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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-K

For the fiscal year ended July 31, 2010

Zale Corporation

A Delaware Corporation
IRS Employer Identification No. 75-0675400
SEC File Number 1-04129

901 W. Walnut Hill Lane
Irving, Texas 75038-1003
(972) 580-4000

Zale Corporation's common stock, par value $0.01 per share, is registered pursuant to Section 12 (b) of the Securities Exchange Act of 1934 (the
"Act") and is listed on the New York Stock Exchange. Zale Corporation does not have any securities registered under Section 12(g) of the Act. Zale Corporation is required to file reports
pursuant to Section 13 of the Act. Zale Corporation (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days.

Zale
Corporation was not required to submit electronically and post on the Company's website Interactive Data Files required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months due to the Rule not being applicable to the Company for the current and previous periods.

Disclosure
of the delinquent filers pursuant to Item 405 of Regulation S-K will not be contained in our definitive Proxy Statement, portions of which are
incorporated by reference in Part III of this Form 10-K.

The
aggregate market value of Zale Corporation's common stock (based upon the closing sales price quoted on the New York Stock Exchange) held by non-affiliates as of
January 31, 2010 was $49,778,255. For this purpose, directors and officers have been assumed to be affiliates. As of October 1, 2010, 32,107,792 shares of Zale Corporation's common stock
were outstanding.

Zale
Corporation is a smaller reporting company filer and is not a well-known seasoned issuer.

Zale
Corporation is not a shell company.

DOCUMENTS INCORPORATED BY REFERENCE.

Portions of Zale Corporation's definitive Proxy Statement for the 2010 Annual Meeting of Stockholders to be held on December 3,
2010 are incorporated by reference into Part III.



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Table of Contents

ZALE CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS



PagePART I.Item 1.

Business

1Item 1A.

Risk Factors

9Item 1B.

Unresolved Staff Comments

12Item 2.

Properties

12Item 3.

Legal Proceedings and Other Matters

13Item 4.

Reserved

13Item 4A.

Executive Officers of the Registrant

13PART II.Item 5.

Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

15Item 6.

Selected Financial Data

17Item 7.

Management's Discussion and Analysis of Financial Condition and
Results of Operations

19Item 7A.

Quantitative and Qualitative Disclosures About Market
Risk

33Item 8.

Financial Statements and Supplementary
Data

33Item 9.

Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

34Item 9A.

Controls and Procedures

34Item 9B.

Other Information

34PART III.Item 10.

Directors, Executive Officers and Corporate
Governance

35Item 11.

Executive Compensation

35Item 12

Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

35Item 13.

Certain Relationships and Related Transactions, and Director
Independence

35Item 14.

Principal Accountant Fees and Services

35PART IV.Item 15.

Exhibits and Financial Statements
Schedules

36


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Table of Contents

PART I

ITEM 1.    BUSINESS

General

We are, through our wholly owned subsidiaries, a leading specialty retailer of fine jewelry. At July 31, 2010, we operated
1,218 specialty retail jewelry stores and 672 kiosks located mainly in shopping malls throughout the United States of America, Canada and Puerto Rico.

We
were incorporated in Delaware in 1993. Our principal executive offices are located at 901 W. Walnut Hill Lane, Irving, Texas 75038-1003. Our telephone number at that
address is (972) 580-4000, and our internet address iswww.zalecorp.com.

During
the fiscal year ended July 31, 2010, we generated $1.6 billion of revenues. We compete in the approximately $61 billion U.S. and Canadian retail jewelry
industry by leveraging our established brand names, economies of scale and geographic and demographic diversity. We have significant brand name recognition as a result of each of our brands'
long-standing presence in the industry and our national and regional advertising campaigns. We believe that brand name recognition is an important advantage in jewelry retailing as jewelry
products are generally unbranded and consumers must trust in a retailer's reliability, credibility and commitment to customer service.

Our
business has changed significantly over the past few years. In November 2007, we sold our Bailey Banks & Biddle brand to Finlay Enterprises, Inc. We have closed a total
of 265 underperforming locations during the last two fiscal years, of which 198 were fine jewelry stores and 67 were kiosks. In May 2010, we enhanced our liquidity by securing a $150 million
Senior Secured Term Loan and extending our revolving credit agreement. In May 2010, we also entered into an agreement with TD Financing Services, Inc. ("TDFS"), a wholly-owned subsidiary of
Toronto-Dominion Bank, to provide financing for our Canadian customers to purchase merchandise through private label credit cards. The agreement with TDFS replaced the agreement with Citi Cards
Canada Inc., which expired on June 30, 2010. In September 2010, we entered into a five year agreement to amend and restate various terms of the Merchant Services Agreement with Citibank
(South Dakota), N.A. ("Citibank"), to provide financing for our U.S. customers beginning October 1, 2010. The previous agreement with Citibank was scheduled to expire in March 2011.

Business Segments

We report our operations under three business segments: Fine Jewelry, Kiosk Jewelry and All Other. An overview of each business segment
follows below. During fiscal year 2010, our Fine Jewelry segment generated $1.4 billion, or approximately 85 percent of our revenues. During fiscal year 2010, the Kiosk Jewelry segment
revenues represented approximately $226 million, or 14 percent of our revenues.

Fine Jewelry

Our Fine Jewelry segment is comprised of five brands, predominantly focused on the value-oriented consumer as our core customer target.
Each brand specializes in fine jewelry and watches, with merchandise and marketing emphasis focused on diamond products. Zales Jewelers® is our national brand in the U.S. providing
moderately priced jewelry to a broad range of customers. Zales Outlet® operates in outlet malls and neighborhood power centers and capitalizes on Zales Jewelers'® national
advertising and brand recognition. Gordon's Jewelers® is a value-oriented regional jeweler. Peoples Jewellers®, our national brand in Canada, provides customers with an
affordable assortment and an accessible shopping experience. Mappins Jewellers® offers Canadian customers a broad selection of merchandise from engagement rings to fashionable and
contemporary fine jewelry. In addition, we have made a strategic decision to expand our Fine Jewelry segment through the e-commerce sites, www.zales.com,
www.zalesoutlet.comandwww.gordonsjewelers.com.

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Zales, our U.S. based flagship, is a leading brand name in jewelry retailing in the U.S., operating 675 stores in
50 states and Puerto Rico with an average store size of 1,685 square feet. Gordon's operates 192 stores in 29 states and Puerto Rico with an average store size of
1,521 square feet.

Zales
is positioned as "The Diamond Store Since 1924" given its emphasis on diamond jewelry especially in the bridal and fashion segments. The Zales brand complements its merchandise
assortments with promotional strategies to increase sales during traditional gift-giving periods and throughout the year. We believe that the prominence of diamond jewelry in our product
selection and Zales' reputation for customer service for over 85 years fosters an image of product expertise, quality and trust among consumers.

Gordon's
was founded in 1905 and its customers share similar demographic characteristics with the Zales customer. Accordingly, we have taken steps to position the brand to leverage our
corporate strengths while focusing on product differentiation that will cater to local demographics. Gordon's features items in every major jewelry category including exclusive bridal designs, branded
watches, gemstones, gold merchandise, and diamond fashion and solitaire products.

Zales
Jewelers' and Gordon's Jewelers' combined revenues accounted for 60 percent of our total revenues, with an average transaction value of $396 in fiscal year 2010.
Additionally, both brands operate as multi-channel retailers and serve internet customers through e-commerce sites: www.zales.comand
www.gordonsjewelers.com, which accounted for approximately four percent of our total revenues in fiscal year 2010. Internet sales totaled
$63.8 million in fiscal year 2010 compared to $56.2 million in fiscal year 2009.



In Canada, we operate 215 stores in nine provinces and enjoy the largest market share of any specialty jewelry retailer in Canada.
Canadian operations consist of two brands, Peoples Jewellers and Mappins Jewellers, and accounted for 16 percent of our total revenues in fiscal year 2010. The average store size is 1,613
square feet with an average transaction value of $303 in fiscal year 2010.

Peoples
Jewellers and Mappins Jewellers are two of the most recognized brand names in Canada. Peoples was founded in 1919 and offers jewelry at affordable prices, attracting a wide
variety of Canadian customers. Using the trademark "Peoples the Diamond Store" in Canada, Peoples emphasizes its diamond business while also offering a wide selection of gold jewelry, gemstone jewelry
and watches. Since 2000, the Peoples brand has built recognition through an aggressive television campaign. Over the past five years, Peoples had the largest television campaign of any Canadian
jewelry retailer. Mappins Jewellers differentiates itself by offering exclusive merchandise primarily in its bridal assortments.



We operate 136 Zales Outlet stores in 35 states and Puerto Rico, sales from which accounted for 10 percent of our total revenues
in fiscal year 2010. The average store size is 2,330 square feet, with an average transaction value of $438 in fiscal year 2010.

The
outlet concept has evolved into three differentiated formats: power strip centers, traditional outlet malls and destination centers. Zales Outlet was established as an extension of
the Zales brand and capitalizes on Zales' national advertising and brand recognition. Our stores feature items in every major jewelry category including branded watches, gemstones, gold merchandise,
and diamond fashion and solitaire products. The merchandise assortment in a typical Zales Outlet store caters to the higher-income, female customer, offering 20 to 70 percent off traditional
retail prices.

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Kiosk Jewelry

The Kiosk Jewelry segment operates under the brand names Piercing Pagoda®, Plumb Gold, and Silver and Gold
Connection® (collectively, "Piercing Pagoda") through mall-based kiosks, and targets the opening price point jewelry customer. In May 2010, we expanded our presence in the
Kiosk Jewelry segment through our e-commerce site,www.pagoda.com. At July 31, 2010, Piercing Pagoda operated 672 locations in 41
states and Puerto Rico. The Kiosk Jewelry segment specializes in gold and silver products, including entry level diamond merchandise, that capitalize on the latest fashion trends.

At
the entry-level price point, the Kiosk Jewelry segment targets a young, fashion forward customer. The Kiosk segment offers an extensive collection of bracelets, earrings, charms,
rings, and 14 karat and 10 karat gold chains, as well as a selection of silver and diamond jewelry, all in basic styles at moderate prices. In addition, trained associates perform
ear-piercing services on site.

Kiosks
are generally located in high traffic areas that are easily accessible and visible within regional shopping malls. The kiosk locations average 188 square feet in size, with an
average transaction value of $40 in fiscal year 2010.

All Other

We provide insurance and reinsurance facilities for various types of insurance coverage, which are marketed primarily to our private
label credit card customers, through Zale Indemnity Company, Zale Life Insurance Company and Jewel Re-Insurance Ltd.
These three companies are the insurers (either through direct written or reinsurance contracts) of our customer credit insurance coverage. In addition to providing merchandise replacement coverage for
certain perils, credit insurance coverage provides protection to the creditor and cardholder for losses associated with the disability, involuntary unemployment, leave of absence or death of the
cardholder. Zale Life Insurance Company also provides group life insurance coverage for our eligible employees. Zale Indemnity Company, in addition to writing direct credit insurance contracts, has
certain discontinued lines of insurance that it continues to service. Credit insurance operations are dependent on our retail sales through our private label credit cards. In fiscal year 2010,
36 percent of our private label credit card purchasers purchased some form of credit insurance. Under the current private label arrangement with Citibank, our insurance affiliates provide
insurance to holders of our U.S. private label credit card and receive payments for such insurance products. On May 7, 2010, we entered into a five year Private Label Credit Card Program
Agreement (the "TD Agreement") with TDFS to provide financing for our Canadian customers to purchase merchandise through private label credit cards beginning July 1, 2010. In addition, TDFS
will provide credit insurance for our Canadian customers and will receive 40 percent of the net profits and the remaining 60 percent will be paid to us. The TD Agreement replaced the
agreement with Citi Cards Canada Inc., which expired on June 30, 2010. In fiscal year 2010, the All Other segment accounted for approximately one percent of our total revenues.

Industry and Competition

Jewelry retailing is highly fragmented and competitive. We compete with a large number of independent regional and local jewelry
retailers, as well as with other national jewelry chains. We also compete with other types of retailers who sell jewelry and gift items such as department stores, discounters, direct mail suppliers,
online retailers and television home shopping programs. Certain of our competitors are non-specialty retailers, which are larger and have greater financial resources than we do. The malls
where most of our stores are located typically contain competing national chains, independent jewelry stores and/or department store jewelry departments. We believe that we also are competing for
consumers' discretionary spending dollars and, therefore, compete with retailers who offer merchandise other than jewelry or giftware. Therefore, we compete primarily on the basis of our reputation
for high quality products, brand recognition, store location, distinctive and value-oriented merchandise, personalized customer service and ability to offer private label credit card programs to
customers wishing to finance

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their
purchases. Our success also is dependent on our ability to both create and react to customer demand for specific merchandise categories.

The
U.S. and Canadian retail jewelry industry accounted for approximately $61 billion of sales in 2009, according to publicly available data. We have a three percent market share
in the combined U.S. and Canadian markets. The largest jewelry retailer in the combined U.S. and Canadian markets is believed to be Wal-Mart Stores, Inc. Other significant segments
of the fine jewelry industry include national chain department stores (such as J.C. Penney Company, Inc.), mass merchant discount stores (such as Wal-Mart Stores, Inc.),
other general merchandise stores, specialty retail
jewelers (such as Signet Jewelers Limited) and apparel and accessory stores. The remainder of the retail jewelry industry is comprised primarily of catalog and mail order houses, direct-selling
establishments, TV shopping networks (such as QVC, Inc.) and online jewelers.

We
hold no material patents, licenses, franchises or concessions; however, our established trademarks and trade names are essential to maintaining our competitive position in the retail
jewelry industry.

Operations by Brand

The following table presents revenues, average sales per location and the number of locations for each of our brands for the periods
indicated.

Year Ended July 31,Revenues (in thousands)

2010

2009

2008Zales and Gordon's (includingzales.comandgordonsjewelers.com)

$
963,077

$
1,110,419

$
1,362,672Zales Outlet


154,747


168,497


191,526Peoples and Mappins(a)


260,683


256,710


321,972Piercing Pagoda (includingpagoda.com)(b)


226,187


232,809


249,489Insurance revenues


11,611


11,309


12,382$
1,616,305

$
1,779,744

$
2,138,041Average Sales Per Location (in thousands)(c):Zales and Gordon's

$
1,034

$
1,061

$
1,251Zales Outlet


1,147


1,149


1,350Peoples and Mappins


1,212


1,213


1,622Piercing Pagoda


338


330


328


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Locations by BrandYear Ended July 31, 2010

Locations Opened
During Period

Locations Closed
During Period

Locations at End
of PeriodZales and Gordon's





28


867Zales Outlet





4


136Peoples and Mappins


6


3


215Piercing Pagoda





12


6726


47


1,890Year Ended July 31, 2009Zales and Gordon's


3


153


895Zales Outlet


6


9


140Peoples and Mappins


5


1


212Piercing Pagoda





55


68414


218


1,931Year Ended July 31, 2008Zales and Gordon's


19


45


1,045Zales Outlet


8


2


143Peoples and Mappins


16


1


208Piercing Pagoda


4


58


73947


106


2,135


Business Segment Data

Information concerning sales and segment income attributable to each of our business segments is set forth below in Item 6,
"Selected Financial Data," Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in the "Notes to Consolidated Financial Statements," all of which
are incorporated herein by reference.

Store Operations

Our stores are designed to differentiate our brands, create an attractive environment, make shopping convenient and enjoyable, and
maximize operating efficiencies, all of which enhance the customer experience. We focus on store layout, with particular focus on arrangement of display cases, lighting, and choice of materials to
optimize merchandise presentation. Promotional displays are changed periodically to provide variety or to reflect seasonal events.

Each
of our stores is led by a store manager who is responsible for store-level operations, including overall store sales and personnel matters. Administrative matters, including
purchasing, distribution and payroll, are consolidated at the corporate level to maintain efficiency and lower operating costs. In addition to selling jewelry, watches and gift items, each store also
offers standard warranties and return policies, and provides extended warranty coverage that may be purchased at the customer's option. In order to facilitate sales, stores will hold merchandise in
layaway, generally requiring a deposit of not less than 10 percent of the purchase price at the inception of the layaway transaction.

We
have implemented inventory control systems, extensive security systems and loss prevention procedures to maintain low inventory losses. We screen employment applicants and provide our
store personnel with training in loss prevention. Despite such precautions, we experience theft losses from time to time, and maintain insurance to cover such external losses.

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We
believe it is important to provide knowledgeable and responsive customer service and we maintain a strong focus on connecting with the customer, both through advertising and
in-store communications and service. Our goal is to form and sustain an effective relationship with the customer from the first sale by maintaining a customer connection. We have a
centralized customer service call center to effectively address customer service issues at lower aggregate cost.

We
continue to focus on the level and frequency of our employee training programs, particularly with store managers and jewelry consultants. We provide selling and merchandise product
training for all store personnel. During fiscal year 2010, we significantly expanded Diamond Council of America training to our store managers, district managers, regional directors and certain
jewelry consultants.

