Exhibit 10.1210.11
    
    Employment Agreement with Paul G. Leonard dated as of
January 5, 2005
    
    January 12, 2005, Form 8-K,
Exhibit 10.110.12*
    
    Zale Corporation Executive Bonus Plan
    
    July 31, 2003 Form 10-K,
Exhibit 10.1510.13
    
    Amendment to Citibank USA, N.A. Agreement, dated as of
April 4, 2003
    
    April 30, 2003 Form 10-Q,
Exhibit 99.210.14*
    
    Form of Change of Control Agreement of Senior Vice
Presidents without separate employment agreements
    
    July 31, 2004, Form 10-K, Exhibit
10.1410.15*
    
    Base Salaries of Named Executive Officers
    
    Filed herewith.10.16*
    
    Summary of Non-Employee Director Compensation
    
    Filed herewith.10.17
    
    Settlement and Release Agreement with Pamela J. Romano,
dated as of February 23, 2005
    
    March 1, 2005, Form 8-K, Exhibit
10.110.18
    
    Master Agreement for Information Technology Services
between Zale Delaware, Inc. and ACS Commercial Solutions,
Inc., dated as of August 1, 2005
    
    Filed herewith.14
    
    Code of Ethics
    
    July 31, 2003 Form 10-K,
Exhibit 1421
    
    Subsidiaries of the registrant
    
    Filed herewith.23.1
    
    Consent of KPMG LLP
    
    Filed herewith.31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer
    
    Filed herewith.31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer
    
    Filed herewith.32.1
    
    Section 1350 Certification of Chief Executive Officer
    
    Filed herewith.32.2
    
    Section 1350 Certification of Chief Financial Officer
    
    Filed herewith.
 42




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##### Table of Contents



The filings referencedfor incorporation by reference areExhibit
    
    
    
    Zale Corporation filings (File No.Number
    
    Description of Exhibit
    
    1-04129) unless otherwise noted99.1
    
    Audit Committee Charter
    
    July 31, 2004 Form 10-K, Exhibit
99.199.2
    
    Compensation Committee Charter
    
    July 31, 2004 Form 10-K, Exhibit
99.299.3
    
    Nominating/Corporate Governance Committee Charter
    
    July 31, 2004 Form 10-K, Exhibit
99.3
 43




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageManagements Report on Internal Control Over Financial Reporting
    
    
    F-2Report of Independent Registered Public Accounting Firm
    
    
    F-3Report of Independent Registered Public Accounting Firm
    
    
    F-4Consolidated Statements of Operations
    
    
    F-5Consolidated Balance Sheets
    
    
    F-6Consolidated Statements of Cash Flows
    
    
    F-7Consolidated Statements of Stockholders Investments
    
    
    F-9Notes to Consolidated Financial Statements
    
    
    F-11
 F-1




---



##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
    Internal
Control  Integrated Framework.
  Mary L. Forté
    
    Mark R. LenzPresident, Chief Executive Officer
    
    Group Senior Vice President,and Director
    
    Chief Financial OfficerOctober 3, 2005
    
    October 3, 2005
 F-2




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal
ControlIntegrated Framework .
    Internal ControlIntegrated Framework Internal
ControlIntegrated Framework
   
 F-3




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal Control 
Integrated Framework
 
 F-4




---



##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedJuly 31,
    
    
    July 31,
    
    
    July 31,2005
    
    
    2004
    
    
    2003Total Revenue
    
    $
    2,383,066
    
    
    $
    2,304,440
    
    
    $
    2,212,241Cost and Expenses:Cost of Sales
    
    
    1,157,226
    
    
    
    1,122,946
    
    
    
    1,101,030Selling, General and Administrative Expenses
    
    
    982,113
    
    
    
    942,796
    
    
    
    884,069Cost of Insurance Operations
    
    
    6,084
    
    
    
    5,963
    
    
    
    8,228Depreciation and Amortization Expense
    
    
    59,840
    
    
    
    56,381
    
    
    
    55,690Impairment of Goodwill
    
    
    
    
    
    
    
    
    
    
    136,300Operating Earnings
    
    
    177,803
    
    
    
    176,354
    
    
    
    26,924Interest Expense, Net
    
    
    7,725
    
    
    
    7,528
    
    
    
    6,319Cost of Early Retirement of Debt
    
    
    
    
    
    
    
    
    
    
    5,910Earnings Before Income Taxes
    
    
    170,078
    
    
    
    168,826
    
    
    
    14,695Income Taxes
    
    
    63,303
    
    
    
    62,353
    
    
    
    55,340Net Earnings (Loss)
    
    $
    106,775
    
    
    $
    106,473
    
    
    $
    (40,645
    )Earnings (Loss) Per Common Share-Basic:Net Earnings (Loss) Per Share
    
    $
    2.08
    
    
    $
    2.02
    
    
    $
    (.63
    )Earnings (Loss) Per Common Share-Diluted:Net Earnings (Loss) Per Share
    
    $
    2.05
    
    
    $
    1.99
    
    
    $
    (.63
    )Weighted Average Number of Common Shares
Outstanding:Basic
    
    
    51,280
    
    
    
    52,650
    
    
    
    64,528Diluted
    
    
    51,975
    
    
    
    53,519
    
    
    
    64,528
  F-5




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share amounts)
 July 31, 2005
    
    
    July 31, 2004ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    55,446
    
    
    $
    63,124Merchandise Inventories
    
    
    853,580
    
    
    