Purchasing and Inventory

We purchase the majority of our merchandise in finished form from a network of established suppliers and manufacturers located
primarily in the United States, India, Southeast Asia and Italy. We have a direct sourcing team that purchases products from 18 countries and we operate a manufacturing subsidiary that is our largest
supplier of finished products. At the end of fiscal year 2010, approximately four percent and 14 percent of our total inventory represented raw materials and finished goods related to our
manufacturing program and distribution center, respectively. All purchasing is done through buying offices at our corporate headquarters ("Store Support Center"). Consignment inventory has
historically consisted of test programs, merchandise at higher price points or merchandise that otherwise does not warrant the risk of ownership. Consignment merchandise can be returned to the vendor
at any time or converted to owned inventory if it meets certain sales thresholds. We had $81.1 million and $71.5 million of consignment inventory on hand at July 31, 2010 and
2009, respectively. During fiscal years 2010 and 2009, we purchased approximately 20 percent and 12 percent, respectively, of our finished merchandise from our top five vendors with no
single vendor exceeding six percent in 2010. If our supply with these top vendors were disrupted, particularly at certain critical times during the year, our sales could be adversely affected in the
short term until alternative supply arrangements could be established.

As
a specialty retail jeweler, we could be affected by industry-wide fluctuations in the prices of diamonds, gold and other metals and stones. The supply and prices of
diamonds in the principal world markets are significantly influenced by a single entity, Diamond Trading Company, which has traditionally controlled the sale of a substantial majority of the world's
supply of diamonds and sells rough diamonds to worldwide diamond cutters at prices determined in its sole discretion. The availability of diamonds to Diamond Trading Company and our suppliers is to
some extent dependent
on the political environment in diamond-producing countries and on continuation of prevailing supply and marketing arrangements for raw diamonds. Until alternate sources are developed, any sustained
interruption in the supply of diamonds could adversely affect us and the retail jewelry industry as a whole. The inverse is true with respect to any oversupply from diamond-producing countries, which
could cause diamond prices to fall.

Proprietary Credit

Our 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 payment sources. We offer revolving and interest free credit plans under our private label credit card program. Approximately 40 percent of our U.S. sales, excluding
Piercing Pagoda, which does not offer proprietary credit, were financed by proprietary credit in fiscal years 2010 and 2009. Our Canadian propriety credit card sales represented approximately
24 percent and 30 percent of Canadian total sales for fiscal years 2010 and 2009, respectively. In fiscal year 2010, our proprietary credit offerings included
same-as-cash, revolving and interest free programs, all of which allowed our sales personnel to provide the customer a variety of financing options.

In
March 2001, we entered into a 10-year agreement with Citibank under which Citibank issues private label credit cards branded with appropriate trademark, and provides
financing for our U.S.

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customers
to purchase merchandise in exchange for payment by us of a merchant fee based on a percentage of each credit card sale. The merchant fee varies according to the credit plan that is chosen by
the customer (i.e., revolving, interest free, same-as-cash). The agreement also enables us to write credit insurance. In September 2010, we entered into a five year
agreement to amend and restate various terms of the Merchant Services Agreement with Citibank, to provide financing for our U.S. customers beginning October 1, 2010. The agreement with Citibank
was scheduled to expire in March 2011.

In
May 2010, we entered into a five year Private Label Credit Card Program Agreement with TDFS to provide financing for our Canadian customers to purchase merchandise through private
label credit cards beginning July 1, 2010. The agreement with TDFS replaced the agreement with Citi Cards Canada Inc., which expired on June 30, 2010.

Employees

As of July 31, 2010, we had approximately 12,800 employees, of whom approximately 14 percent were Canadian employees and
less than one percent of whom were represented by unions. Additionally, we usually hire temporary employees during November and December of each year, the Holiday season.

Seasonality

As a specialty retailer of fine jewelry, our business is seasonal in nature, with our second quarter, which includes the holiday months
of November through January, accounting for a proportionally greater percentage of annual sales, earnings from operations and cash flow than the other three quarters. Other important periods include
Valentine's Day and Mother's Day. We expect such seasonality to continue.

Information Technology

Our technology systems provide information necessary for: (i) store operations; (ii) inventory control;
(iii) profitability monitoring by certain measures (merchandise category, buyer, store); (iv) customer service; (v) expense control programs; and (vi) overall management
decision support. Significant data processing systems include point-of-sale reporting, purchase order management, replenishment, warehouse management, merchandise planning and
control, payroll, general ledger, sales audit and accounts payable. Bar code ticketing and scanning are used at all point-of-sale terminals to ensure accurate sales and margin
data compilation and to provide for inventory control monitoring. Information is made available online to merchandising staff on a timely basis, thereby increasing the merchants' ability to be
responsive to changes in customer behavior. We are also improving the connectivity between stores and our Store Support Center to enhance operating effectiveness.

Our
information technology systems and processes allow management to monitor, review and control operational performance on a daily, monthly, quarterly and annual basis for each store
and each transaction. Senior management can review and analyze activity by store, amount of sale, terms of sale or employees who sell the merchandise.

We
have a data center operations services agreement with a third party for the management of our client server systems, Local Area Network operations, Wide Area Network management and
e-commerce hosting. In June 2010, we entered into a new services agreement that supersedes the agreement that was scheduled to expire in 2012. The new agreement requires fixed payments
totaling $24.1 million over a 74-month period plus a variable amount based on usage. We believe that by outsourcing our data center operations, we are better able to focus our
resources on developing and executing the strategic initiatives discussed in the Business section.

We
have historically upgraded, and expect to continue to upgrade, our information systems to improve operations and support future growth. We estimate we will make capital expenditures
of approximately $7 million in fiscal year 2011 for enhancements to our information systems and infrastructure.

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Regulation

Our operations are affected by numerous federal and state 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 our private label credit cards, credit to
our customers is provided primarily through bank cards such as Visa®, MasterCard®, and Discover®. Regulations implementing the Credit Card Accountability
Responsibility and Disclosure Act of 2009 imposed new restrictions on credit card pricing, finance charges and fees, customer billing practices and payment application that have negatively impacted
the availability of credit to our customers. Any change in the regulation of credit which would materially limit the availability of credit to our traditional customer base could adversely affect our
results of operations or financial condition.

We
are subject to the jurisdiction of various state and other taxing authorities. From time to time, these taxing authorities conduct reviews or audits of the Company.

The
sale of insurance products is also regulated. Our three wholly owned insurance companies are required to file reports with various insurance commissions, and are also subject to
regulations relating to capital adequacy, the payment of dividends and the operation of their businesses generally. State laws also impose registration and disclosure obligations with respect to the
credit and other insurance products that we sell to our customers. In addition, the providers of our private label credit programs
are subject to disclosure and other requirements under state and federal law and are subject to review by the Federal Trade Commission and the state and federal banking regulators.

Merchandise
in the retail jewelry industry is frequently sold at a discount off the "regular" or "original" price. We are subject to federal and state regulations requiring retailers
offering merchandise at promotional prices to offer the merchandise at regular or original prices for stated periods of time. Additionally, we are subject to certain
truth-in-advertising and various other laws, including consumer protection regulations that regulate retailers generally and/or the promotion and sale of jewelry in particular.

Available Information

We provide links to our filings with the Securities and Exchange Commission ("SEC") and to the SEC filings (Forms 3, 4 and
5) of our directors and executive officers under Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), free of charge, on our website at www.zalecorp.com, under
the heading "SEC Filings" in the "Investor Relations" section. These links are automatically updated, so the filings are
available immediately after they are made publicly available by the SEC. These filings also are available through the SEC's EDGAR system atwww.sec.gov.

Our
certificate of incorporation and bylaws as well as the charters for the compensation, audit, nominating and corporate governance committees of our Board of Directors and the
corporate governance guidelines are available on our website atwww.zalecorp.com, under the heading "About Zale Corporation" in the "Corporate
Governance" section.

We
have a Code of Business Conduct and Ethics (the "Code"). All of our directors, executive officers and employees are subject to the Code. The Code is available on our web site at www.zalecorp.com, under
the heading "About Zale Corporation" in the "Corporate Governance" section. Waivers of the Code, if any, for directors and
executive officers would be disclosed in a SEC filing on Form 8-K or, to the extent permitted by law, on our website.

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ITEM 1A.    RISK FACTORS

We make forward-looking statements in this Annual Report on Form 10-K and in other reports we file with the SEC. In
addition, members of our senior management make forward-looking statements orally in presentations to analysts, investors, the media and others. Forward-looking statements include statements regarding
our objectives and expectations with respect to our financial plan, sales and earnings, merchandising and marketing strategies, acquisitions and dispositions, share repurchases, store opening,
renovation, remodeling and expansion, inventory management and performance, liquidity and cash flows, capital structure, capital expenditures, development of our information technology and
telecommunications plans and related management information systems, e-commerce initiatives, human resource initiatives and
other statements regarding our plans and objectives. In addition, the words "plans to," "anticipate," "estimate," "project," "intend," "expect," "believe," "forecast," "can," "could," "should,"
"will," "may," or similar expressions may identify forward-looking statements, but some of these statements may use other phrasing. These forward-looking statements are intended to relay our
expectations about the future, and speak only as of the date they are made. We disclaim any obligation to update or revise publicly or otherwise any forward-looking statements to reflect subsequent
events, new information or future circumstances.

Forward-looking
statements are not guarantees of future performance and a variety of factors could cause our actual results to differ materially from the anticipated or expected results
expressed in or suggested by these 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 decrease.

Jewelry purchases are discretionary and may be affected by adverse trends in the general economy (and consumer perceptions of those
trends). In addition, a number of other factors affecting consumers such as employment, wages and salaries, business conditions, energy costs, credit availability and taxation policies, for the
economy as a whole and in regional and local markets where we operate, can impact sales and earnings. The economic downturn that began in 2008 has significantly impacted our sales and the continuation
of this downturn, and particularly its worsening, would have a material adverse impact on our business and financial condition.

The concentration of a substantial portion of our sales in three relatively brief selling periods means that our performance is more susceptible to disruptions.

A substantial portion of our sales are derived from three selling periodsHoliday (Christmas), Valentine's Day and Mother's
Day. Because of the briefness of these three selling periods, the opportunity for sales to recover in the event of a disruption or other difficulty is limited, and the impact of disruptions and
difficulties can be significant. For instance, adverse weather (such as a blizzard or hurricane), a significant interruption in the receipt of products (whether because of vendor or other product
problems), or a sharp decline in mall traffic occurring during one of these selling periods could materially impact sales for the affected period and, because of the importance of each of these
selling periods, commensurately impact overall sales and earnings.

Most of our sales are of products that include diamonds, precious metals and other commodities. A substantial portion of our purchases and sales occur outside the United
States. Fluctuations in the availability and pricing of commodities or exchange rates could impact our ability to obtain, produce and sell products at favorable prices.

The supply and price of diamonds in the principal world market are significantly influenced by a single entity, which has traditionally
controlled the marketing of a substantial majority of the world's supply of diamonds and sells rough diamonds to worldwide diamond cutters at prices determined in its sole

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discretion.
The availability of diamonds also is somewhat dependent on the political conditions in diamond-producing countries and on the continuing supply of raw diamonds. Any sustained interruption
in this supply could have an adverse affect on our business.

We
also are affected by fluctuations in the price of diamonds, gold and other commodities. A significant change in prices of key commodities could adversely affect our business by
reducing operating margins or decreasing consumer demand if retail prices are increased significantly. In addition, foreign currency exchange rates and fluctuations impact costs and cash flows
associated with our Canadian operations and the acquisition of inventory from international vendors.

A
substantial portion of our raw materials and finished goods are sourced in countries generally described as having developing economies. Any instability in these economies could result
in an interruption of our supplies, increases in costs, legal challenges and other difficulties.

Our sales are dependent upon mall traffic.

Our stores and kiosks are located primarily in shopping malls throughout the U.S., Canada and Puerto Rico. Our success is in part
dependent upon the continued popularity of malls as a shopping destination and the ability of malls, their tenants and other mall attractions to generate customer traffic. Accordingly, a significant
decline in this popularity, especially if it is sustained, would substantially harm our sales and earnings. In addition, even assuming this popularity continues, mall traffic can be negatively
impacted by weather, gas prices and similar factors.

We operate in a highly competitive and fragmented industry.

The retail jewelry business is highly competitive and fragmented, and we compete with nationally recognized jewelry chains as well as a
large number of independent regional and local jewelry retailers and other types of retailers who sell jewelry and gift items, such as department stores and mass merchandisers. We also compete with
internet sellers of jewelry. Because of the breadth and depth of this competition, we are constantly under competitive pressure that both constrains pricing and requires extensive merchandising
efforts in order for us to remain competitive.

Any failure by us to manage our inventory effectively will negatively impact our financial condition, sales and earnings.

We purchase much of our inventory well in advance of each selling period. In the event we misjudge consumer preferences or demand, we
will experience lower sales than expected and will have excessive inventory that may need to be written down in value or sold at prices that are less than expected, which could have a material adverse
impact on our business and financial condition.

Any failure of our pricing and promotional strategies to be as effective as desired will negatively impact our sales and earnings.

We set the prices for our products and establish product specific and store-wide promotions in order to generate store
traffic and sales. While these decisions are intended to maximize our sales and earnings, in some instances they do not. For instance, promotions, which can require substantial lead time, may not be
as effective as desired or may prove unnecessary in certain economic circumstances. Where we have implemented a pricing or promotional strategy that does not work as expected, our sales and earnings
will be adversely impacted.

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Table of Contents

Because of our dependence upon a small concentrated number of landlords for a substantial number of our locations, any significant erosion of our relationships with those
landlords or their financial condition would negatively impact our ability to obtain and retain store locations.

We are significantly dependent on our ability to operate stores in desirable locations with capital investment and lease costs that
allow us to earn a reasonable return on our locations. We depend on the leasing market and our landlords to determine supply, demand, lease cost and operating costs and conditions. We cannot be
certain as to when or whether desirable store locations will become or remain available to us at reasonable lease and operating costs. Several large landlords dominate the ownership of prime malls,
and we are dependent upon maintaining good relations with those landlords in order to obtain and retain store locations on optimal terms. From time to time, we do have disagreements with our landlords
and a significant disagreement, if not resolved, could have an adverse impact on our business. In addition, any financial weakness on the part of our landlords could adversely impact us in a number of
ways, including decreased marketing by the landlords and the loss of other tenants that generate mall traffic.

Any disruption in, or changes to, our private label credit card arrangements may adversely affect our ability to provide consumer credit and write credit insurance.

We rely on third party credit providers to provide financing for our customers to purchase merchandise and credit insurance through
private label credit cards. Any disruption in, or changes to, our credit card agreements would adversely affect our sales and earnings.

Significant restrictions in the amount of credit available to our customers could negatively impact our business and financial condition.

Our customers rely heavily on financing provided by credit card companies to purchase our merchandise. The availability of credit to
our customers is impacted by numerous factors, including general economic conditions and regulatory requirements relating to the extension of credit. Numerous federal and state laws 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. Regulations
implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 imposed new restrictions on credit card pricing, finance charges and fees, customer billing practices and payment
application that have negatively impacted the availability of credit to our customers. Future regulations or changes in the application of current laws could further impact the availability of credit
to our customers. If the amount of available credit provided to our customers is significantly restricted, which recently has been the trend, our sales and earnings would be negatively impacted.

We are dependent upon our revolving credit agreement and other third party financing arrangements for our liquidity needs.

We have a revolving credit agreement and a Senior Secured Term Loan that contain various financial and other covenants. Should we be
unable to fulfill the covenants contained in these loans, we would be unable to fund our operations without a significant restructuring of our business.

If the credit markets deteriorate, our ability to obtain the financing needed to operate our business could be adversely impacted.

We utilize a revolving credit agreement to finance our working capital requirements, including the purchase of inventory, among other
things. If our ability to obtain the financing needed to meet these requirements was adversely impacted as a result of continued deterioration in the credit markets, our business could be
significantly impacted. In addition, the amount of available borrowings under our revolving credit agreement is based, in part, on the appraised liquidation value of our inventory. Any declines in the
appraised value of our inventory could impact our ability to obtain the financing necessary to operate our business.

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Table of Contents

Acquisitions and dispositions involve special risk, including the risk that we may not be able to complete proposed acquisitions or dispositions or that such transactions
may not be beneficial to us.

We have made significant acquisitions and dispositions in the past and may in the future make additional acquisitions and dispositions.
Difficulty integrating an acquisition into our existing infrastructure and operations may cause us to fail to realize expected return on investment through revenue increases, cost savings, increases
in geographic or product presence and customer reach, and/or other projected benefits from the acquisition. In addition, we may not achieve anticipated cost savings or may be unable to find attractive
investment opportunities for funds received in connection with a disposition. Additionally, attractive acquisition or disposition opportunities may not be available at the time or pursuant to terms
acceptable to us and we may be unable to complete acquisitions or dispositions.

Ineffective accounting controls can have adverse impacts on the Company.

Under Federal law, we are required to maintain an effective system of internal controls over financial reporting. Should we not
maintain an effective system, it would result in a violation of those laws and could impair our ability to produce accurate and timely financial statements. In turn, this could result in increased
audit costs, a loss of investor confidence, difficulties in accessing the capital markets, and regulatory and other actions against us. Any of these outcomes could be costly to both our shareholders
and us.

Changes in estimates, assumptions and judgments made by management related to our evaluation of goodwill and other long-lived assets for impairment could
significantly affect our financial results.

Evaluating goodwill and other long-lived assets for impairment is highly complex and involves many subjective estimates,
assumptions and judgments by our management. For instance, management makes estimates and assumptions with respect to future cash flow projections, terminal growth rates, discount rates and
long-term business plans. If our actual results are not consistent with our estimates, assumptions and judgments by our management, we may be required to recognize impairments.

Additional factors that may adversely affect our financial performance.

Increases in expenses that are beyond our control including items such as increases in interest rates, inflation, fluctuations in
foreign currency rates, higher tax rates and changes in laws and regulations, may negatively impact our operating results.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.    PROPERTIES

We lease a 430,000 square foot facility, which serves as our corporate headquarters and primary distribution facility. The lease for
this facility extends through March 2018. The facility is located in Las Colinas, a planned business development in Irving, Texas, near the Dallas/Fort Worth International Airport. Our Canadian
distribution operation is conducted in a leased 26,280 square foot facility in Toronto, Ontario with a lease term through November 2014. We also lease a 20,000 square foot distribution and warehousing
facility in Irving, Texas, with a lease term through June 2011, which serves as the Piercing Pagoda distribution center.

We
rent our store retail space under leases that generally range in terms from 5 to 10 years and may contain minimum rent escalation clauses, while kiosk leases generally range
from three to five years. Most of the store leases provide for the payment of base rentals plus real estate taxes, insurance, common area

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maintenance
fees and merchants association dues, as well as percentage rents based on the store's gross sales.

We
lease 18 percent of our store and kiosk locations from Simon Property Group and 14 percent of our store and kiosk locations from General Growth Management, Inc.
No other lessor accounts for 10 percent or more of our store and kiosk locations.

The
following table indicates the expiration dates of our leases as of July 31, 2010:

Term Expires

Stores

Kiosks

Other(a)

Total

Percentage
of Total2011


9


5





14


0.7
%2012


197


184


1


382


20.2
%2013


156


221


1


378


20.0
%2014


175


181





356


18.8
%2015 and thereafter


681


81


2


764


40.3
%1,218


672


4


1,894


100.0
%


---

Management believes that substantially all of the store leases expiring in fiscal year 2011 that it wishes to renew (including leases which
expired earlier and are currently being operated under month-to-month extensions) will be renewed. We expect that leases will be renewed on terms not materially different than
the terms of the expiring or expired leases. Management believes our facilities are suitable and adequate for our business as presently conducted.

ITEM 3.    LEGAL PROCEEDINGS AND OTHER MATTERS

Information regarding legal proceedings is incorporated by reference from Note 19 to our consolidated financial statements set
forth, under the heading, "Contingencies," in Part IV of this report.

ITEM 4.    RESERVED

ITEM 4A.    EXECUTIVE OFFICERS OF THE REGISTRANT

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

Name

Age

PositionTheo Killion


59

Chief Executive OfficerMatthew W. Appel


54

Executive Vice President and Chief Financial OfficerGilbert P. Hollander


57

Executive Vice President and Chief Merchant and Sourcing OfficerRichard A. Lennox


45

Executive Vice President, Chief Marketing and E-Commerce Officer


Executive Officers

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

Mr. Theo Killionhas served as Chief Executive Officer of the Company since September 23, 2010. He served as President of
the Company from August 5, 2008 to September 23, 2010, and as Interim Chief Executive Officer from January 13, 2010 to September 23, 2010. From January 23, 2008 to
August 5, 2008, Mr. Killion served as Executive Vice President of Human Resources, Legal and Corporate Strategy. From

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May
2006 to January 2008, Mr. Killion was employed with the executive recruiting firm Berglass+Associates, focusing on companies in the retail, consumer goods and fashion industries. From April
2004 through April 2006, Mr. Killion served as Executive Vice President of Human Resources at Tommy Hilfiger. From 1996 to 2004, Mr. Killion served in various management positions with
Limited Brands.

Mr. Matthew W. Appelwas named Executive Vice President of the Company effective May 2009 and appointed Chief Financial Officer of
the Company on June 15, 2009. From March 2007 to May 2009, Mr. Appel served as Vice President and Chief Financial Officer of ExlService Holdings, Inc. Prior to ExlService
Holdings, Inc, Mr. Appel was Vice President, BPO Product Management from 2006 to 2007 and Vice President, Finance and Administration BPO from 2003 through 2005 at Electronic Data Systems
Corporation. From 2001 to 2003, Mr. Appel was the Senior Vice President, Finance and Accounting BPO at Affiliated Computer Services, Inc. Mr. Appel began his career with Arthur
Andersen, where he spent seven years in their audit practice. Mr. Appel is a certified public accountant and certified management accountant.

Mr. Gilbert P. Hollanderwas appointed Executive Vice President and Chief Sourcing Officer in September 2007, and was given the
additional title of Chief Merchant Officer on January 13, 2010. Prior
to that appointment, Mr. Hollander served as President, Corporate Sourcing/Piercing Pagoda beginning in May 2006, and was given the additional title of Group Senior Vice President in August
2006. From January 2005 to August 2006, he served as President, Piercing Pagoda. Prior to and up until that appointment, Mr. Hollander served as Vice President of Divisional Merchandise for
Piercing Pagoda, to which he was appointed in August 2003. Mr. Hollander served as Senior Vice President of Merchandising for Piercing Pagoda from February 2000 to August 2003. Prior to
February 2000, Mr. Hollander held various management positions within Piercing Pagoda beginning in May of 1997.

Mr. Richard A. Lennoxwas named Executive Vice President, Chief Marketing Officer of the Company effective August 2009. Prior to
joining the Company, Mr. Lennox served as Executive Vice President, Marketing Director at J. Walter ThompsonNew York. Mr. Lennox started at J. Walter Thompson
in 1989 and held various senior level marketing positions. He began his career in 1987 with AGBLondon.

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Table of Contents

PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the New York Stock Exchange under the symbol "ZLC." The following table sets forth the high and low sale
prices as reported on the NYSE for our common stock for each fiscal quarter during the two most recent fiscal years.

2010

2009High

Low

High

LowFirst

$
8.20

$
4.73

$
30.89

$
14.03Second

$
5.51

$
2.08

$
15.99

$
1.17Third

$
3.80

$
1.83

$
5.25

$
0.92Fourth

$
3.27

$
1.39

$
5.92

$
3.04


As of October 1, 2010, the Company's outstanding shares of common stock were held by approximately 570 holders of record. We have not paid
dividends on the common stock since its initial issuance on July 30, 1993, and do not anticipate paying dividends on the common stock in the foreseeable future. In addition, our revolving
credit agreement and our Senior Secured Term Loan limit our ability to pay dividends or repurchase our common stock. At July 31, 2010, we had borrowing availability under the
revolving credit agreement of approximately $241.7 million. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital
Resources" and "Notes to Consolidated Financial StatementsLong-Term Debt."

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Table of Contents

Corporate Performance Graph

The following graph shows a comparison of cumulative total returns for the Company, the S&P 500 Index, the S&P 600
Specialty Store Index and the S&P 600 Smallcap Index for the period from July 31, 2005 to July 31, 2010. The comparison assumes $100 was invested on July 31, 2005 in the
Company's common stock and in each of the three indices and, for the S&P 500 Index, the S&P 600 Specialty Store Index and the S&P 600 Smallcap Index, assumes reinvestment of
dividends. The Company has not paid any dividends during this period.

GRAPHIC

7/31/05

1/31/06

7/31/06

1/31/07

7/31/07

1/31/08

7/31/08

1/31/09

7/31/09

1/31/10

7/31/10Zale Corporation

$
100.00

$
72.09

$
75.32

$
80.94

$
62.44

$
48.12

$
65.06

$
3.65

$
17.41

$
6.41

$
5.18S&P 500


100.00


104.67


105.38


119.86


122.38


117.10


108.80


71.86


87.09


95.68


99.14S&P Smallcap Spec


100.00


77.96


66.06


79.80


74.75


53.47


53.74


29.50


51.85


60.32


68.19S&P 600 Smallcap


100.00


108.15


103.78


117.25


118.42


108.94


108.62


68.93


87.70


95.79


104.51


The stock price performance depicted in the above graph is not necessarily indicative of future price performance. The
Corporate Performance Graph shall not be deemed "soliciting material" or to be "filed" with the SEC, nor shall such information be incorporated by reference into any future filing by the Company under
the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates the graph by reference in such filing.

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Table of Contents

ITEM 6.    SELECTED FINANCIAL DATA

The following selected financial data is qualified in its entirety by our consolidated financial statements (and the related notes
thereto) contained elsewhere in this Annual Report on Form 10-K and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The statement of operations data and balance sheet data for each of the fiscal years ended July 31, 2010, 2009 and 2008 has been derived from our audited consolidated financial
statements. The statement of operations and balance sheet data for each of the fiscal years ended July 31, 2007 and 2006 has been derived from our unaudited consolidated financial statements.
During fiscal year 2008, we sold Bailey Banks & Biddle. As a result,
their operations are reflected as discontinued operations in the following consolidated statements of operations. All amounts in the following table are in thousands, except per share amounts.

Year Ended July 31,2010

2009

2008

2007

2006Revenues

$
1,616,305

$
1,779,744

$
2,138,041

$
2,152,785

$
2,153,955Costs and expenses:Cost of sales(a)


802,172


948,572


1,089,553


1,029,553


1,044,876Selling, general and administrative(b)


846,205


934,249


991,772


974,855


974,284Depreciation and amortization


50,005


58,947


60,244


56,595


54,670Other charges (gains)(c)


33,370


46,940


(10,700
)

9,658


(1,900
)Operating (loss) earnings


(115,447
)

(208,964
)

7,172


82,124


82,025Interest expense


15,657


10,399


12,364


18,969


11,185Other gains(d)


(6,564
)




(3,500
)




(Loss) earnings before income taxes


(124,540
)

(219,363
)

(1,692
)

63,155


70,840Income tax (benefit) expense


(28,750
)

(53,015
)

4,761


16,812


16,725(Loss) earnings from continuing operations


(95,790
)

(166,348
)

(6,453
)

46,343


54,115Earnings (loss) from discontinued operations, net of taxes


2,118


(23,155
)

7,084


11,143


(6,061
)Net (loss) earnings

$
(93,672
)
$
(189,503
)
$
631

$
57,486

$
48,054Basic net (loss) earnings per common share:(Loss) earnings from continuing operations

$
(2.99
)
$
(5.21
)
$
(0.15
)
$
0.95

$
1.11Earnings (loss) from discontinued operations


0.07


(0.73
)

0.16


0.23


(0.13
)Basic net (loss) earnings per share

$
(2.92
)
$
(5.94
)
$
0.01

$
1.18

$
0.98Diluted net (loss) earnings per common share:(Loss) earnings from continuing operations

$
(2.99
)
$
(5.21
)
$
(0.15
)
$
0.95

$
1.10Earnings (loss) from discontinued operations


0.07


(0.73
)

0.16


0.22


(0.12
)Diluted net (loss) earnings per share

$
(2.92
)
$
(5.94
)
$
0.01

$
1.17

$
0.98Weighted average number of common shares outstanding:Basic


32,062


31,899


42,361


48,694


48,808Diluted


32,062


31,899


42,476


48,995


49,211Balance Sheet Data:Working capital

$
383,006

$
460,885

$
613,665

$
774,778

$
628,743Total assets


1,160,381


1,230,972


1,415,260


1,600,144


1,449,639Long-term debt


284,684


310,500


326,306


227,306


202,813Total stockholders' investment


308,020


373,793


566,471


880,414


783,960


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Table of Contents

Segment Data

We report our business under three segments: Fine Jewelry, Kiosk Jewelry and All Other. The All Other segment includes insurance and
reinsurance operations. Operating earnings by segment are calculated before unallocated corporate overhead, interest and taxes but include an internal charge for inventory carrying cost to evaluate
segment profitability. Unallocated costs are before income taxes and include corporate employee related costs, administrative costs, information technology costs, corporate facilities costs and
depreciation and amortization. All amounts in the following table are in thousands.

Year Ended July 31,Selected Financial Data by Segment

2010

2009

2008

2007

2006Revenues:Fine Jewelry(a)

$
1,378,507

$
1,535,626

$
1,876,170

$
1,876,580

$
1,864,195Kiosk(b)


226,187


232,809


249,489


262,627


276,619All Other


11,611


11,309


12,382


13,578


13,141Total revenues

$
1,616,305

$
1,779,744

$
2,138,041

$
2,152,785

$
2,153,955Depreciation and amortization:Fine Jewelry

$
35,558

$
42,407

$
42,832

$
39,933

$
38,172Kiosk


4,120


4,899


5,296


5,625


5,571All Other














Unallocated


10,327


11,641


12,116


11,037


10,927Total depreciation and amortization

$
50,005

$
58,947

$
60,244

$
56,595

$
54,670Operating (loss) earnings:Fine Jewelry(c)

$
(84,818
)
$
(192,683
)
$
18,909

$
100,531

$
87,450Kiosk(d)


13,133


2,465


9,905


6,170


19,212All Other


4,731


5,706


5,641


6,780


6,443Unallocated(e)


(48,493
)

(24,452
)

(27,283
)

(31,357
)

(31,080
)Total operating (loss) earnings

$
(115,447
)
$
(208,964
)
$
7,172

$
82,124

$
82,025Assets(f):Fine Jewelry(g)

$
820,353

$
868,227

$
987,369

$
1,250,967

$
1,108,569Kiosk(h)


85,631


107,457


118,601


120,660


119,395All Other


33,643


24,842


27,234


25,406


22,228Unallocated


220,754


230,446


282,056


203,111


199,447Total assets

$
1,160,381

$
1,230,972

$
1,415,260

$
1,600,144

$
1,449,639Capital expenditures:Fine Jewelry

$
9,945

$
18,702

$
59,289

$
47,433

$
48,644Kiosk





420


3,266


3,036


7,750All Other














Unallocated


4,705


9,235


22,582


28,791


20,026Total capital expenditures

$
14,650

$
28,357

$
85,137

$
79,260

$
76,420


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Table of Contents

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For important information regarding forward-looking statements made in this Management's Discussion and Analysis of Financial Condition
and Results of Operations see "Item 1ARisk Factors."

Overview

We are a leading specialty retailer of fine jewelry in North America. At July 31, 2010, we operated 1,218 fine jewelry stores
and 672 kiosks located primarily in shopping malls throughout the United States of America, Canada and Puerto Rico.

We
report our business under three operating segments: Fine Jewelry, Kiosk Jewelry and All Other. Our Fine Jewelry segment is comprised of five brands, predominantly focused on the
value-oriented consumer. Each brand specializes in fine jewelry and watches, with merchandise and marketing emphasis focused on diamond products. These five brands have been aggregated into one
reportable segment. The Kiosk Jewelry segment operates under the brand names Piercing Pagoda®, Plumb Gold, and Silver and Gold Connection® through
mall-based kiosks and is focused on the opening price point customer. The Kiosk Jewelry segment specializes in gold and silver products that capitalize on the latest fashion trends. The
All Other segment includes our insurance and reinsurance operations, which offer insurance coverage primarily to our private label credit card customers.

Comparable
store sales declined by 6.6 percent during fiscal year 2010. Gross margin increased by 370 basis points to 50.4 percent for the year ended July 31, 2010
compared to the same period in the prior year. The improvement in gross margin was primarily the result of a decline in merchandise discounts. Cost of sales for fiscal year 2010 includes an
$8.3 million charge for certain slow moving inventory, compared to $15.2 million in the same period in the prior year, which increased gross margin by approximately 35 basis points.
Operating margin improved by 460 basis points to a loss of 7.1 percent compared to a loss of 11.7 percent in the same period in the prior year.

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Table of Contents

On May 10, 2010, we entered into an agreement to amend and restate various terms of the revolving credit agreement with Bank of America N.A. and certain
other lenders. The Amended and Restated Revolving Credit Agreement (the "Revolving Credit Agreement") consists of two tranches: (a) an extended tranche totaling $530 million, including
seasonal borrowings of $88 million, maturing on April 30, 2014 and (b) a non-extending tranche totaling $120 million, including seasonal borrowings of
$20 million, maturing on August 11, 2011. The commitments under the agreement from both tranches total $650 million, including seasonal borrowings of $108 million. The
Revolving Credit Agreement is secured by a first priority security interest and lien on merchandise inventory, credit card receivables and certain other assets and a second priority security interest
and lien on all other assets.