    826,824Other Current Assets
    
    
    64,042
    
    
    
    63,956Total Current Assets
    
    
    973,068
    
    
    
    953,904Property and Equipment, Net
    
    
    282,033
    
    
    
    266,688Goodwill, Net
    
    
    90,774
    
    
    
    85,583Other Assets
    
    
    35,025
    
    
    
    35,909Total Assets
    
    $
    1,380,900
    
    
    $
    1,342,084LIABILITIES AND STOCKHOLDERS INVESTMENTCurrent Liabilities:Accounts Payable and Accrued Liabilities
    
    $
    325,981
    
    
    $
    319,599Deferred Tax Liability, Net
    
    
    56,356
    
    
    
    51,417Total Current Liabilities
    
    
    382,337
    
    
    
    371,016Non-current Liabilities
    
    
    37,325
    
    
    
    42,486Non-current Tax Liability, Net
    
    
    13,850
    
    
    
    4,968Long-term Debt
    
    
    129,800
    
    
    
    197,500Commitments and ContingenciesStockholders Investment:Preferred Stock (Par value $0.01 per share, 5,000 shares authorized)
    
    
    
    
    
    
    Common Stock
(Par value $0.01 per share, 150,000 and 70,000 shares
authorized, 53,056 and 52,110 shares issued and 51,239 and 52,110
shares outstanding as of July 31, 2005 and 2004, respectively)
    
    
    531
    
    
    
    521Additional Paid-In Capital
    
    
    88,970
    
    
    
    63,661Accumulated Other Comprehensive Income
    
    
    24,119
    
    
    
    13,470Accumulated Earnings
    
    
    755,237
    
    
    
    648,462Deferred Compensation
    
    
    (1,269
    )
    
    
    867,588
    
    
    
    726,114Treasury Stock
    
    
    (50,000
    )
    
    
    Total Stockholders Investment
    
    
    817,588
    
    
    
    726,114Total Liabilities and Stockholders Investment
    
    $
    1,380,900
    
    
    $
    1,342,084
  F-6




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedJuly 31,
    
    
    July 31,
    
    
    July 31,2005
    
    
    2004
    
    
    2003Net Cash Flows from Operating Activities:Net earnings (loss)
    
    $
    106,775
    
    
    $
    106,473
    
    
    $
    (40,645
    )Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:Depreciation and amortization expense
    
    
    59,840
    
    
    
    56,381
    
    
    
    55,690Amortization of long-term debt issue costs
    
    
    1,306
    
    
    
    1,329
    
    
    
    463Deferred compensation expense
    
    
    660
    
    
    
    
    
    
    
    115Impairment of Goodwill
    
    
    
    
    
    
    
    
    
    
    136,300Impairment of Fixed Assets
    
    
    1,497
    
    
    
    2,627
    
    
    
    2,092Loss from dispositions of property & equipment
    
    
    4,388
    
    
    
    2,429
    
    
    
    6,194Deferred taxes
    
    
    12,993
    
    
    
    30,976
    
    
    
    46,286Tax benefit associated with stock option exercises
    
    
    5,665
    
    
    
    7,955
    
    
    
    2,292Changes in assets and liabilities:Merchandise inventories
    
    
    (20,968
    )
    
    
    (24,431
    )
    
    
    (9,073
    )Other current assets
    
    
    261
    
    
    
    (11,150
    )
    
    
    2,419Other assets
    
    
    (2,194
    )
    
    
    (315
    )
    
    
    (5,114
    )Accounts payable and accrued liabilities
    
    
    3,216
    
    
    
    12,113
    
    
    
    (26,011
    )Non-current liabilities
    
    
    (5,161
    )
    
    
    (6,309
    )
    
    
    (6,188
    )Net Cash Provided by Operating Activities
    
    
    168,278
    
    
    
    178,078
    
    
    
    164,820Net Cash Flows from Investing Activities:Additions to property and equipment
    
    
    (83,124
    )
    
    
    (60,788
    )
    
    
    (43,579
    )Proceeds from sales of fixed assets
    
    
    3,971
    
    
    
    
    
    
    
    Purchase of available for sale investments
    
    
    (3,480
    )
    
    
    (4,980
    )
    
    
    (12,964
    )Proceeds from sale of available for sale investments
    
    
    4,440
    
    
    
    5,751
    
    
    
    14,190Net Cash Used in Investing Activities
    
    
    (78,193
    )
    
    
    (60,017
    )
    
    
    (42,353
    )Net Cash Flows from Financing Activities:Payments on revolving credit agreement
    
    
    (1,456,600
    )
    
    
    (704,300
    )
    
    
    (169,154
    )Borrowings under revolving credit agreement
    
    
    1,388,900
    
    
    
    717,400
    
    
    
    353,554Senior notes repurchase
    
    
    
    
    
    
    
    
    
    
    (86,787
    )Proceeds from exercise of stock options
    
    
    17,725
    
    
    
    39,565
    
    
    
    14,711Loan origination costs on new revolving credit agreement
    
    
    
    
    
    
    
    
    
    
    (6,563
    )Purchase of common stock
    
    
    (50,000
    )
    
    
    (143,358
    )
    
    
    (278,236
    )Net Cash Used in Financing Activities
    
    
    (99,975
    )
    
    
    (90,693
    )
    
    
    (172,475
    )Effect of Exchange Rate Changes on Cash
    
    
    2,212
    
    
    
    483
    
    
    
    394Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (7,678
    )
    
    
    27,851
    
    
    
    (49,614
    )Cash and Cash Equivalents at Beginning of Period
    
    
    63,124
    
    
    
    35,273
    
    
    
    84,887Cash and Cash Equivalents at End of Period
    
    $
    55,446
    
    
    $
    63,124
    
    
    $
    35,273
  F-7




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedJuly 31, 2005
    
    
    July 31, 2004
    
    
    July 31, 2003Supplemental cash flow information:Interest paid
    
    $
    6,602
    
    
    $
    5,559
    
    
    $
    9,767Interest received
    
    $
    644
    
    
    $
    409
    
    
    $
    1,368Income taxes paid (net of refunds received)
    
    $
    31,110
    
    
    $
    19,914
    
    
    $
    33,302
  F-8




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT
(amounts in thousands)
 AccumulatedNumber of
    
    
    
    
    
    Additional
    
    OtherCommon Shares
    
    Common
    
    Paid-In
    
    ComprehensiveOutstanding
    
    Stock
    
    Capital
    
    Income (Loss)Balance July 31, 2002
    
    
    67,138
    
    
    $
    671
    
    
    $
    549,584
    
    
    $
    (6,559
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized Loss on Securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (243
    )Unrealized Gain on Derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    259Cumulative Translation Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,377Exercise of Stock Options, including
related tax benefit
    
    
    445
    
    
    
    8
    
    
    
    16,995
    
    
    
    Purchase of Common Stock
    
    
    (6,432
    )
    
    
    
    
    
    
    
    
    
    
    Contribution to 401(k) plan
    
    
    29
    
    
    
    
    
    
    
    (154
    )
    
    
    Deferred Compensation Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effect of Stock Split
    
    
    (5,958
    )
    
    
    (127
    )
    
    
    127
    
    
    
    Balance July 31, 2003
    
    
    55,222
    
    
    $
    552
    
    
    $
    566,552
    
    
    $
    6,834Net Earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized Loss on Securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (163
    )Release of Pre-Bankruptcy Tax Reserve
    
    
    
    
    
    
    
    
    
    
    54,547
    
    
    
    Unrealized Loss on Derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (292
    )Cumulative Translation Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,091Exercise of Stock Options, including
related tax benefit
    
    
    1,202
    
    
    
    13
    
    
    
    47,506
    
    
    
    Purchase of Common Stock
    
    
    (2,762
    )
    
    
    
    
    
    
    
    
    
    
    Contribution to 401(k) plan
    
    
    
    
    
    
    
    
    
    
    302
    
    
    
    Restricted Stock Issued
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    Effect of Stock Split
    
    
    (1,627
    )
    
    
    (44
    )
    
    
    (605,246
    )
    
    
    Balance July 31, 2004
    
    
    52,110
    
    
    $
    521
    
    
    $
    63,661
    
    
    $
    13,470Net Earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized Loss on Securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (474
    )Unrealized Loss on Derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (338
    )Cumulative Translation Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,461Exercise of Stock Options, including
related tax benefit
    
    
    946
    
    
    
    10
    
    
    
    23,380
    
    
    
    Purchase of Common Stock
    
    
    (1,812
    )
    
    
    
    
    
    
    
    
    
    
    Restricted Stock Issued/Cancelled
    
    
    (5
    )
    
    
    
    
    
    
    1,929
    
    
    
    Deferred Compensation Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance July 31, 2005
    
    
    51,239
    
    
    $
    531
    
    
    $
    88,970
    
    
    $
    24,119
  F-9




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT  (continued)
(amounts in thousands)
 Accumulated
    
    Deferred
    
    Treasury
    
    Total
    
    ComprehensiveEarnings
    
    Compensation
    
    Stock
    
    Investment
    
    Income (Loss)Balance July 31, 2002
    
    $
    629,767
    
    
    $
    (115
    )
    
    $
    (233,541
    )
    
    $
    939,807
    
    
    $
    139,728Net Loss
    
    
    (40,645
    )
    
    
    
    
    
    
    
    
    
    
    (40,645
    )
    
    
    (40,645
    )Unrealized Loss on Securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (243
    )
    
    
    (243
    )Unrealized Gain on Derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    259
    
    
    
    259Cumulative Translation Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,377
    
    
    
    13,377Exercise of Stock Options,
including related tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,003
    
    
    
    Purchase of Common Stock
    
    
    
    
    
    
    
    
    
    
    (278,236
    )
    
    
    (278,236
    )
    
    
    Contribution to 401(k) plan
    
    
    
    
    
    
    
    
    
    
    1,040
    
    
    
    886
    
    
    
    Deferred Compensation Amortization
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    115
    
    
    
    Effect of Stock Split
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance July 31, 2003
    
    $
    589,122
    
    
    $
    
    
    
    $
    (510,737
    )
    
    $
    652,323
    
    
    $
    (27,252
    )Net Earnings
    
    
    106,473
    
    
    
    
    
    
    
    
    
    
    
    106,473
    
    
    
    106,473Unrealized Loss On Securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (163
    )
    
    
    (163
    )Release of Pre-Bankruptcy Tax
Reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,547
    
    
    
    Unrealized Loss on Derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (292
    )
    
    
    (292
    )Cumulative Translation Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,091
    
    
    
    7,091Exercise of Stock Options,
including related tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,519
    
    
    
    Purchase of Common Stock
    
    
    
    
    
    
    
    
    