On
May 10, 2010, we entered into a $150 million Senior Secured Term Loan (the "Term Loan") and a Warrant and Registration Rights Agreement (see below) with Z Investment
Holdings, LLC, an affiliate of Golden Gate Capital. The Term Loan matures on May 10, 2015 and is secured by substantially all current and future intangible assets and a second priority
security interest on merchandise inventory and credit card receivables. The proceeds received were used to pay down amounts outstanding under
the Revolving Credit Agreement after payment of debt issuance costs incurred pursuant to the Revolving Credit Agreement and the Term Loan.

In
connection with the execution of the Term Loan, we entered into a Warrant and Registration Rights Agreement (the "Warrant Agreement") with Z Investment Holdings, LLC. Under the
terms of the Warrant Agreement, we issued 6.4 million A-Warrants and 4.7 million B-Warrants (collectively, the "Warrants") to purchase shares of our common stock,
on a one-for-one basis, for an exercise price of $2.00 per share, which was below market value at the date of issuance. The Warrants, which are currently exercisable and which
expire seven years after issuance, represent 25 percent of our common stock on a fully diluted basis (including the shares issuable upon exercise of the Warrants, and excluding certain
out-of-the-money stock options) as of the date of the issuance. The fair value of the Warrants totaled $21.3 million as of the date of issuance.

On
September 24, 2010, we amended the Term Loan with Z Investment Holdings, LLC. The amendment eliminated the Minimum Consolidated EBITDA covenant and our option to pay a
portion of future interest payments in kind subsequent to July 31, 2010. As a result, all future interest payments will be made in cash. In consideration for the amendment, we paid Z Investment
Holdings, LLC an aggregate of $25.0 million, of which $11.3 million was used to pay down the outstanding principal balance of the Term Loan, $1.2 million was a prepayment
premium and $12.5 million was an amendment fee.

On
May 7, 2010, we entered into a five year Private Label Credit Card Program Agreement (the "TD Agreement") with TD Financing Services Inc. ("TDFS"), a wholly-owned
subsidiary of Toronto-Dominion Bank, to provide financing for our Canadian customers to purchase merchandise through private label credit cards beginning July 1, 2010. In addition, TDFS will
provide credit insurance for our customers and will receive 40 percent of the net profits, as defined, and the remaining 60 percent will be paid to us. The TD Agreement replaced the
agreement with Citi Cards Canada Inc., which expired on June 30, 2010.

On
September 23, 2010, we entered into a five year agreement to amend and restate various terms of the Merchant Services Agreement with Citibank, to provide financing for our U.S.
customers beginning October 1, 2010. The agreement with Citibank was scheduled to expire in March 2011.

During
the fiscal year ended July 31, 2010, the average Canadian currency rate appreciated by approximately 12 percent relative to the U.S. dollar. Due to our Canadian
operations being reported at the average U.S. dollar equivalent, the appreciation in the Canadian dollar resulted in a $27.9 million increase in reported revenues compared to fiscal year 2009,
substantially offset by an increase in reported cost of sales and selling, general and administrative expenses of $13.1 million and $11.0 million, respectively. In addition, as a result
of the appreciation in the Canadian dollar, we recorded gains associated with the settlement of Canadian accounts payable totaling $2.8 million during the fiscal year ended July 31, 2010
compared to losses of $7.6 million during the same period in the prior year.

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Net
earnings associated with lifetime warranties totaled $49.8 million for the year ended July 31, 2010, compared to $28.3 million for the same period in the prior
year. The increase in net earnings is the result of a change in our warranty product from a two-year warranty to a lifetime warranty in fiscal year 2007. The revenues related to lifetime
warranties are recognized on a straight-line basis over a five year period. As a result, revenues recognized will not be comparable until fiscal year 2012, when five years of revenue will
be included in the consolidated statement of operations.

Comparable
store sales include internet sales and exclude revenue recognized from warranties and insurance premiums related to credit insurance policies sold to customers who purchase
merchandise under our proprietary credit programs. The sales results of new stores are included beginning with their thirteenth full month of operation. The results of stores that have been relocated,
renovated or refurbished are included in the calculation of comparable store sales on the same basis as other stores. However, stores closed for more than 90 days due to unforeseen events
(e.g., hurricanes, etc.) are excluded from the calculation of comparable store sales.

From
time to time, we include non-GAAP measurements of financial information in Management's Discussion and Analysis of Financial Condition and Results of Operations. We use
these measurements as part of our evaluation of the performance of the Company. In addition, we believe these measures provide useful information to investors, particularly in evaluating the
performance of the Company in the current fiscal year as compared to prior periods.

Results of Operations

The following table sets forth certain financial information from our audited consolidated statements of operations expressed as a
percentage of revenues and should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Form 10-K.

Year Ended July 31,2010

2009

2008Revenues


100.0
%

100.0
%

100.0
%Costs and expenses:Cost of sales


49.6


53.3


51.0Selling, general and administrative


52.4


52.5


46.4Depreciation and amortization


3.1


3.3


2.8Other charges (gains)


2.1


2.6


(0.5
)Operating (loss) earnings


(7.1
)

(11.7
)

0.3Interest expense


1.0


0.6


0.6Other gains


(0.4
)




(0.2
)Loss before income taxes


(7.7
)

(12.3
)

(0.1
)Income tax (benefit) expense


(1.8
)

(3.0
)

0.2Loss from continuing operations


(5.9
)

(9.3
)

(0.3
)Earnings (loss) from discontinued operations, net of taxes


0.1


(1.3
)

0.3Net loss


(5.8
)%

(10.6
)%


%


Year Ended July 31, 2010 Compared to Year Ended July 31, 2009

Revenues.Revenues for fiscal year 2010 were $1,616.3 million, a decrease of 9.2 percent compared to revenues of
$1,779.7 million for the same period in the prior fiscal year. Comparable store sales decreased 6.6 percent as compared to the same period in the prior year. The decline in comparable
store sales was

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driven
by a 5.9 percent decrease in the number of customer transactions in our fine jewelry stores and a 4.0 percent decrease in the average transaction price. The decline was also due
to the closing of 47 stores, partially offset by an $18.2 million increase in revenues recognized related to lifetime warranties and a $27.9 million increase related to the appreciation
of the Canadian currency rate.

The
Fine Jewelry segment contributed $1,378.5 million of revenues in the fiscal year ended July 31, 2010, a decrease of 10.2 percent as compared to
$1,535.6 million for the same period in the prior year.

Revenues
include $226.2 million for the Kiosk Jewelry segment compared to $232.8 million in the prior year, representing a decrease of 2.8 percent. The decrease
relates primarily to a decline in the number of kiosks to 672 from 684 as of July 31, 2010 and 2009, respectively.

The
All Other segment contributed $11.6 million in revenues for the fiscal year ended July 31, 2010 as compared to $11.3 million for the same period in the prior
year, representing an increase of 2.7 percent.

During
the fiscal year ended July 31, 2010, we opened 6 stores in the Fine Jewelry segment. In addition, we closed 35 stores in the Fine Jewelry segment and 12 kiosks in the Kiosk
Jewelry segment.

Cost of Sales.Cost of sales includes cost of merchandise and services sold, as well as receiving and distribution costs. Cost
of sales as a
percentage of revenues was 49.6 percent for the year ended July 31, 2010, compared to 53.3 percent for the same period in the prior year. The decrease is due to a 380 basis point
improvement associated with a decline in merchandise discounts compared to the same period in the prior year and a 150 basis point improvement in lifetime warranty margins. The decrease was partially
offset by a 100 basis point increase in cost of merchandise.

Our
last-in, first-out ("LIFO") inventory charges were $5.7 million and $1.0 million for the fiscal years ended July 31, 2010 and 2009,
respectively.

Selling, General and Administrative.Included in selling, general and administrative ("SG&A") are store operating,
advertising, buying, cost of
insurance operations and general corporate overhead expenses. SG&A was 52.4 percent of revenues for the year ended July 31, 2010, compared to 52.5 percent for the same period in
the prior year. SG&A decreased by $88.0 million to $846.2 million for the year ended July 31, 2010. The decrease is the result of a $36.9 million decrease in payroll
related costs associated primarily with headcount reductions, a decrease in rent and occupancy costs of $29.6 million due to store closures and rent reductions negotiated with our landlords, a
$12.0 million decrease in promotional costs, a $10.3 million decrease in foreign currency losses and a $6.9 million decrease in legal and severance costs. The decrease was
partially offset by a $5.8 million charge during fiscal year 2010 related to fees paid to Citibank associated with our failure to meet the minimum required volume of credit sales and a
$4.4 million increase in professional fees associated with the restatement of our prior year financial statements and the related SEC investigation.

Depreciation and Amortization.Depreciation and amortization as a percent of revenues for the year ended July 31, 2010 and
2009 was
3.1 percent and 3.3 percent, respectively. The decrease is primarily the result of store closures and impairment charges recorded during fiscal years 2010 and 2009.

Other Charges (Gains).Other charges (gains) for the year ended July 31, 2010 includes a $29.9 million charge related
to the impairment
of long-lived assets associated with underperforming stores and a $3.4 million charge associated with store closures. Other charges (gains) for the year ended July 31, 2009
includes a $27.0 million charge associated with store closures, a $14.9 million charge related to the impairment of long-lived assets associated with underperforming stores
and a $5.0 million goodwill impairment charge related to a reporting unit in the Fine Jewelry segment.

Interest Expense.Interest expense as a percent of revenues for the years ended July 31, 2010 and 2009 was 1.0 percent
and
0.6 percent, respectively. Interest expense increased by $5.3 million to $15.7 million for the year ended July 31, 2010. The increase is the result of interest expense
totaling $5.1 million related to

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the
Term Loan executed in May 2010, partially offset by a decrease in the weighted average effective interest rate associated with the revolving credit agreement from 2.6 percent in the prior
year to 1.8 percent this year.

Other Gains.Other gains for the year ended July 31, 2010 includes an $8.3 million gain related to a decrease in the
fair value of the
Warrants issued in connection with the Term Loan executed in May 2010 and a $1.7 million charge related to debt issuance costs attributable to the Warrants.

Income Tax (Benefit) Expense.The income tax benefit totaled $28.8 million for the year ended July 31, 2010, compared
to
$53.0 million for the year ended July 31, 2009. The income tax benefit for the year ended July 31, 2010 is the result of the recognition of refunds totaling $33.4 million
associated with the Worker, Homeownership and Business Assistance Act of 2009, partially offset by $2.8 million of tax expense associated with our Canadian subsidiaries. Income tax benefit for
fiscal year 2009 is the result of operating losses, partially offset by a net charge totaling $13.9 million related to our decision to revoke our election under Accounting Standards
Codification ("ASC") 740 to indefinitely reinvest certain foreign earnings outside the U.S. and a $12.5 million charge related to uncertainties surrounding the utilization of net operating loss
carryforwards.

Year Ended July 31, 2009 Compared to Year Ended July 31, 2008

Revenues.Revenues for fiscal year 2009 were $1,779.7 million, a decrease of 16.8 percent compared to revenues of
$2,138.0 million for the same period in the prior fiscal year. Comparable store sales decreased 16.6 percent as compared to the same period in the prior year. The decline in comparable
store sales was driven by a 20.8 percent decrease in the number of customer transactions in our fine jewelry stores, partially offset by an increase in the average transaction price. The
decline was also due to a $35.0 million impact associated with the depreciation of the Canadian currency rate and a decrease in the number of open stores, partially offset by a
$10.6 million increase in revenues recognized related to lifetime warranties.

The
Fine Jewelry segment contributed $1,535.6 million of revenues in the fiscal year ended July 31, 2009, a decrease of 18.2 percent as compared to
$1,876.2 million for the same period in the prior year.

Revenues
include $232.8 million for the Kiosk Jewelry segment compared to $249.5 million in the prior year, representing a decrease of 6.7 percent. The decrease
relates primarily to a decline in the number of kiosks to 684 from 739 as of July 31, 2009 and 2008, respectively.

The
All Other segment contributed $11.3 million in revenues for the fiscal year ended July 31, 2009 as compared to $12.4 million for the same period in the prior
year, representing a decrease of 8.7 percent.

During
the fiscal year ended July 31, 2009, we opened 14 stores in the Fine Jewelry segment. In addition, we closed 163 stores in the Fine Jewelry segment and 55 kiosks in the
Kiosk Jewelry segment.

Cost of Sales.Cost of sales includes cost of merchandise and services sold, as well as receiving and distribution costs. Cost
of sales as a
percentage of revenues was 53.3 percent for the year ended July 31, 2009, compared to 51.0 percent for the same period in the prior year. The increase is primarily due to an
increase in store-wide discounts during the Holiday season and an inventory impairment charge recorded during the fourth quarter of fiscal year 2009 totaling approximately 80 basis points
associated with our decision to accelerate the sale of certain clearance merchandise. The increase was partially offset by an increase in revenues recognized associated with lifetime warranties.

Our
LIFO inventory charges were $1.0 million and $2.4 million for the fiscal years ended July 31, 2009 and 2008, respectively.

Selling, General and Administrative.Included in selling, general and administrative ("SG&A") are store operating,
advertising, buying, cost of
insurance operations and general corporate overhead expenses.

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SG&A
was 52.5 percent of revenues for the year ended July 31, 2009, compared to 46.4 percent for the same period in the prior year. SG&A decreased by $57.5 million to
$934.2 million for the year ended July 31, 2009. The decrease is the result of expense reductions totaling $64.1 million and a $15.1 million decrease in incentive based
compensation due to lower sales. The decrease was partially offset by a $6.7 million increase in legal settlement and severance costs and a $9.6 million increase in foreign currency
losses.

Depreciation and Amortization.Depreciation and amortization as a percent of revenues for the years ended July 31, 2009 and
2008 was
3.3 percent and 2.8 percent, respectively. The increase is due to lower total revenues during the current year compared to the prior year, partially offset by store closures.

Other Charges (Gains).Other charges (gains) for the year ended July 31, 2009 includes a $27.0 million charge
associated with store
closures, a $14.9 million charge related to the impairment of long-lived assets associated with underperforming stores and a $5.0 million goodwill impairment charge related
to a reporting unit in the Fine Jewelry segment. Other charges (gains) for the year ended July 31, 2008 includes a $12.6 million benefit related to a change in our vacation policy and a
$1.9 million charge related to the impairment of long-lived assets associated with underperforming stores.

Interest Expense.Interest expense as a percent of revenues for the year ended July 31, 2009 and 2008 was flat at
0.6 percent. Interest
expense decreased by $2.0 million to $10.4 million for the year ended July 31, 2009. The weighted average effective interest rate decreased from 5.1 percent last year to
2.6 percent this year. The decrease in the weighted average effective interest rate was offset by an increase in average borrowings compared to the same period in the prior year and a decrease
in total revenues.

Other Gains.During the year ended July 31, 2008, we sold our interest in a diamond known as the "Incomparable Diamond" and
recognized a gain
of $3.5 million.

Income Tax (Benefit) Expense.The income tax benefit totaled $53.0 million for the year ended July 31, 2009, compared
to
$4.8 million income tax expense for the year ended July 31, 2008. The income tax benefit for the year ended July 31, 2009 includes a net charge totaling $13.9 million
related to our decision to revoke our election under ASC 740 and a $12.5 million charge related to uncertainties surrounding the utilization of net operating loss carryforwards. Income tax
expense for the year ended July 31, 2008 includes a $4.3 million charge related to the expiration of certain net operating loss carryforwards.

Liquidity and Capital Resources

Our cash requirements consist primarily of funding ongoing operations, including inventory requirements, capital expenditures for new
stores, renovation of existing stores, upgrades to our information technology systems and distribution facilities and debt service. For fiscal year 2010, our cash requirements were funded through cash
flows from operations, funds available under our Term Loan and our revolving credit agreement with a syndicate of lenders led by Bank of America, N.A. We also manage availability under the revolving
credit agreement by monitoring the
timing of merchandise receipts and vendor payments. The average vendor payment terms during the year ended July 31, 2010 was approximately 44 days. As of July 31, 2010, we had
cash and cash equivalents totaling $26.2 million.

Net
cash provided by operating activities increased from $2.7 million for the year ended July 31, 2009 to $52.3 million for the year ended July 31, 2010. The
$49.6 million increase in cash provided by operating activities is the result of a $62.4 million increase in accounts payable due to the timing of vendor payments and a decrease in
operating losses. The increase was partially offset by cash payments totaling $18.6 million related to lease terminations associated with closed stores, a $20.9 million decrease in
amounts received from vendors for returned merchandise and vendor deposits, a $20.0 million decrease in federal and state income tax refunds and a $32.7 million net decrease in cash
received related to lifetime warranties.

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In November 2009, the Worker, Homeownership and Business Assistance Act of 2009 (the "WHBA") was signed into law. The WHBA includes provisions that extend the
time period in which net operating loss carrybacks can be utilized from two years to five years, with certain limitations. In December 2009 and May 2010, we received tax refunds associated with the
WHBA totaling $16.9 million and $12.8 million, respectively, related to operating losses generated in fiscal year 2009.

Our
business is highly seasonal, with a disproportionate amount of sales (approximately 30 percent to 40 percent) occurring in November and December of each year, the
Holiday season. Other important periods include Valentine's Day and Mother's Day. We purchase inventory in anticipation of these periods and, as a result, have higher inventory and inventory financing
needs immediately prior to these periods. Owned inventory at July 31, 2010 was $703.1 million, a decrease of $37.1 million compared to July 31, 2009. The decrease in
inventory is primarily the result of our store closures and inventory reduction initiatives, partially offset by lower than expected sales.

In
fiscal 2008, the Board of Directors authorized share repurchases of $350 million. As part of the share repurchase program, we repurchased a total of 17.6 million shares
of our common stock, at a cost of $326.7 million, in fiscal 2008. As of July 31, 2010, we have approximately $23.3 million in remaining authorization under our repurchase program.
Our Term Loan contains a $1.0 million limit for repurchase of our common stock in any fiscal year.



On May 10, 2010, we entered into an agreement to amend and restate our revolving credit agreement. Prior to that, our revolving
credit agreement provided for borrowings up to $500 million. Borrowings under the credit agreement were capped at the lesser of: (1) 73 percent of the cost of eligible inventory
during October through December and 69 percent for the remainder of the year (minus certain reserves that may be established under the credit agreement), plus 85 percent of credit card
receivables; or (2) 90 percent of the appraised liquidation value of eligible inventory (minus certain reserves that may be established under the credit agreement), plus
85 percent of credit card receivables. The credit agreement provided for increased seasonal borrowing capacity of up to $100 million from October 15 through December 15 and
contained an accordion feature that allowed us to permanently increase the facility size in $25 million increments up to an additional $100 million, subject to approval by our lenders
and certain other requirements. We were also required to maintain $50 million of borrowing availability or satisfy a minimum fixed charge coverage ratio of 1.1:1.0 for an applicable
12 month reference period.



On May 10, 2010, we entered into an agreement to amend and restate various terms of the revolving credit agreement with Bank of
America, N.A. and certain other lenders. The Amended and Restated Revolving Credit Agreement (the "Revolving Credit Agreement") consists of two tranches: (a) an extended tranche totaling
$530 million, including seasonal borrowings of $88 million, maturing on April 30, 2014 and (b) a non-extending tranche totaling $120 million, including
seasonal borrowings of $20 million, maturing on August 11, 2011. The commitments under the agreement from both tranches total $650 million, including seasonal borrowings of
$108 million. Borrowings under the Revolving Credit Agreement are capped at the lesser of: (1) 73 percent of the cost of eligible inventory during October through December and
69 percent for the remainder of the year (less certain reserves that may be established under the agreement), plus 85 percent of eligible credit card receivables or
(2) 90 percent of the appraised liquidation value of eligible inventory (less certain reserves that may be established under the agreement), plus 85 percent of eligible credit
card receivables. On January 1, 2011, the rate applied to the appraised liquidation value of eligible inventory will be reduced to 87.5 percent. The Revolving Credit Agreement also
contains an accordion feature that allows us to permanently increase borrowings up to an additional $100 million, subject to approval by our lenders and certain other requirements. The
Revolving Credit Agreement is secured by a first priority security interest and lien on merchandise inventory, credit

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card
receivables and certain other assets and a second priority security interest and lien on all other assets. At July 31, 2010, we had borrowing availability under the Revolving Credit
Agreement of $241.7 million.

Based
on the most recent inventory appraisal performed as of June 2010, available borrowings under the Revolving Credit Agreement will be determined under item (2) described in
the preceding paragraph. For the period of September 2010 through March 2011 monthly borrowing rates calculated from the cost of eligible inventory are as follows: 65 percent for
September 2010 and for the period of October 2010 through December 2010 ranging from 72 percent to 73 percent. Monthly borrowing rates for the period January 2011 through July 2011
calculated from the cost of eligible inventory are projected to range from 58 percent to 60 percent.

Borrowings
under the extended tranche bear interest based on average excess availability at either: (i) LIBOR plus the applicable margin (ranging from 350 to 400 basis points) or
(ii) the base rate (as defined in the Revolving Credit Agreement) plus the applicable margin (ranging from 250 to 300 basis points). Borrowings under the non-extending tranche bear
interest based on the average excess availability of either: (i) LIBOR plus the applicable margin (ranging from 100 to 150 basis points) or (ii) the base rate (as defined in the
Revolving Credit Agreement). We are required to pay a quarterly unused commitment fee for the extended tranche of 50 basis points and a quarterly unused commitment fee for the
non-extending tranche ranging from 20 to 25 basis points, each based on the preceding quarter's unused commitment.

We
are required to maintain excess availability (as defined in the Revolving Credit Agreement) of not less than $60 million during the thirty days prior to, and six months after,
on a projected basis, August 11, 2011. In addition, excess availability cannot be less than $40 million during the term of the agreement and less than $50 million on one occasion
for three consecutive business days in each four month period, except for the period from September 1 through November 30, when excess availability can be less than $50 million on
two occasions, but in no event can excess availability be less than $50 million more than four times during any 12 consecutive months. The Revolving Credit Agreement contains various other
covenants including restrictions on the incurrence of certain indebtedness, liens, investments, acquisitions and asset sales.

We
incurred debt issuance costs associated with the Revolving Credit Agreement totaling approximately $13 million. The debt issuance costs will be amortized to interest expense on
a straight line basis over the life of the Revolving Credit Agreement. The amortization of the debt issuance costs will increase interest expense by approximately $3 million in fiscal year
2011.

On
September 24, 2010, we received a waiver and consent from the lenders under the Amended and Restated Revolving Credit Agreement permitting the amendments to our Term Loan and
the related payments to Z Investment Holdings, LLC (see below for additional details).



On September 24, 2010, we amended our Term Loan with Z Investment Holdings, LLC (see additional details below under the
headingFirst Amendment to the Senior Secured Term Loan). The following information relates to the Term Loan prior to the amendment.

On
May 10, 2010, we entered into a $150 million Term Loan and a Warrant and Registration Rights Agreement (see below) with Z Investment Holdings, LLC, an affiliate
of Golden Gate Capital. The Term Loan matures on May 10, 2015 and is secured by a first priority security interest in substantially all current and future intangible assets and a second
priority security interest on merchandise inventory, credit card receivables and certain other assets. The proceeds received were used to pay down amounts outstanding under the Revolving Credit
Agreement after payment of debt issuance costs incurred pursuant to the Revolving Credit Agreement and the Term Loan.

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The
Term Loan bears interest at 15 percent payable on a quarterly basis. We can elect to pay all interest in cash or defer up to one-third of the interest by adding it
to the principal balance of the loan. We may repay all or any portion of the Term Loan with the following penalty prior to maturity: (i) 10 percent during the first year;
(ii) 7.5 percent during the second year; (iii) 5.0 percent during the third year; (iv) 2.5 percent during the fourth year and (v) no penalty in the
fifth year.

The
Term Loan contains various covenants, as defined in the agreement, including maintenance of minimum consolidated EBITDA thresholds, maintaining minimum store contribution thresholds
for Zale Canada, as defined, and Piercing Pagoda and restrictions on the incurrence of certain indebtedness, liens, investments, acquisitions and asset sales. The minimum consolidated EBITDA threshold
for the twelve months ending July 31, 2011 is $10 million. The minimum store contribution threshold for the twelve month period ending July 31, 2011 for Zale Canada and Piercing
Pagoda is CAD $30 million and $20 million, respectively. The Term Loan also requires us to maintain minimum liquidity, as defined, of $120 million through December 31, 2010
and $135 million thereafter.

We
incurred debt issuance costs associated with the Term Loan totaling approximately $13 million, $1.7 million of which was attributable to the warrants (see more details
below underWarrant and Registration Rights Agreement) and expensed on the date of issuance. The remaining $11.3 million of debt issuance costs
are included in other assets in the accompanying consolidated balance sheet and will be amortized to interest expense using the effective interest method over the life of the loan.

On
May 10, 2010, we acknowledged the terms of an intercreditor agreement (the "Intercreditor Agreement") between Bank of America N.A., as agent under the Revolving Credit
Agreement, and Z Investment Holdings, LLC, as agent under the Term Loan. Under the Intercreditor Agreement, Z Investment Holdings, LLC, may request Bank of America to establish a reserve
equal to two and one-half percent of the borrowing base, as defined in the Revolving Credit Agreement, if the excess availability is less than $75 million at any time, thereby
reducing the amount we can borrow. In addition, the Intercreditor Agreement restricts changes that can be made to certain terms and covenants under the Term Loan.



On September 24, 2010, we amended the Term Loan with Z Investment Holdings, LLC. The amendment eliminated the Minimum
Consolidated EBITDA covenant and our option to pay a portion of future interest payments in kind subsequent to July 31, 2010. As a result, all future interest payments will be made in cash. In
consideration for the amendment, we paid Z Investment Holdings, LLC an aggregate of $25.0 million, of which $11.3 million was used to pay down the outstanding principal balance of
the Term Loan, $1.2 million was a prepayment premium and $12.5 million was an amendment fee. The outstanding balance of the Term Loan after the amendment totaled $140.5 million.

In
accordance with ASC 470-50,DebtModifications and Extinguishments, the amendment is considered a significant
modification which required us to account for the Term Loan and related unamortized costs as an extinguishment and record the amended Term Loan at fair value. As a result, we will record a charge to
interest expense totaling $45.8 million in the first quarter of fiscal year 2011. The charge consists of $20.3 million related to the unamortized discount associated with the Warrants
issued in connection with the Term Loan, the $12.5 million amendment fee, $10.3 million related to the unamortized debt issuance costs associated with the Term Loan and
$2.7 million related to the prepayment premium and other costs associated with the amendment.



In connection with the execution of the Term Loan, we entered into a Warrant and Registration Rights Agreement (the "Warrant
Agreement") with Z Investment Holdings, LLC. Under the terms of the Warrant Agreement, we issued 6.4 million A-Warrants and 4.7 million B-Warrants
(collectively, the

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"Warrants")
to purchase shares of our common stock, on a one-for-one basis, for an exercise price of $2.00 per share, which was below market value at the date of issuance. The
Warrants, which are currently exercisable and which expire seven years after issuance, represent 25 percent of our common stock on a fully diluted basis (including the shares issuable upon
exercise of the Warrants, and excluding certain out-of-the-money stock options) as of the date of the issuance. The A-Warrants were exercisable
immediately; however, the B-Warrants were not exercisable until the shares of common stock to be issued upon exercise of the B-Warrants were approved by our stockholders, which
occurred on July 23, 2010. The number of shares and exercise price are subject to customary antidilution protection. The Warrant Agreement also entitles the holder to designate two, and in
certain circumstances three, directors to our board. The holders of the Warrants may, at their option, at any time beginning on August 31, 2010, request that we register for resale all or part
of the common stock issuable under the Warrant Agreement.

The
fair value of the Warrants totaled $21.3 million as of the date of issuance and was recorded as a long-term liability, with a corresponding discount to the
carrying value of the Term Loan. The discount is being amortized into interest expense over the life of the loan using the effective interest method. On July 23, 2010, the stockholders approved
the shares of common stock to be issued upon exercise of the B-Warrants. The long-term liability associated with the Warrants was marked-to-market as of
the date of the stockholder approval resulting in an $8.3 million gain during the fourth quarter of fiscal year 2010. The remaining amount of $13.0 million was reclassified to
stockholders' investment and is included in additional paid-in capital in the accompanying consolidated balance sheet. As indicated above, the remaining unamortized discount as of
September 24, 2010 totaling $20.3 million associated with the Warrants will be charged to interest expense during the first quarter of fiscal year 2011.



On May 7, 2010, we entered into a five year Private Label Credit Card Program Agreement with TDFS to provide financing for our
Canadian customers to purchase merchandise through private label credit cards beginning July 1, 2010. In addition, TDFS will provide credit insurance for our customers and will receive
40 percent of the net profits, as defined, and the remaining 60 percent will be paid to us. The TD Agreement replaced the agreement with Citi Cards Canada Inc., which expired on
June 30, 2010. The TD Agreement will automatically renew for successive one year periods, unless either party notifies the other in writing of its intent not to renew. The agreement may be
terminated at any time during the 90 day period following the end of a program year in the event that credit sales are less than $50 million in the immediately preceding year. If TDFS
terminates the agreement as a result of a breach by us, we will be required to pay a termination fee of $1.0 million in the first year, $0.7 million in the second year or
$0.3 million in the third year. Our customers use our private label credit card to pay for approximately 24 percent of purchases in Canada.

On
September 23, 2010, we entered into a five year agreement to amend and restate various terms of the Merchant Services Agreement ("MSA") with Citibank (South Dakota), N.A.
("Citibank"), to provide financing for our U.S. customers to purchase merchandise through private label credit cards beginning October 1, 2010. The MSA will automatically renew for successive
two year periods, unless either party notifies the other in writing of its intent not to renew. In addition, the MSA can be terminated by either party upon certain breaches by the other party and also
can be terminated by Citibank if our net credit card sales during any twelve month period are less than $315 million or if net card sales during a twelve month period decrease by
20 percent or more from the prior twelve month period. After any termination, we may purchase or be obligated to purchase the credit card portfolio under certain circumstances. Our customers
use our private label credit card to pay for approximately 40 percent of purchases in the U.S.

Our
previous U.S. agreement with Citibank required us to maintain a minimum volume of credit sales that we did not meet. As a result, Citibank could have terminated the agreement after
providing 180 days written notice, unless we paid Citibank merchant fees associated with the shortfall to the minimum volume of credit sales. We retained the right under the agreement with
Citibank to not pay the fees and change

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service
providers. As a result, the fees did not represent a contractual obligation prior to our decision to pay the additional amounts on June 15, 2010. The decision to pay the fee was made to
allow sufficient time to negotiate the terms of an agreement with Citibank and consider proposals from other service providers without disrupting the upcoming holiday season. As a result of our
decision, we recorded a charge totaling $5.8 million during the fourth quarter of fiscal year 2010.



In connection with the sale of the Bailey Banks & Biddle brand in November 2007, we assigned the applicable store operating
leases to the buyer, Finlay Fine Jewelry Corporation ("Finlay"). As a condition of this assignment, we remained contingently liable for the leases for the remainder of the respective current lease
terms, which generally ranged from fiscal year 2009 through fiscal year 2017. On August 5, 2009, Finlay filed for Chapter 11 bankruptcy protection and subsequently decided to liquidate.
The maximum potential liability for base rent payments under the remaining six leases totaled approximately $13 million as of July 31, 2010. As of October 12, 2010, we finalized
agreements or reached agreements in principle with the landlords to settle the lease obligations for two of the remaining six leases, including obligations with respect to common area maintenance and
other charges. Base rents for the remaining leases totaled approximately $8.0 million as of July 31, 2010. Settlements with respect to the obligations for the remaining locations are
still under negotiation. As of July 31, 2010, the remaining lease reserve associated with the Bailey Banks & Biddle lease obligations totaled $5.6 million. During fiscal year
2010, we made payments totaling $15.4 million. In addition, the lease reserve was reduced by $2.1 million as a result of settlements with landlords and changes in assumptions used to
calculate the reserve.

During
fiscal 2010 and 2009, we recorded lease termination charges related to certain store closures primarily in our Fine Jewelry segment. As of July 31, 2010, the remaining
lease reserve associated with the store closures totaled $5.1 million. During fiscal year 2010, we made payments totaling $18.6 million and incurred additional charges of
$3.4 million related to the store closures.

We
were not able to finalize agreements with all of the landlords, and certain landlords have made demands, or initiated legal proceedings to collect the remaining base rent payments
associated with the terminated leases. While we believe we have made reasonable estimates and assumptions to record these charges, it is possible a material change could occur and we may be required
to record additional charges.

Capital Growth

During fiscal year 2010, we invested approximately $2.4 million in capital expenditures to open six new stores in the Fine
Jewelry segment. We invested approximately $7.6 million to remodel, relocate and refurbish eleven stores in our Fine Jewelry segment. We also invested $4.7 million in infrastructure,
primarily related to our information technology and our distribution centers. We anticipate investing approximately $15 million to $20 million in capital expenditures in fiscal year
2011, including $10 million to remodel and refurbish existing stores in our Fine Jewelry segment and approximately $7 million in capital investments related to information technology
infrastructure and support operations.