    
    (143,358
    )
    
    
    (143,358
    )
    
    
    Contribution to 401(k) plan
    
    
    
    
    
    
    
    
    
    
    1,672
    
    
    
    1,974
    
    
    
    Restricted Stock Issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effect of Stock Split
    
    
    (47,133
    )
    
    
    
    
    
    
    652,423
    
    
    
    
    
    
    
    Balance July 31, 2004
    
    $
    648,462
    
    
    $
    
    
    
    $
    
    
    
    $
    726,114
    
    
    $
    113,109Net Earnings
    
    
    106,775
    
    
    
    
    
    
    
    
    
    
    
    106,775
    
    
    
    106,775Unrealized Loss on Securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (474
    )
    
    
    (474
    )Unrealized Loss on Derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (338
    )
    
    
    (338
    )Cumulative Translation Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,461
    
    
    
    11,461Exercise of Stock Options,
including related tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,390
    
    
    
    Purchase of Common Stock
    
    
    
    
    
    
    
    
    
    
    (50,000
    )
    
    
    (50,000
    )
    
    
    Restricted Stock Issued/Cancelled
    
    
    
    
    
    
    (1,929
    )
    
    
    
    
    
    
    
    
    
    
    Deferred Compensation Amortization
    
    
    
    
    
    
    660
    
    
    
    
    
    
    
    660
    
    
    
    Balance July 31, 2005
    
    $
    755,237
    
    
    $
    (1,269
    )
    
    $
    (50,000
    )
    
    $
    817,588
    
    
    $
    117,424
  F-10




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Basis of Presentation
  zales.com. Ò baileybanksandbiddle.com.
   Summary of Significant Accounting Policies
 Use of Estimates.
 F-11




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Cash and Cash Equivalents.
 Merchandise Inventories
    Long-lived Assets and Goodwill .
  F-12




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Cost of Sales
 Selling General and Administrative Expenses.
 Depreciation and Amortization.
  Stock Based Compensation.
  F-13




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Stock Based Compensation (continued)
 Year Ended July 312005
    
    2004
    
    2003(amounts in thousands)Net earnings (loss), as reported
    
    $
    106,775
    
    
    $
    106,473
    
    
    $
    (40,645
    )Add: Restricted stock which is included in net
earnings, net of related tax effects
    
    
    414
    
    
    
    
    
    
    
    Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects
    
    
    (6,509
    )
    
    
    (6,205
    )
    
    
    (5,207
    )Pro forma net earnings (loss)
    
    $
    100,680
    
    
    $
    100,268
    
    
    $
    (45,852
    )Earnings (Loss) Per Common ShareBasic:Earnings (Loss) Per Common Share, as reported
    
    $
    2.08
    
    
    $
    2.02
    
    
    $
    (.63
    )Earnings (Loss) Per Common Share, pro forma
    
    $
    1.96
    
    
    $
    1.90
    
    
    $
    (.71
    )Earnings (Loss) Per Common Share  Diluted:Earnings (Loss) Per Common Share, as reported
    
    $
    2.05
    
    
    $
    1.99
    
    
    $
    (.63
    )Earnings (Loss) Per Common Share, pro forma
    
    $
    1.94
    
    
    $
    1.87
    
    
    $
    (.71
    )Weighted Average Number of Common Shares
Outstanding:Basic
    
    
    51,280
    
    
    
    52,650
    
    
    
    64,528Diluted
    
    
    51,975
    
    
    
    53,519
    
    
    
    64,528
  Revenue Recognition.
 F-14




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Credit Insurance Operations .
  Advertising Expenses.
 Vendor Allowances .
 Reclassifications.
 Foreign Currency.
 Derivative Financial Instruments .
  F-15




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
      Merchandise Inventories
     F-16




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Investments
   July 31, 2005
    
    
    July 31, 2004Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value(amounts in thousands)U.S. government
obligations
    
    $
    14,085
    
    
    $
    14,036
    
    
    $
    14,882
    
    
    $
    15,115Corporate bonds and notes
    
    
    5,047
    
    
    
    5,071
    
    
    
    5,188
    
    
    
    5,289Corporate equity
securities
    
    
    4,373
    
    
    
    4,533
    
    
    
    4,211
    
    
    
    3,814$
    23,505
    
    
    $
    23,640
    
    
    $
    24,281
    
    
    $
    24,218
  Property And Equipment
  July 31, 2005
    
    
    July 31, 2004(amounts in thousands)Building and Leasehold Improvements
    
    $
    231,274
    
    
    $
    209,738Furniture and Fixtures
    
    
    399,583
    
    
    
    359,894Construction in Progress
    
    
    17,722
    
    
    
    15,824Total Property and Equipment
    
    
    648,579
    
    
    
    585,456Less: Accumulated Amortization and Depreciation
    
    
    (366,546
    )
    
    
    (318,768
    )Total Net Property and Equipment
    
    $
    282,033
    
    
    $
    266,688
   F-17




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Accounts Payable and Accrued Liabilities
  July 31, 2005
    
    
    July 31, 2004(amounts in thousands)Accounts Payable
    
    $
    133,300
    
    
    $
    138,800Accrued Payroll
    
    
    37,882
    
    
    
    42,596Accrued Taxes
    
    
    49,116
    
    
    
    31,529Extended Service Agreement Deferred Revenue
    
    
    24,617
    
    
    
    28,146Accrued Rent
    
    
    42,178
    
    
    