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Table of Contents

Contractual Obligations

Aggregate information about our contractual obligations as of July 31, 2010 is presented in the following table (in millions):

Payments Due by PeriodTotal

Less than
1 Year

1 - 3 Years

4 - 5 Years

More than
5 Years

OtherLong-term debt

$
317

$
11

$


$
306

$


$
Interest on Senior Secured Term Loan(a)


100


21


42


37





Operating leases(b)


810


180


284


189


157


Operations services agreement(c)


44


7


15


15


7


Other long-term liabilities(d)


5














5Total

$
1,276

$
219

$
341

$
547

$
164

$
5


---

Not included in the table above as contractual obligations are our obligations under employment agreements and ordinary course purchase orders for
merchandise, including certain merchandise on consignment.

Recent Accounting Pronouncement

Effective August 1, 2009, we adopted Statement of Financial Accounting Standard ("SFAS") No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement
No. 162("SFAS 168"), effective for our fiscal quarter ended October 31, 2009. SFAS 168 established the Financial Accounting Standards Board
("FASB") Accounting Standards Codification ("ASC") as the single source of authoritative non-governmental accounting principles to be applied in the preparation of financial statements in
conformity with GAAP. Although SFAS 168 does not change GAAP, the adoption of SFAS 168 impacted our financial statements since all future references to authoritative accounting
literature are now in accordance with SFAS 168, except for the following standards, which will remain authoritative until they are integrated into the ASC: SFAS 164, Not-for-Profit Entities: Mergers and
Acquisitions; SFAS 166,Accounting
for Transfers of Financial Assets;SFAS 167,Amendments to FASB Interpretation No. 46R; and SFAS 168.

In
April 2009, the FASB issued accounting standards under ASC Topic 825,Financial Instruments, which extend the annual financial
statement disclosure requirements for financial instruments to interim reporting periods of publicly traded companies. We adopted this standard effective August 1, 2009.

In
August 2009, the FASB issued Accounting Standards Update 2009-05,Measuring Liabilities at Fair Value("ASU
2009-05"), which is effective for the first reporting period (including interim periods) following issuance. ASU 2009-05 clarifies the application of certain valuation
techniques in circumstances

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in
which a quoted price in an active market for the identical liability is not available. We adopted this standard effective November 1, 2009.

In
January 2010, the FASB issued Accounting Standards Update 2010-06,Improving Disclosures about Fair Value Measurements("ASU 2010-06"). ASU 2010-06 provides more robust disclosures about the transfers between Levels 1 and 2, the activity in Level 3 fair value measurements and
clarifies the level of disaggregation and disclosure related to the valuation techniques and inputs used. The new disclosures are effective for interim and annual reporting periods beginning after
December 15, 2009, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010. We do not expect a material impact from the
adoption of this guidance on our consolidated financial statements.

In
February 2010, the FASB issued Accounting Standards Update 2010-09,Amendments to Certain Recognition and Disclosure
Requirements("ASU 2010-09"). ASU 2010-09 amends the guidance issued in ASC 855,Subsequent Events, by
not requiring SEC filers to disclose the date through which an entity has evaluated subsequent events. ASU 2010-09 was effective upon issuance. There was not a material impact from the
adoption of this guidance on our consolidated financial statements.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements as of July 31, 2010.

Inflation

In management's opinion, changes in revenues, net earnings, and inventory valuation that have resulted from inflation and changing
prices have not been material during the periods presented. Although currently not material, recent increases in gold prices have negatively
affected the cost of merchandise inventory. The inflation rates pertaining to merchandise inventories, especially as they relate to gold and diamond costs, are primary components in determining our
last-in, first-out inventory and was approximately three percent during fiscal year 2010. There is no assurance that inflation will not materially affect us in the future.

Critical Accounting Policies and Estimates

Our significant accounting policies are disclosed in Note 1 of our consolidated financial statements. The following discussion
addresses our most critical accounting policies, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or
use of complex estimates.

Merchandise Inventories.Merchandise inventories are stated at the lower of cost or market. Substantially all U.S. inventories
represent finished
goods which are valued using the LIFO retail inventory method. Merchandise inventory of Peoples Jewellers and Mappins Jewellers of Canada is valued using the first-in,
first-out ("FIFO") retail inventory method. Under the retail method, inventory is segregated into categories of merchandise with similar characteristics at its current average retail
selling value. The determination of inventory at cost and the resulting gross margins are calculated by applying an average cost-to-retail ratio to the retail value of
inventory. At the end of fiscal year 2010, approximately four percent and 14 percent of our total inventory represented raw materials and finished goods related to our manufacturing program and
distribution center, respectively. This inventory is valued at the weighted average cost of the items.

We
are required to determine the LIFO cost on an interim basis by estimating annual inflation trends, annual purchases and ending inventory levels for the fiscal year. Actual annual
inflation rates and inventory balances as of the end of any fiscal year may differ from interim estimates. We apply internally developed indices that we believe accurately and consistently measure
inflation or deflation in the components of our merchandise (i.e., diamonds, gold and other metals and precious stones) and our overall merchandise mix. We believe our internally developed
indices more accurately reflect inflation or

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deflation
in our own prices than the U.S. Bureau of Labor Statistics ("BLS") producer price indices or other published indices.

We
also reduce our inventory valuation for discontinued, slow-moving and damaged inventory. This write-down of inventory is equal to the difference between the
cost of
inventory and its estimated market value based upon assumptions of targeted inventory turn rates, future demand, management strategy and market conditions. If actual market conditions are less
favorable than those projected by management, or if management strategy changes, additional inventory write-downs may be required and, in the case of a major change in strategy or downturn in market
conditions, such write-downs could be significant.

Shrinkage
is estimated for the period from the last inventory date to the end of the fiscal year on a store-by-store basis. Such estimates are based on experience
and the shrinkage results from the last physical inventory. Physical inventories are taken at least once annually for all store locations and for the distribution centers. The shrinkage rate from the
most recent physical inventory, in combination with historical experience and significant changes in physical inventory results could impact our shrinkage reserve.

Impairment of Long-Lived Assets.Long-lived assets are periodically reviewed for impairment by comparing the carrying value
of the assets with their estimated undiscounted future cash flows. If the evaluation indicates that the carrying amount of the asset may not be recoverable, the potential impairment is measured based
on a projected discounted cash flow method using a discount rate that is considered to be commensurate with the risk inherent in our current business model. Assumptions are made with respect to cash
flows expected to be generated by the related assets based upon updated projections. Any changes in key assumptions, particularly store performance or market conditions, could result in an
unanticipated impairment charge. For instance, in the event of a major market downturn or adverse developments within a particular market or portion of our business, individual stores may become
unprofitable, which could result in a write-down of the carrying value of the assets located in those stores. Any impairment would be recognized in operating results.

Goodwill.In accordance with ASC 350,IntangiblesGoodwill and Other, we
test goodwill
for impairment annually, at the end of our second quarter, or more frequently if events occur which indicate a potential reduction in the fair value of a reporting unit's net assets below its carrying
value. We calculate estimated fair value using the present value of future cash flows expected to be generated using weighted average cost of capital, terminal values and updated financial
projections. The fair value of Peoples Jewellers and Piercing Pagoda would have to decline by more than 22 percent and 63 percent, respectively, to be considered for impairment. If our
actual results are not consistent with estimates and assumptions used to calculate fair value, we may be required to recognize additional goodwill impairments.

Revenue Recognition.We recognize revenue in accordance with ASC 605,Revenue Recognition. Revenue
related to merchandise sales, which is approximately 93 percent of total revenues, is recognized at the time of the sale, reduced by a provision for sales returns. The provision for sales
returns is based on historical evidence of our return rate. Repair revenues are recognized when the service is complete and
the merchandise is delivered to the customers. We offer our customers lifetime warranties on certain products that cover sizing and breakage, with an option to purchase theft protection for a
two-year period. The revenue from the lifetime warranty is recognized on a straight-line basis over a five-year period. Revenues also include premiums from our
insurance businesses, principally related to credit insurance policies sold to customers who purchase our merchandise under the proprietary credit program. Insurance premiums are recognized over the
coverage period.

Self-Insurance.We are self-insured for certain losses related to general liability, workers' compensation and medical
claims. Our liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet dates. The estimated liability is not discounted and is established based upon analysis of
historical data and actuarial estimates. While we believe these estimates are reasonable based on the information currently available, if actual trends, including the severity or frequency of claims,

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medical
cost inflation, or fluctuations in premiums differ from our estimates, our results of operations could be impacted.

Other Reserves.We are involved in a number of legal and governmental proceedings as part of the normal course of business.
Reserves are established
based on management's best estimates of our potential liability in these matters. These estimates have been developed in consultation with in-house and outside counsel and are based on a
combination of litigation and settlement strategies. In addition, from time to time we close stores prior to the expiration of the lease term which requires us to record reserves associated with the
leases based on the present value of the remaining lease rentals, including common area maintenance and other charges, reduced by estimated sublease rentals that could reasonably be obtained. If our
estimates and assumptions used to record these charges change, we may be required to record additional charges.

Income
taxes are estimated for each jurisdiction in which we operate. This involves assessing the current tax exposure together with temporary differences resulting from differing
treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent that
recovery is deemed not likely, a valuation allowance is recorded.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates, which may adversely affect our financial position, results of operations
and cash flows. We do not use derivative financial instruments for trading or other speculative purposes and are not party to any leveraged financial instruments.

The
investments of our insurance subsidiaries, primarily stocks and bonds, had an approximate market value at July 31, 2010 of $26 million.

Our
Senior Secured Term Loan bears interest at a fixed rate of 15 percent and would not be affected by interest rate changes. Future and existing borrowings under our revolving
credit agreement would be affected by interest rate changes. As of July 31, 2010, we had borrowings of $165.0 million under our revolving credit agreement. A one percent increase in the
interest rate would increase annual interest expense by approximately $1.7 million. Both agreements were executed in May 2010. Accordingly, the outstanding principal for these debt instruments
approximated fair value as of July 31, 2010.

Commodity Risk.We principally address commodity risk through retail price point adjustments and have, from time to time,
purchased forward contracts
for gold and silver. As of July 31, 2010, we do not have any forward contracts for gold or silver.

Foreign Currency Risk.We are not subject to substantial currency fluctuations because most of our purchases are U.S.
dollar-denominated. However, as
a result of our Canadian operations, we are exposed to market risk from currency rate exposures which may adversely affect our financial position, results of operations and cash flows. During the
fiscal year ended July 31, 2010, the average Canadian currency rate appreciated by approximately 12 percent relative to the U.S. dollar. Due to our Canadian operations being reported at
the average U.S. dollar equivalent, the appreciation in the Canadian dollar resulted in a $27.9 million increase in reported revenues compared to fiscal year 2009, substantially offset by an
increase in reported cost of sales and selling, general and administrative expenses of $13.1 million and $11.0 million, respectively. In addition, as a result of the depreciation of the
Canadian dollar we recorded losses associated with the settlement of Canadian accounts payable totaling $2.8 million during the fiscal year ended July 31, 2010 compared to losses of
$7.6 million during the same period in the prior year.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

We refer you to the Index to Consolidated Financial Statements attached hereto on page 39 for a listing of all financial
statements. The consolidated financial statements are included on pages F-1 through F-32. We incorporate these consolidated financial statements in this document by
reference.

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Table of Contents

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

Not applicable.

ITEM 9A.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in the
Company's periodic SEC filings within the required
time period, and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.

Our
Management's Report on Internal Control Over Financial Reporting is included on page F-1 of this Annual Report on Form 10-K. The report of
Ernst & Young LLP, our independent registered public accounting firm, regarding the effectiveness of our internal control over financial reporting is included on
page F-3 of this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

As reported in our Annual Report on Form 10-K for the year ended July 31, 2009, we determined that there were
control deficiencies that constituted material weaknesses related to certain account reconciliations and the segregation of duties and oversight with respect to our advertising programs. To remediate
these deficiencies, we implemented the following changes in internal control over financial reporting during the fiscal year ended July 31, 2010 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting:



We
have completed all of the actions necessary to remediate the material weaknesses in internal control over financial reporting and have tested the controls for effectiveness.

ITEM 9B.    OTHER INFORMATION

Not applicable.

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Table of Contents

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information set forth under the headings "Proposal No. 1: Election of Directors," "Corporate Governance," "Executive
Compensation" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive Proxy Statement for the 2010 Annual Meeting of Stockholders is incorporated herein by reference.

ITEM 11.    EXECUTIVE COMPENSATION

The information set forth under the headings "Compensation Discussion and Analysis," "Compensation Committee Report," "Compensation
Committee Interlocks and Insider Participation," "Director Compensation" and "Other Corporate Governance Policies-Risk Management Related to Compensation Policies and Practices" in our
definitive Proxy Statement for the 2010 Annual Meeting of Stockholders is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information set forth under the headings "Outstanding Voting Securities of the Company and Principal Holders Thereof" and "Equity
Compensation Plan Information" in our definitive Proxy Statement for the 2010 Annual Meeting of Stockholders is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information set forth under the headings "Independence of Board of Directors" and "Related Party Transactions" in our definitive
Proxy Statement for the 2010 Annual Meeting of Stockholders is incorporated herein by reference.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information set forth under the heading "Independent Registered Public Accounting Firm" in our definitive Proxy Statement for the
2010 Annual Meeting of Stockholders is incorporated herein by reference.

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Table of Contents

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

The following documents are filed as part of this report.



We
make reference to the Index to Consolidated Financial Statements attached to this document on page 39 for a listing of all financial statement documents included on
pages F-1 through F-32.



All
other financial statements and financial statement schedules for which provision is made in the applicable accounting regulation of the SEC 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.



Each
management contract or compensation plan required to be filed as an exhibit is identified by an asterisk (*).

Exhibit
Number

Description of Exhibit

The filings referenced for incorporation by
reference are Zale Corporation filings
(File No. 1-04129) unless otherwise noted3.1a

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

June 20, 2008 Form 8-K, Exhibit 3.14.1

Amended and Restated Credit Agreement, dated as of May 10, 2010

April 30, 2010 Form 10-Q, Exhibit 10.54.2a

Credit Agreement, dated as of May 10, 2010

April 30, 2010 Form 10-Q, Exhibit 10.64.2b

First Amendment to Credit Agreement, dated as of September 24, 2010

Filed herewith4.3

Warrant and Registration Rights Agreement, dated as of May 10, 2010

April 30, 2010 Form 10-Q, Exhibit 10.74.4a

Intercreditor Agreement, dated as of May 10, 2010

April 30, 2010 Form 10-Q, Exhibit 10.84.4b

First Amendment to Intercreditor Agreement, dated as of September 24, 2010

Filed herewith10.1*

Zale Corporation Savings and Investment Plan, as amended

July 31, 2006 Form 10-K, Exhibit 10.110.2*

Form of Indemnification Agreement

July 31, 2009 Form 10-K, Exhibit 10.210.3*

Zale Corporation Omnibus Stock Incentive Plan

July 31, 2000 Form 10-K, Exhibit 10.3a


36

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Table of Contents

Exhibit
Number

Description of Exhibit

The filings referenced for incorporation by
reference are Zale Corporation filings
(File No. 1-04129) unless otherwise noted10.4a*

Zale Corporation 2003 Stock Incentive Plan, as amended

July 31, 2006 Form 10-K, Exhibit 10.4a10.4b*

Form of Incentive Stock Option Award Agreement

July 31, 2008 Form 10-K, Exhibit 10.4b10.4c*

Form of Non-qualified Stock Option Award Agreement

July 31, 2008 Form 10-K, Exhibit 10.4c10.4d*

Form of Restricted Stock Award Agreement

July 31, 2008 Form 10-K, Exhibit 10.4d10.4e*

Form of Time-Vesting Restricted Stock Unit Award Agreement

July 31, 2008 Form 10-K, Exhibit 10.4e10.4f*

Form of Performance-Based Restricted Stock Unit Award Agreement

July 31, 2008 Form 10-K, Exhibit 10.4f10.5*

Outside Directors' 1995 Stock Option Plan

July 31, 2001 Form 10-K, Exhibit 10.3c10.6a*

Non-Employee Director Equity Compensation Plan

November 24, 2008 Form 8-K, Exhibit 10.110.6b*

Amendment to Zale Corporation Non-Employee Director Equity Compensation Plan

December 24, 2009 Form 8-K, Exhibit 10.110.6c*

Form of Stock Option Award Agreement

November 17, 2005 Form 8-K, Exhibit 10.210.6d*

Form of Restricted Stock Award Agreement

November 17, 2005 Form 8-K, Exhibit 10.310.6e*

Form of Restricted Stock Unit Agreement

November 24, 2008 Form 8-K, Exhibit 10.210.6f*

Form of Deferred Stock Unit Agreement

November 24, 2008 Form 8-K, Exhibit 10.310.7*

Form of Amended and Restated Employment Security Agreement with Executive Vice Presidents