    31,337Other Accruals
    
    
    38,888
    
    
    
    47,191Total Accounts Payable and Accrued
Liabilities
    
    $
    325,981
    
    
    $
    319,599
 Non-Current Liabilities
  Deferred Credit.
 Postretirement Benefits.
 F-18




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   F-19




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Postretirement Benefits (continued)
 July 31, 2005
    
    
    July 31, 2004(amounts in thousands)Change in Benefit Obligation:Benefit obligation at beginning of year
    
    $
    4,983
    
    
    $
    5,745Service cost
    
    
    
    
    
    
    Interest cost
    
    
    280
    
    
    
    349Plan participant contributions
    
    
    1,217
    
    
    
    1,272Curtailments
    
    
    
    
    
    
    Amendments
    
    
    
    
    
    
    Actuarial loss (gain)
    
    
    (921
    )
    
    
    (50
    )Benefits Paid
    
    
    (1,947
    )
    
    
    (2,333
    )Benefit obligation at end of year
    
    $
    3,612
    
    
    $
    4,983Change in Plan Assets:Market value at beginning of year
    
    $
    
    
    
    $
    Employer contributions
    
    
    730
    
    
    
    1,061Plan participant contributions
    
    
    1,217
    
    
    
    1,272Benefit payments
    
    
    (1,947
    )
    
    
    (2,333
    )Market value at end of year
    
    $
    
    
    
    $
    Beginning of fiscal year assumptions (for Annual
Expense) Discount Rate
    
    
    6.00
    %
    
    
    6.50
    %End of fiscal year assumptions (for Year-End
Benefit Obligation) Discount Rate
    
    
    5.21
    %
    
    
    6.00
    %Projected Cash Flows:Net ContributionsCurrent Fiscal Year
    
    $
    730
    
    
    $
    1,061Fiscal Year +1
    
    
    425
    
    
    
    600Net Benefit PaymentsCurrent Fiscal Year
    
    $
    730
    
    
    $
    1,061Fiscal Year +1
    
    
    425
    
    
    
    600Fiscal Year +2
    
    
    386
    
    
    
    571Fiscal Year +3
    
    
    361
    
    
    
    541Fiscal Year +4
    
    
    341
    
    
    
    513Fiscal Year +5
    
    
    323
    
    
    
    483Sum of next 5 fiscal years
    
    
    1,306
    
    
    
    1,964Reconciliation of Funded Status:Benefit Obligation
    
    $
    (3,612
    )
    
    $
    (4,983
    )Unrecognized net actuarial gain
    
    
    (5,821
    )
    
    
    (5,304
    )Unrecognized prior service cost
    
    
    (3,440
    )
    
    
    (3,756
    )Net Amount Recognized
    
    $
    (12,873
    )
    
    $
    (14,043
    )Development of Prepaid (Accrued ) Benefit Cost:Prepaid (accrued) last year
    
    $
    (14,043
    )
    
    $
    (15,481
    )Plus: Net employer contributions last year
    
    
    730
    
    
    
    1,061Plus: Net periodic benefit income expense last
year
    
    
    440
    
    
    
    377Less: Cost of special SFAS 106 events last year
    
    
    
    
    
    
    Prepaid (accrued) this year
    
    $
    (12,873
    )
    
    $
    (14,043
    )
 F-20




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Year EndedJuly 31, 2005
    
    July 31, 2004
    
    July 31, 2003(amounts in thousands)Service Cost
    
    $
    
    
    
    $
    
    
    
    $
    Interest Cost
    
    
    280
    
    
    
    349
    
    
    
    508Amortization of Prior Service Cost and Gain
    
    
    (720
    )
    
    
    (726
    )
    
    
    (607
    )Settlement / Curtailment / Termination of
Benefits
    
    
    
    
    
    
    
    
    
    
    Net Periodic (Benefit) Cost
    
    $
    (440
    )
    
    $
    (377
    )
    
    $
    (99
    )
  Non-Qualified Retirement Plan
  Long-Term Debt
 Payoff of Senior Notes. 1 2
 Revolving Credit Agreement.
   F-21




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Lease Commitments
  Rent expense is as follows:
    
    Year Ended
    
    Year Ended
    
    Year EndedJuly 31,
    
    July 31,
    
    July 31,2005
    
    2004
    
    2003(amounts in thousands)Retail Space:Minimum Rentals
    
    $
    196,647
    
    
    $
    182,520
    
    
    $
    175,193Rentals Based on Sales
    
    
    11,589
    
    
    
    12,212
    
    
    
    10,767208,236
    
    
    
    194,732
    
    
    
    185,960Equipment and Corporate Headquarters
    
    
    1,773
    
    
    
    2,823
    
    
    
    2,757Total Rent Expense
    
    $
    210,009
    
    
    $
    197,555
    
    
    $
    188,717
   3⁄4
 F-22




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Interest
    Income Taxes
  Year Ended
    
    Year Ended
    
    Year EndedJuly 31,
    
    July 31,
    
    July 31,2005
    
    2004
    
    2003(amounts in thousands)Federal Income Tax Expense at Statutory Rate
    
    $
    59,527
    
    
    $
    59,089
    
    
    $
    5,143Impairment of Goodwill
    
    
    
    
    
    
    
    
    
    
    47,705State Income Taxes, Net of Federal Income Tax
Benefit
    
    
    2,634
    
    
    
    2,657
    
    
    
    2,205Other
    
    
    1,142
    
    
    
    607
    
    
    