December 24, 2008 Form 8-K, Exhibit 10.210.8*

Form of Employment Security Agreement for Corporate Senior Vice Presidents

April 30, 2008 Form 10-Q, Exhibit 10.710.9*

Form of Employment Security Agreement for Brand Senior Vice Presidents

April 30, 2008 Form 10-Q, Exhibit 10.710.10a*

Offer Letter to Theo Killion

January 29, 2008 Form 8-K, Exhibit 10.110.10b*

Offer Letter to Theo Killion

Filed herewith10.11*

Employment Security Agreement with Matthew W. Appel

April 30, 2009 Form 10-Q, Exhibit 10.210.12*

Offer Letter to Richard Lennox

Filed herewith10.13*

Separation and Release Agreement with William Acevedo

February 12, 2010 Form 8-K, Exhibit 10.310.14a*

Amended and Restated Employment Agreement with Neal Goldberg

December 24, 2008 Form 8-K, Exhibit 10.1


37

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Table of Contents

Exhibit
Number

Description of Exhibit

The filings referenced for incorporation by
reference are Zale Corporation filings
(File No. 1-04129) unless otherwise noted10.14b*

Separation and Release Agreement with Neal Goldberg

February 12, 2010 Form 8-K, Exhibit 10.410.15*

Separation and Release Agreement with Mary Kwan

Filed herewith10.16*

Base Salaries and Target Bonus for the Named Executives Officers

Filed herewith10.17*

Zale Corporation Bonus Plan

July 31, 2008 Form 10-K, Exhibit 10.810.18a

Lease Agreement for Corporate Headquarters

July 31, 1996 Form 10-K, Exhibit 10.1110.18b

First Amendment to Lease Agreement for Corporate Headquarter

July 31, 1996 Form 10-K, Exhibit 10.11a10.18c

Second Amendment to Lease Agreement for Corporate Headquarters

July 31, 2004 Form 10-K, Exhibit 10.7c10.19

Master Agreement for Information Technology Services between Zale Delaware, Inc. and ACS Commercial Solutions, Inc., dated as of August 1, 2005

July 2006 Form 10-K, Exhibit 10.1810.20

Private Label Credit Card Program Agreement

May 12, 2010 Form 8-K, Exhibit 10.114

Code of Business Conduct and Ethics

July 31, 2009 Form 10-K, Exhibit 1421

Subsidiaries of the Registrant

July 31, 2007 Form 10-K, Exhibit 2123.1

Consent of Ernst & Young LLP

Filed herewith31.1

Rule 13a-14(a) Certification of Chief Executive Officer

Filed herewith31.2

Rule 13a-14(a) Certification of Chief Financial Officer

Filed herewith32.1

Section 1350 Certification of Chief Executive Officer

Filed herewith32.2

Section 1350 Certification of Chief Financial Officer

Filed herewith99.1

Audit Committee Charter

July 31, 2004 Form 10-K, Exhibit 99.199.2

Compensation Committee Charter

July 31, 2006 Form 10-K, Exhibit 99.299.3

Nominating/Corporate Governance Committee Charter

July 31, 2004 Form 10-K Exhibit 99.3


38

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Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



PageManagement's Report on Internal Control Over Financial Reporting

F-1Reports of Independent Registered Public Accounting Firm

F-2Consolidated Statements of Operations

F-4Consolidated Balance Sheets

F-5Consolidated Statements of Cash Flows

F-6Consolidated Statements of Stockholders' Investment

F-7Notes to Consolidated Financial Statements

F-8


39

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Table of Contents

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our
evaluation, our management concluded that our internal control over financial reporting was effective as of July 31, 2010. The effectiveness of our internal control over financial reporting was
audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report on page F-3.

/s/ THEO KILLION Theo Killion Chief Executive OfficerOctober 12, 2010

/s/ MATTHEW W. APPEL Matthew W. Appel Executive Vice President
and Chief Financial OfficerOctober 12, 2010


F-1

---





Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders of
Zale Corporation:

We
have audited the accompanying consolidated balance sheets of Zale Corporation and subsidiaries as of July 31, 2010 and 2009, and the related consolidated statements of
operations, stockholders' investment, and cash flows for each of the three years in the period ended July 31, 2010. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zale Corporation and subsidiaries at
July 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 2010, in conformity with U.S.
generally accepted accounting principles.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Zale Corporation's internal control over financial reporting as
of July 31, 2010, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated October 12, 2010 expressed an unqualified opinion thereon.

/s/ ERNST
& YOUNG LLP

Dallas,
Texas
October 12, 2010

F-2

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders of
Zale Corporation:

We
have audited Zale Corporation's internal control over financial reporting as of July 31, 2010, based on criteria established inInternal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Zale Corporation's management is
responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, Zale Corporation maintained, in all material respects, effective internal control over financial reporting as of July 31, 2010, based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Zale Corporation and
subsidiaries as of July 31, 2010 and 2009, and the related consolidated statements of operation, stockholders' investment, and cash flows for each of the three years in the period ended
July 31, 2010 of Zale Corporation and our report dated October 12, 2010 expressed an unqualified opinion thereon.

/s/ ERNST
& YOUNG LLP

Dallas,
Texas
October 12, 2010

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Table of Contents

ZALE CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        (in thousands, except per share amounts)

Year Ended July 31,2010

2009

2008Revenues

$
1,616,305

$
1,779,744

$
2,138,041Cost and expenses:Cost of sales


802,172


948,572


1,089,553Selling, general and administrative


846,205


934,249


991,772Depreciation and amortization


50,005


58,947


60,244Other charges (gains)


33,370


46,940


(10,700
)Operating (loss) earnings


(115,447
)

(208,964
)

7,172Interest expense


15,657


10,399


12,364Other gains


(6,564
)




(3,500
)Loss before income taxes


(124,540
)

(219,363
)

(1,692
)Income tax (benefit) expense


(28,750
)

(53,015
)

4,761Loss from continuing operations


(95,790
)

(166,348
)

(6,453
)Earnings (loss) from discontinuedoperations, net of taxes


2,118


(23,155
)

7,084Net (loss) earnings

$
(93,672
)
$
(189,503
)
$
631Basic net (loss) earnings per common share:Loss from continuing operations

$
(2.99
)
$
(5.21
)
$
(0.15
)Earnings (loss) from discontinued operations


0.07


(0.73
)

0.16Net (loss) earnings per share

$
(2.92
)
$
(5.94
)
$
0.01Diluted net (loss) earnings per common share:Loss from continuing operations

$
(2.99
)
$
(5.21
)
$
(0.15
)Earnings (loss) from discontinued operations


0.07


(0.73
)

0.16Net (loss) earnings per share

$
(2.92
)
$
(5.94
)
$
0.01Weighted average number of common shares outstanding:Basic


32,062


31,899


42,361Diluted


32,062


31,899


42,476


See notes to consolidated financial statements.

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Table of Contents

ZALE CORPORATION AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (in thousands, except per share amounts)

July 31, 2010

July 31, 2009ASSETSCurrent Assets:Cash and cash equivalents

$
26,235

$
24,987Merchandise inventories


703,115


740,257Other current assets


41,964


51,973Total current assets


771,314


817,217Property and equipment, net


173,359


238,138Goodwill


98,388


94,605Other assets


52,668


29,480Deferred tax asset


64,652


51,532Total assets

$
1,160,381

$
1,230,972LIABILITIES AND STOCKHOLDERS' INVESTMENTCurrent Liabilities:Accounts payable and accrued liabilities

$
317,922

$
309,949Deferred tax liability


59,136


46,383Current portion of long-term debt


11,250


Total current liabilities


388,308


356,332Long-term debt, less current portion


284,684


310,500Other liabilities


179,369


190,347Commitments and contingenciesStockholders' Investment:Common stock, par value $0.01, 150,000 shares authorized; 54,732 shares issued; 32,107 and 31,969 shares outstanding at July 31, 2010 and 2009,
respectively


488


488Additional paid-in capital


160,645


147,348Accumulated other comprehensive income


48,440


37,307Accumulated earnings


564,010


657,682773,583


842,825Treasury stock, at cost, 22,625 and 22,763 shares at July 31, 2010 and 2009, respectively


(465,563
)

(469,032
)Total stockholders' investment


308,020


373,793Total liabilities and stockholders' investment

$
1,160,381

$
1,230,972


See notes to consolidated financial statements.

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Table of Contents

ZALE CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (in thousands)

Year Ended July 31,2010

2009

2008Cash Flows From Operating Activities:Net (loss) earnings

$
(93,672
)
$
(189,503
)
$
631Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:Depreciation and amortization


50,005


58,947


60,244Deferred taxes


39


(61,014
)

(14,573
)Loss on retirements of property and equipment


1,005


2,663


3,477Impairment of property and equipment


29,944


23,786


1,902Amortization of debt issuance costs


3,380


684


683Gain on warrants


(8,315
)




Goodwill impairment





5,020


Stock-based compensation


3,865


5,713


4,406Change in vacation policy








(12,609
)(Earnings) loss from discontinued operations


(2,118
)

23,155


(7,084
)Conversion of paid in kind interest to Senior Secured Term Loan


1,703





Changes in assets and liabilities:Merchandise inventories


42,374


53,184


71,137Other current assets


10,103


53,759


(1,298
)Other assets


2,071


2,807


2,505Accounts payable and accrued liabilities


24,226


1,583


(34,496
)Other liabilities


(12,288
)

21,911


59,623Net cash provided by operating activities


52,322


2,695


134,548Cash Flows From Investing Activities:Payments for property and equipment


(14,650
)

(28,357
)

(85,137
)Purchase of available-for-sale investments


(2,959
)

(22,721
)

(10,448
)Proceeds from sales of available-for-sale investments


2,409


25,779


8,251Net cash used in investing activities


(15,200
)

(25,299
)

(87,334
)Cash Flows From Financing Activities:Borrowings under revolving credit agreement


4,465,100


5,107,150


3,630,800Payments on revolving credit agreement


(4,610,600
)

(5,122,955
)

(3,531,801
)Proceeds from Senior Secured Term Loan


150,000





Debt issuance costs


(25,523
)




Proceeds from exercise of stock options





6,211


1,992Excess tax benefit on stock options exercised





158


53Purchase of common stock








(326,694
)Net cash used in financing activities


(21,023
)

(9,436
)

(225,650
)Cash Flows From Discontinued Operations:Net cash used in operating activities of discontinued operations


(15,395
)




(21,593
)Net cash provided by investing activities of discontinued operations








225,052Net cash (used in) provided by discontinued operations


(15,395
)




203,459Effect of exchange rate changes on cash


544


(4,315
)

161Net change in cash and cash equivalents


1,248


(36,355
)

25,184Cash and cash equivalents at beginning of period


24,987


61,342


36,158Cash and cash equivalents at end of period

$
26,235

$
24,987

$
61,342


See notes to consolidated financial statements.

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Table of Contents

ZALE CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT        (in thousands)

Common Stock



Accumulated
Other
Comprehensive
IncomeAdditional
Paid-In
Capital

Accumulated
Earnings

Treasury
StockShares

Amount

TotalBalances at July 31, 2007


49,053

$
487

$
138,036

$
45,939

$
845,952

$
(150,000
)
$
880,414Net earnings














631





631Unrealized gain on securities











741








741Cumulative translation adjustment











4,356








4,356Comprehensive income




















5,728Adjustment to initially apply ASC 740














602





602Issuance of common stock


101


1


1,991











1,992Tax benefit from exercise of stock options








23











23Purchase of common stock


(17,553
)













(326,694
)

(326,694
)Stock-based compensation


11





4,406











4,406Balances at July 31, 2008


31,612


488


144,456


51,036


847,185


(476,694
)

566,471Net loss














(189,503
)




(189,503
)Unrealized gain on securities











81








81Cumulative translation adjustment











(13,810
)







(13,810
)Comprehensive loss




















(203,232
)Issuance of common stock


357





(1,604
)







7,662


6,058Tax benefit from exercise of stock options








(1,217
)










(1,217
)Stock-based compensation








5,713











5,713Balances at July 31, 2009


31,969


488


147,348


37,307


657,682


(469,032
)

373,793Net loss














(93,672
)




(93,672
)Unrealized gain on securities











1,023








1,023Cumulative translation adjustment











10,110








10,110Comprehensive loss




















(82,539
)Fair value of warrants issued in connection with the Senior Secured Term Loan








13,036











13,036Issuance of common stock


138





(3,604
)







3,469


(135
)Stock-based compensation








3,865











3,865Balances at July 31, 2010


32,107

$
488

$
160,645

$
48,440

$
564,010

$
(465,563
)
$
308,020


See notes to consolidated financial statements.

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Table of Contents

ZALE CORPORATION AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation.References to the "Company," "we," "us," and "our" in this Form 10-K are references to Zale
Corporation and
its subsidiaries. We are, through our wholly owned subsidiaries, a leading specialty retailer of fine jewelry in North America. At July 31, 2010, we operated 1,218 specialty retail jewelry
stores and 672 kiosks located mainly in shopping malls throughout the United States of America, Canada and Puerto Rico.

We
report our operations under three segments: Fine Jewelry, Kiosk Jewelry and All Other. Our Fine Jewelry segment is comprised of five brands, predominantly focused on the
value-oriented consumer as our core customer target. Each brand specializes in fine jewelry and watches, with merchandise and marketing emphasis focused on diamond products. Zales
Jewelers® is our national brand in the U.S. providing moderately priced jewelry to a broad range of customers. Zales Outlet® operates in outlet malls and neighborhood power
centers and capitalizes on Zales Jewelers'® national advertising and brand recognition. Gordon's Jewelers® is a value-oriented regional jeweler. Peoples Jewellers®,
our national brand in Canada, provides customers with an affordable assortment and an accessible shopping experience. Mappins Jewellers® offers Canadian customers a broad selection of
merchandise from engagement rings to fashionable and contemporary fine jewelry. Certain brands in the Fine Jewelry segment have expanded their presence in the retail market through their
e-commerce sites,www.zales.com, www.zalesoutlet.comandwww.gordonsjewelers.com.

The
Kiosk Jewelry segment operates under the brand names Piercing Pagoda®, Plumb Gold, and Silver and Gold Connection® through mall-based
kiosks and is focused on the opening price point customer. The Kiosk Jewelry segment specializes in gold and silver products that capitalize on the latest fashion trends. In May 2010, we expanded our
presence in the Kiosk Jewelry segment through our e-commerce site,www.pagoda.com.

The
All Other segment includes our insurance and reinsurance operations, which offer insurance coverage primarily to our private label credit card customers.

The
accompanying consolidated financial statements and related notes are for the twelve month fiscal periods ended July 31, 2010 and 2009. We consolidate substantially all of our
U.S. operations into Zale Delaware, Inc. ("ZDel"), a wholly owned subsidiary of Zale Corporation. ZDel is the parent company for several subsidiaries, including three that are engaged primarily
in providing credit insurance to our credit customers. We consolidate our Canadian retail operations into Zale International, Inc., which is a
wholly owned subsidiary of Zale Corporation. All significant intercompany transactions have been eliminated.

Cash and Cash Equivalents.Cash and cash equivalents include cash on hand, deposits in banks and short-term marketable
securities at
varying interest rates with original maturities of three months or less. Also included in cash equivalents are proceeds due from credit card transactions with settlement terms of less than five days.
The carrying amount approximates fair value due to the short-term maturity of those instruments.

Merchandise Inventories.Merchandise inventories are stated at the lower of cost or market. Substantially all U.S. inventories
represent finished
goods which are valued using the last-in, first-out ("LIFO") retail inventory method. Merchandise inventory of Peoples Jewellers and Mappins Jewellers of Canada is valued using
the first-in, first-out ("FIFO") retail inventory method. Under the retail method, inventory is segregated into categories of merchandise with similar characteristics at its
current average retail selling value. The determination of inventory at cost and the resulting gross margins are calculated by applying an average cost-to-retail ratio to the
retail value of inventory. At the end of fiscal year 2010, approximately four percent and 14 percent of our total inventory represented raw materials and finished

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Table of Contents

goods
related to our manufacturing program and distribution center, respectively. These inventories are valued at the weighted average cost of those items. The LIFO charge was $5.7 million,
$1.0 million and $2.4 million for the years ended July 31, 2010, 2009 and 2008, respectively. The cumulative LIFO provision reflected in the accompanying consolidated balance
sheets was $18.9 million and $13.2 million at July 31, 2010 and 2009, respectively. Domestic inventories on a FIFO basis were $606.4 million and $652.9 million at
July 31, 2010 and 2009, respectively. Our Canadian inventory accounted for on the FIFO retail method was approximately $115.6 million and $100.6 million at July 31, 2010
and 2009, respectively.

Consignment
inventory and the related contingent obligations are not reflected in our consolidated financial statements. Consignment inventory has historically consisted of test
programs, merchandise at higher price points, or merchandise that otherwise does not warrant the risk of outright ownership. Consignment inventory can be returned to the vendor at any time. At the
time consigned inventory is sold, we record the purchase liability in accounts payable and the related cost of merchandise in cost of sales. We had $81.1 million and $71.5 million of
consignment inventory on hand at July 31, 2010 and 2009, respectively.