    287Total Income Tax Expense
    
    $
    63,303
    
    
    $
    62,353
    
    
    $
    55,340Effective Income Tax Rate
    
    
    37.2
    %
    
    
    36.9
    %
    
    
    376.6 %
    (1)
  Year Ended
    
    Year Ended
    
    Year EndedJuly 31,
    
    July 31,
    
    July 31,2005
    
    2004
    
    2003(amounts in thousands)Current Provision:Federal
    
    $
    36,771
    
    
    $
    29,375
    
    
    $
    7,347Foreign
    
    
    9,015
    
    
    
    1,786
    
    
    
    3,823State
    
    
    4,524
    
    
    
    216
    
    
    
    (2,116
    )Total Current Provision
    
    
    50,310
    
    
    
    31,377
    
    
    
    9,054Deferred Provision:Federal
    
    
    14,154
    
    
    
    22,768
    
    
    
    39,016Foreign
    
    
    (286
    )
    
    
    5,606
    
    
    
    2,817State
    
    
    (875
    )
    
    
    2,602
    
    
    
    4,453Total Deferred Provision
    
    
    12,993
    
    
    
    30,976
    
    
    
    46,286Total Income Tax Provision
    
    $
    63,303
    
    
    $
    62,353
    
    
    $
    55,340
 F-23




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   July 31, 2005
    
    July 31, 2004(amounts in thousands)Current Deferred Taxes:AssetsCustomer
receivables
    
    $
    467
    
    
    $
    642Accrued
liabilities
    
    
    30,886
    
    
    
    37,866State and local
taxes
    
    
    
    
    
    
    4,152Net operating loss
carryforward
    
    
    6,821
    
    
    
    7,601Inventory reserves
    
    
    10,766
    
    
    
    9,163Other
    
    
    2,078
    
    
    
    Total Assets
    
    
    51,018
    
    
    
    59,424LiabilitiesMerchandise inventories,
principally due to LIFO
reserve
    
    
    (98,453
    )
    
    
    (102,586
    )Accrued
liabilities
    
    
    (8,921
    )
    
    
    (8,255
    )Deferred Current Tax
Liability, Net
    
    $
    (56,356
    )
    
    $
    (51,417
    )Non-Current Deferred Taxes:AssetsNet operating loss
carryforward
    
    
    13,749
    
    
    
    23,061Postretirement
benefits
    
    
    5,020
    
    
    
    5,477Accrued
liabilities
    
    
    7,563
    
    
    
    9,678State and local taxes
    
    
    9,784
    
    
    
    Other
    
    
    8,694
    
    
    
    4,905Total Assets
    
    
    44,810
    
    
    
    43,121LiabilitiesProperty and
equipment
    
    
    (44,755
    )
    
    
    (36,188
    )Other
    
    
    (1,380
    )
    
    
    (881
    )Goodwill
    
    
    (12,525
    )
    
    
    (11,020
    )Deferred Non-Current Tax
(Liability), Net
    
    $
    (13,850
    )
    
    $
    (4,968
    )
  F-24




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Capital Stock
 Common Stock.
 Stock Split.
 Preferred Stock.
 Treasury Stock.
     F-25




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
    Incentive Stock Plan.
   F-26




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  Weighted Average ExerciseShares
    
    
    
    
    
    
    
    
    
    Grant Price
    
    
    
    
    
    
    
    
    
    PriceFiscal
    
    Fiscal
    
    FiscalFiscal 2005
    
    Fiscal 2004
    
    Fiscal 2003
    
    Fiscal 2005
    
    Fiscal 2004
    
    Fiscal 2003
    
    2005
    
    2004
    
    2003Outstanding,
beginning of year
    
    
    3,922,132
    
    
    
    5,578,852
    
    
    
    6,050,906
    
    
    $
    10.9129.57
    
    
    $
    4.50-23.23
    
    
    $
    4.50-22.78
    
    
    $
    20.81
    
    
    $
    18.05
    
    
    $
    17.17Granted
    
    
    128,250
    
    
    
    813,600
    
    
    
    1,169,000
    
    
    
    25.50-30.65
    
    
    
    23.94-29.57
    
    
    
    14.50-23.23
    
    
    
    27.13
    
    
    
    27.32
    
    
    
    22.10Exercised
    
    
    (946,209
    )
    
    
    (2,336,370
    )
    
    
    (887,104
    )
    
    
    10.91-26.70
    
    
    
    4.50-21.75
    
    
    
    4.50-21.75
    
    
    
    18.54
    
    
    
    16.68
    
    
    
    16.83Canceled
    
    
    (230,563
    )
    
    
    (133,950
    )
    
    
    (753,950
    )
    
    
    14.15-30.03
    
    
    
    4.50-26.55
    
    
    
    4.87-22.78
    
    
    
    22.02
    
    
    
    17.65
    
    
    
    18.71Outstanding, end of
year
    
    
    2,873,610
    
    
    
    3,922,132
    
    
    
    5,578,852
    
    
    $
    13.11-30.65
    
    
    $
    10.91-29.57
    
    
    $
    4.50-23.23
    
    
    $
    21.74
    
    
    $
    20.81
    
    
    $
    18.05
  Options Outstanding
    
    
    
    
    
    
    
    
    
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    AverageRange of Exercise
    
    
    Number
    
    
    Remaining Life
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrices
    
    
    Outstanding
    
    
    (Years)
    
    
    Price
    
    
    Exercisable
    
    
    Price$   10.20
    
    
    13.60
    
    
    
    2,500
    
    
    
    3.3
    
    
    
    13.11
    
    
    
    2,500
    
    
    
    13.1113.60
    
    
    17.00
    
    
    
    821,474
    
    
    
    6.7
    
    
    
    14.57
    
    
    
    523,724
    
    
    
    14.7417.00
    
    
    20.40
    
    
    
    3,000
    
    
    
    5.1
    
    
    
    17.38
    
    
    
    3,000
    
    
    
    17.3820.40
    
    
    23.80
    
    
    
    1,177,599
    
    
    
    6.9
    
    
    
    22.67
    
    
    
    727,349
    
    
    
    22.4123.80
    
    
    27.20
    
    
    
    171,500
    
    
    
    8.9
    
    
    
    26.26
    
    
    
    17,125
    
    
    
    26.1127.20
    
    
    30.60
    
    
    
    696,537
    
    
    
    9.0
    
    
    
    27.55
    
    
    
    166,896
    
    
    
    27.47$   30.60
    
    $
    34.00
    
    
    
    1,000
    
    
    
    9.4
    
    
    
    30.65
    
    
    
    0
    
    
    
    0.002,873,610
    
    
    
    7.5
    
    
    $
    21.74
    
    
    
    1,440,594
    
    
    $
    20.23
  Earnings (Loss) Per Common Share
  F-27




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Earnings (Loss) Per Common Share (continued)
 Years Ended July 31,2005
    
    
    2004
    
    
    2003(amounts in thousands, except per share amounts)Net earnings (loss) available to stockholders
    
    $
    106,775
    
    
    $
    106,473
    
    
    $
    (40,645
    )Basic:Weighted average number of common shares outstanding
    
    
    51,280
    
    
    
    52,650
    
    
    
    64,528Net earnings (loss) per share  basic
    
    $
    2.08
    
    
    $
    2.02
    
    
    $
    (0.63
    )Diluted:Basic weighted average number of common shares
outstanding
    
    
    51,280
    
    
    
    52,650
    
    
    
    64,528Effect of dilutive stock options:Stock Options
    
    
    695
    
    
    
    869
    
    
    
    Diluted weighted average number of common shares
outstanding as adjusted
    
    
    51,975
    
    
    
    53,519
    
    
    
    64,528Net earnings (loss) per share  diluted
    
    $
    2.05
    
    
    $
    1.99
    
    
    $
    (0.63
    )
 Comprehensive Income (Loss)
  Segments
      F-28




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Selected Financial Data by Segment
 Year Ended July 31,2005
    
    
    2004
    
    
    2003(amounts in thousands, except per share amounts)RevenuesFine Jewelry (a)
    
    $
    2,089,261
    
    
    $
    2,022,214
    
    
    $
    1,939,454Kiosk (b)
    
    
    280,897
    
    
    
    269,660
    
    
    
    256,665All Other
    
    
    12,908
    
    
    
    12,566
    
    
    
    16,122Total Revenues
    
    $
    2,383,066
    
    
    $
    2,304,440
    
    
    $
    2,212,241Depreciation & Amortization ExpenseFine Jewelry
    
    $
    44,410
    
    
    $
    41,757
    
    
    $
    40,915Kiosk
    
    
    4,708
    
    
    
    4,199
    
    
    
    4,653All Other
    
    
    
    
    
    
    
    
    
    
    Unallocated
    
    
    10,722
    
    
    
    10,425
    
    
    
    10,122Total Depreciation & Amortization Expense
    
    $
    59,840
    
    
    $
    56,381
    
    
    $
    55,690Operating Earnings (Loss)Fine Jewelry
    
    $
    147,414
    
    
    $
    153,739
    
    
    $
    151,650Kiosk (c)
    
    
    29,030
    
    
    
    25,951
    
    
    
    (125,629
    )All Other
    
    
    6,824
    
    
    
    6,603
    
    
    
    7,894Unallocated (d)
    
    
    (5,465
    )
    
    
    (9,939
    )
    
    
    (6,991
    )Total Operating Earnings
    
    $
    177,803
    
    
    $
    176,354
    
    
    $
    26,924Assets (e)Fine Jewelry (f)
    
    $
    1,103,142
    
    
    $
    1,055,755
    
    
    $
    1,036,080Kiosk (g)
    
    
    117,125
    
    
    
    111,238
    
    
    
    96,485All Other
    
    
    35,670
    
    
    
    37,737
    
    
    
    38,217Unallocated (d)
    
    
    124,963
    
    
    
    137,354
    
    
    
    123,324Total Assets
    
    $
    1,380,900
    
    
    $
    1,342,084
    
    
    $
    1,294,106Capital ExpendituresFine Jewelry
    
    $
    59,587
    
    
    $
    42,535
    
    
    $
    27,064Kiosk
    
    
    8,650
    
    
    
    6,038
    
    
    
    6,383All Other
    
    
    
    
    
    
    
    
    
    
    Unallocated
    
    
    14,887
    
    
    
    12,215
    
    
    
    10,132Total Capital
    
    $
    83,124
    
    
    $
    60,788
    
    
    $
    43,579
 
 a)
    
    Includes $198.3, $174.1 and $150.4 million in fiscal years 2005, 2004, and 2003, respectively, related to foreign operations.b)
    
    Includes $6.6 million in fiscal year 2005 related to foreign operations.c)
    
    Includes impairment of goodwill of $136.3 million in fiscal year 2003.d)
    
    Includes $71.0, $65.9, and $63.3 million in fiscal years 2005, 2004, and 2003, respectively, to offset internal carrying costs charged to
the segments.e)
    
    Assets allocated to segments include fixed assets, inventories and goodwill. Unallocated assets include cash, prepaid assets such as rent,
corporate office improvements, and technology infrastructure.f)
    
    Includes $27.2, $23.2 and $20.0 million of fixed assets in fiscal years 2005, 2004, and 2003, respectively, related to foreign operations.g)
    
    Includes $390,000 of fixed
assets in fiscal years 2005 related to foreign operations.
There were no foreign operations in this segment prior to 2005. F-29




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Commitments and Contingencies
   New Accounting Pronouncements
  Guarantee Obligations
  Credit Programs
  F-30




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
  Product Warranty Programs.
  Year EndedJuly 31, 2005
    
    
    July 31, 2004
    
    
    July 31, 2003(amounts in thousands)Beginning Balance
    
    $
    31,794
    
    
    $
    32,160
    
    
    $
    32,541Extended Service Agreements Sold
    
    
    59,415
    
    
    
    50,183
    
    
    
    38,866Extended Service Agreements
Revenue Recognized
    
    
    (62,945
    )
    
    
    (50,549
    )
    
    
    (39,247
    )Ending Balance
    
    $
    28,264
    
    
    $
    31,794
    
    
    $
    32,160
 Benefit Plans
 Defined Contribution Retirement Plan
   F-31




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Financial Instruments
    Concentrations of Business and Credit Risk.
 Other Matters
 American Jobs Creation Act.
 Lease Accounting and Other.
    F-32




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
   Subsequent Events
 Hurricane Katrina.
 Bailey, Banks and Biddle.
 F-33




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##### Table of Contents



ZALE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (continued)
 Quarterly Results Of Operations (Unaudited)
  Fiscal Year 2005For the Three Months EndedJuly 31, 2005
    
    April 30, 2005
    
    January 31, 2005
    
    October 31, 2004Total
Revenues
    
    $
    472,343
    
    
    $
    515,618
    
    
    $
    972,332
    
    
    $
    422,773Cost of Sales
    
    
    225,566
    
    
    
    246,151
    
    
    
    480,229
    
    
    
    205,280Net Earnings
(Loss)
    
    
    4,055
    
    
    
    14,456
    
    
    
    99,197
    
    
    
    (10,933
    )Net earnings (loss) per diluted
share
    
    $
    0.08
    
    
    $
    0.28
    
    
    $
    1.91
    
    
    $
    (0.21
    )
 Fiscal Year 2004For the Three Months EndedJuly 31, 2004
    
    April 30, 2004
    
    January 31, 2004
    
    October 31, 2003Total
Revenues
    
    $
    455,598
    
    
    $
    483,175
    
    
    $
    949,023
    
    
    $
    416,644Cost of Sales
    
    
    214,518
    
    
    
    232,802
    
    
    
    469,936
    
    
    
    205,690Net Earnings
(Loss)
    
    
    6,894
    
    
    
    11,528
    
    
    
    97,295
    
    
    
    (9,244
    )Net earnings (loss) per diluted
share
    
    $
    0.13
    
    
    $
    0.22
    
    
    $
    1.83
    
    
    $
    (0.17
    )
 F-34




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##### Table of Contents



SIGNATURES
 th
 ZALE CORPORATIONBy:
    
    /s/ Mary L. FortéMary L. FortéPresidentand Chief Executive Officer
   Signature
    
    Title
    
    Date/s/ Mary L. Forté
    
    President, Chief Executive Officer andMary L. Forté
    
    Director (principal executive officer ofthe registrant)
    
    September 29, 2005/s/ Sue E. Gove
    
    Executive Vice President, ChiefSue E. Gove
    
    Operating Officer and Director
    
    September 29, 2005Group Senior Vice President/s/ Mark R. Lenz
    
    and Chief Financial Officer (principalMark R. Lenz
    
    financial officer of the registrant)
    
    September 29, 2005Senior Vice President, Controller/s/ Cynthia T. Gordon
    
    (principal accounting officer of theCynthia T. Gordon
    
    registrant)
    
    September 29, 2005/s/ Richard C. Marcus
    
    Chairman of the Board
    
    September 29, 2005Richard C. Marcus/s/ J. Glen Adams
    
    Director
    
    September 29, 2005J. Glen Adams/s/ A. David Brown
    
    Director
    
    September 29, 2005A. David Brown/s/ Mary E. Burton
    
    Director
    
    September 29, 2005Mary E. Burton/s/ John B. Lowe, Jr.
    
    Director
    
    September 29, 2005John B. Lowe, Jr./s/ Thomas C. Shull
    
    Director
    
    September 29, 2005Thomas C. Shull/s/ David M. Szymanski
    
    Director
    
    September 29, 2005David M. Szymanski
 F-35




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.15
    
    Base Salaries of Named Executive Officers10.16
    
    Summary of Director Compensation10.18
    
    Master Agreement for Information Technology Services
between Zale Delaware, Inc. and ACS Commercial
Solutions, Inc.21
    
    Subsidiaries of the registrant.23.1
    
    Consent of KPMG LLP.31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer.32.1
    
    Section 1350 Certification of Chief Executive Officer.32.2
    
    Section 1350 Certification of Chief Financial Officer.
  F-36