We
are required to determine the LIFO cost on an interim basis by estimating annual inflation trends, annual purchases and ending inventory levels for the fiscal year. Actual annual
inflation rates and inventory balances as of the end of any fiscal year may differ from interim estimates. We apply internally developed indices that we believe accurately and consistently measure
inflation or deflation in the components of our merchandise (i.e., the proper weighting of diamonds, gold and other metals and precious stones) and our overall merchandise mix. We believe our
internally developed indices more accurately reflect inflation or deflation in our own prices than the U.S. Bureau of Labor Statistics producer price indices or other published indices.

We
also write-down our inventory for discontinued, slow-moving and damaged inventory. This write-down is equal to the difference between the cost of
inventory and its estimated market value based upon assumptions of targeted inventory turn rates, future demand, management strategy and market conditions. If actual market conditions are less
favorable than those projected by management or management strategy changes, additional inventory write-downs may be required and, in the case of a major change in strategy or downturn in market
conditions, such write-downs could be significant.

Shrinkage
is estimated for the period from the last inventory date to the end of the fiscal year on a store-by-store basis. Such estimates are based on experience
and the shrinkage results from the last physical inventory. Physical inventories are taken at least once annually for all store locations and for the distribution centers. The shrinkage rate from the
most recent physical inventory, in combination with historical experience and significant changes in physical inventory results, could impact our shrinkage reserve.

Impairment of Long-Lived Assets.Long-lived assets are reviewed for impairment by comparing the carrying value of the assets
with their estimated future cash flows. If the evaluation indicates that the carrying amount of the asset may not be recoverable, the potential impairment is measured based on a projected discounted
cash flow method, using a discount rate that is commensurate with the risk inherent in our current business model. Assumptions are made with respect to cash flows expected to be generated by the
related assets based upon the most recent projections. Any changes in key assumptions, particularly store performance or market conditions, could result in an unanticipated impairment charge. For
instance, in the event of a major market downturn or adverse developments within a particular market or portion of our business, individual stores may become unprofitable, which could result in a
write-down of the carrying value of the assets located in those stores.

Goodwill.In accordance with Accounting Standards Codification (ASC) 350,IntangiblesGoodwill and
Other, we test goodwill for impairment annually, at the end of our second quarter, or more frequently if events occur which indicate a potential reduction in the fair value of
a reporting unit's net assets below its carrying value. We calculate estimated fair value using the present value of future cash flows expected to

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Table of Contents

be
generated using weighted average cost of capital, terminal values and updated financial projections. If our actual results are not consistent with estimates and assumptions used to calculate fair
value, we may be required to recognize additional goodwill impairments. See Note 4 for additional disclosures related to goodwill.

Revenue Recognition.We recognize revenue in accordance with ASC 605,Revenue Recognition. Revenue
related to merchandise sales, which is approximately 93 percent of total revenues, is recognized at the time of the sale, reduced by a provision for sales returns. The provision for sales
returns is based on historical evidence of our return rate. Repair revenues are recognized when the service is complete and the merchandise is delivered to the customers. We offer our customers
lifetime warranties on certain products that cover sizing and breakage, with an option to purchase theft protection for a two-year period. The revenue from the lifetime warranty is
recognized on a straight-line basis over a five-year period. Revenues also include premiums from our insurance businesses, principally related to credit insurance policies sold
to customers who purchase our merchandise under the proprietary credit program. Insurance premiums are recognized over the coverage period.

In
connection with the sale of our customer receivables in fiscal year 2000, we entered into a 10-year merchant services agreement whereby Citibank, N.A. issues private label
credit cards branded with appropriate Company trademarks. We received a $41.8 million incentive for entering into the agreement that is being recognized ratably over 10 years. The
remaining $4.2 million incentive balance as of July 31, 2009 was recognized as revenue during fiscal year 2010.

Cost of Sales.Cost of sales includes cost of merchandise sold, as well as receiving and distribution costs.

Selling, General and Administrative.Included in selling, general and administrative ("SG&A") are store operating,
advertising, buying, costs of
insurance operations and general corporate overhead expenses.

Operating Leases.Rent expense is recognized on a straight-line basis, including consideration of rent holidays, tenant
improvement
allowances received from the landlords and applicable rent escalations over the term of the lease. The commencement date of the rent expense is the earlier of the date when we become legally obligated
for the rent payments or the date when we take possession of the building for construction purposes.

Depreciation and Amortization.Buildings and leasehold improvements are stated at cost and are amortized using the straight-line
method
over the estimated useful lives of the assets or remaining lease life, whichever is shorter, which generally range from 5 to 10 years. Fixtures and equipment are amortized using the
straight-line method over the estimated useful lives of the assets, which range from 3 to 15 years. Original cost and related accumulated depreciation or amortization is removed
from the accounts in the year assets are retired. Gains or losses on dispositions of property and equipment are recorded in the year of disposal and are included in SG&A in the accompanying
consolidated statements of operations. Repairs and maintenance costs are expensed as incurred.

Stock-Based Compensation.Stock-based compensation is accounted for under ASC 718,CompensationStock
Compensation, which requires the use of the fair value method of accounting for all stock-based compensation, including stock options. Stock-based compensation expense for
fiscal years 2010, 2009 and 2008 includes compensation expense for new share-based awards and for share-based awards granted prior to, but not yet vested, as of July 31, 2006.

Preferred Stock.At July 31, 2010 and 2009, 5.0 million shares of preferred stock, par value of $0.01, were authorized.
None were
issued or outstanding.

Credit Insurance Operations.Insurance premium revenue from credit insurance subsidiaries was $11.6 million,
$11.3 million and
$12.4 million for the fiscal years ended July 31, 2010, 2009 and 2008,

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Table of Contents

respectively.
These insurance premiums are included in revenues in the accompanying consolidated statements of operations.

Self-Insurance.We are self-insured for certain losses related to general liability, workers' compensation and medical
claims. Our liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet dates. The estimated liability is not discounted and is established based upon analysis of
historical data and actuarial estimates. While we believe these estimates are reasonable based on the information currently available, if actual trends, including the severity or frequency of claims,
medical cost inflation, or fluctuations in premiums differ from our estimates, our results of operations could be impacted.

Advertising Expenses.Advertising is generally expensed when the advertisement is utilized and is a component of SG&A. All
related production costs
are expensed upon the first occurrence of the advertisement. Advertising expenses were $75.8 million, $87.9 million and $96.3 million for the fiscal years ended July 31,
2010, 2009 and 2008, respectively, net of amounts contributed by vendors. The amounts of prepaid advertising at July 31, 2010 and 2009 were $0.8 million and $0.9 million,
respectively, and are classified as components of other current assets in the accompanying consolidated balance sheets.

Vendor Allowances.We receive cash or allowances from merchandise vendors primarily in connection with cooperative advertising
programs and
reimbursements for markdowns taken to sell the vendor's products. We have agreements in place with each vendor setting forth the specific conditions for each allowance or payment. The majority of
these agreements are entered into or renewed annually at the beginning of each fiscal year. Qualifying vendor reimbursements of costs incurred to specifically advertise vendors' products are recorded
as a reduction of advertising expense. All other allowances or cash payments received are recorded as a reduction to the cost of merchandise. Vendor allowances included in advertising expense totaled
$0.5 million, $5.9 million and $4.3 million for the fiscal years ended July 31, 2010, 2009 and 2008, respectively. Vendor allowances included in cost of sales totaled
$3.6 million and $1.3 million for the years ended July 31, 2010 and 2009, respectively. There were no vendor allowances included in cost of sales for the year ended
July 31, 2008.

Income Taxes.Income taxes are accounted for under the asset and liability method prescribed by ASC 740,Income
Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not such
assets will be realized.

Effective
August 1, 2007, we adopted the provisions for evaluating uncertainties under ASC 740. As a result of the adoption of ASC 740 in the first quarter of fiscal year 2008, we
recognized a decrease of $0.6 million in the liability for unrecognized tax benefits, net of the federal deferred tax benefit, with a corresponding increase to accumulated earnings.

We
file income tax returns in the U.S. federal jurisdiction, in various states and in certain foreign jurisdictions. We are no longer subject to U.S. federal examinations by tax
authorities for fiscal years before July 31, 2005. We are subject to audit by taxing authorities of most states and certain foreign jurisdictions and are subject to examination by these taxing
jurisdictions for fiscal years generally after July 31, 2004.

Sales Tax.We present revenues net of taxes collected and record the taxes as a liability in the consolidated balance sheets
until the taxes are
remitted to the appropriate taxing authority.

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Table of Contents

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 period. Resulting translation adjustments
are included as a component of comprehensive income in the accompanying consolidated statements of stockholders' investment.

During
the fiscal year ended July 31, 2010, the average Canadian currency rate appreciated by approximately 12 percent relative to the U.S. dollar. Due to our Canadian
operations being reported at the average U.S. dollar equivalent, the appreciation in the Canadian dollar resulted in a $27.9 million increase in reported revenues compared to fiscal year 2009,
substantially offset by an increase in reported cost of sales and selling, general and administrative expenses of $13.1 million and $11.0 million, respectively. In addition, as a result
of the appreciation in the Canadian dollar, we recorded gains associated with the settlement of Canadian accounts payable totaling $2.8 million during the fiscal year ended July 31, 2010
compared to losses of $7.6 million during the same period in the prior year.

Earnings Per Common Share.Basic earnings (loss) per common share is computed by dividing net earnings (loss) available to common
stockholders 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. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, restricted share awards and warrants
issued in connection with the Senior Secured Term Loan determined using the treasury stock method. There were antidilutive stock options of 2.6 million as of July 31, 2010 and 2009.
There were antidilutive warrants of 11.1 million as of July 31, 2010.

We
incurred a net loss of $93.7 million and $189.5 million for the years ended July 31, 2010 and 2009, respectively. A net loss causes all outstanding stock options,
restricted share awards and warrants to be antidilutive (that is, the potential dilution would decrease the loss per share). As a result, the basic and dilutive losses per common share are the same
for those fiscal years.

Fair Value Measurements.In September 2006, the Financial Accounting Standards Board issued ASC 820,Fair
Value Measurements
and Disclosures. ASC 820 clarifies the definition of fair value, describes methods used to appropriately measure fair value, and expands fair value disclosure requirements, but
does not change existing guidance as to whether or not an instrument is carried at fair value.

ASC
820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair values. These tiers include:

Level 1



Quoted prices foridenticalinstruments in active markets;Level 2



Quoted prices forsimilarinstruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose
significant inputs are observable; andLevel 3



Instruments whose significant inputs areunobservable.


As
cash and short-term cash investments, trade payables and certain other short-term financial instruments are all short-term in nature, their
carrying amount approximates fair value.

Our
revolving credit agreement and Senior Secured Term Loan were executed in May 2010. Accordingly, the outstanding principal for these debt instruments approximated fair value as of
July 31, 2010.

We
utilize fair value techniques to evaluate the need for potential impairment losses related to goodwill pursuant to ASC 350,IntangibleGoodwill and
Otherand long-lived assets pursuant to ASC 360,Property, Plant and Equipment. We calculate estimated fair value
using Level 3 inputs, including the present value of future cash flows expected to be generated using weighted average cost of capital, terminal values

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and
updated financial projections. The weighted average cost of capital was estimated using information from comparable companies and management's judgment related to risks associated with the
operations of each reporting unit. The terminal value used in the goodwill analysis was determined based on estimates of long-term inflation expectations.

We
calculate the estimated fair value of the closed store reserve using Level 3 inputs, including the present value of the remaining lease rentals and other charges using a
weighted average cost of capital, reduced by estimated sublease rentals. The weighted average cost of capital was estimated using information from comparable companies and management's judgment
related to the risk associated with the operations of the stores. The sublease rentals were estimated using comparable rentals in the same or similar markets in which the closed stores operated.

In
May 2010, we issued 11.1 million warrants in connection with our Senior Secured Term Loan. The fair value of the warrants was estimated using the Black-Scholes option pricing
model using Level 2 inputs. The assumptions used in the option pricing model include expected volatility of 80 percent, a risk-free interest rate of 2.9 percent and an
expected life of seven years. Expected volatility and expected life of the warrants are based on historical experience. The risk-free interest rate is based on the yield of a seven year
U.S. Treasury zero coupon note.

The
investments of our insurance subsidiaries, primarily stocks and bonds, are accounted for as available-for-sale securities and are reflected in other assets in
the accompanying consolidated balance sheets. The fair values of these instruments as of July 31, 2010 and 2009 were approximately $26 million and $25 million, respectively, and
are based on quoted market prices in an active market, a Level 1 measurement in the fair value hierarchy (see Note 6 for additional information related to our investments).

Concentrations of Business and Credit Risk.During fiscal year 2010, we purchased approximately 20 percent of our finished
merchandise from
five vendors with no single vendor exceeding six percent, compared to approximately 12 percent in the same period of the prior year. In fiscal years 2010 and 2009, approximately
12 percent and 16 percent, respectively, of our merchandise requirements were assembled by our internal manufacturing organization. If purchases from these top vendors were disrupted,
particularly at certain critical times during the year, our sales could be adversely affected in the short term until alternative supply arrangements could be established. As of July 31, 2010
and 2009, we had no significant concentrations of credit risk.

Use of Estimates.Our accounting and financial reporting policies are in conformity with U.S. generally accepted accounting
principles. The
preparation of financial statements in conformity with U.S. 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. For example, unexpected changes in market conditions or a downturn in the economy could adversely affect actual results. Estimates are used in accounting
for, among other things, inventory valuation, goodwill and long-lived asset valuation, LIFO inventory retail method, legal liability, credit insurance liability, product warranty,
depreciation, workers' compensation, tax and contingencies. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in
the period they are determined to be necessary.

Reclassifications.Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to
conform to our fiscal
year 2010 presentation. In the consolidated statement of operations for fiscal year 2009, we recorded lease termination charges totaling $23.2 million related to the Bailey Banks &
Biddle brand that was sold in November 2007. In our fiscal year 2009 Form 10-K, this amount was included in "Other charges (gains)" and "Loss from continuing operations." In our
fiscal year 2010 Form 10-K, we have reclassified the $23.2 million charge in our consolidated statement of operations to "Earnings (loss) from discontinued operations" and
have adjusted "Earnings (loss) from discontinued operations" and "Accounts payable and accrued liabilities" in the consolidated statement of cash flows for

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fiscal
year 2009 in order to correct the presentation in accordance with ASC 205-20,Discontinued Operations. The reclassifications to the
fiscal year 2009 presentation are reflected in our fiscal year 2010 Form 10-K based on the determination that they were not material to our consolidated financial statements and
disclosures. These reclassifications have no net impact on "Net loss" or "Net cash provided by operating activities" as reported for fiscal year 2009.

2. OTHER CURRENT ASSETS

Our other current assets consist of the following (in thousands):

Year Ended July 31,2010

2009Prepaid rent

$
20,083

$
20,824Vendor returns and deposits


4,767


9,232Tax receivable


8,622


12,477Other


8,492


9,440$
41,964

$
51,973


3. PROPERTY AND EQUIPMENT, NET

Our property and equipment consists of the following (in thousands):

Year Ended July 31,2010

2009Building and leasehold improvements

$
232,079

$
229,123Furniture and fixtures


448,440


447,314Construction in progress


13,256


14,312693,775


690,749Less accumulated depreciation and amortization


(520,416
)

(452,611
)$
173,359

$
238,138


4. GOODWILL

In accordance with ASC 350,IntangiblesGoodwill and Other, we test
goodwill for impairment annually, at the end of our second quarter, or more frequently if events occur which indicate a potential reduction in the fair value of a reporting unit's net assets below its
carrying value. We calculate estimated fair value using the present value of future cash flows expected to be generated using a weighted average cost of capital, terminal values and updated financial
projections. As a result of the decline in our sales, we concluded that an interim impairment test was necessary and performed the test as of June 30, 2010. Based on the test results, we
concluded that no impairment was necessary for the $79.0 million of goodwill related to the Peoples Jewellers acquisition and the $19.4 million of goodwill related to the Piercing Pagoda
acquisition. As of the date
of the test, the fair value of Peoples Jewellers and Piercing Pagoda would have to decline by more than 22 percent and 63 percent, respectively, to be considered for potential
impairment. The key assumptions used to determine the fair value of our reporting units include: (1) cash flow projections for five years assuming positive comparable store sales growth;
(2) terminal year growth rates of two percent; and (3) discount rates of 17 percent to 20 percent based on our weighted average cost of capital adjusted for risks
associated with the operations of each reporting unit. While we believe we have made reasonable estimates and assumptions to calculate the fair value of the reporting units, it is possible a material
change could occur. If our actual results are not consistent with estimates and assumptions used to calculate fair value, we may be required to recognize goodwill impairments.

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Table of Contents

Based on the test results performed in fiscal year 2009, we fully impaired goodwill totaling $5.0 million related to a reporting unit in the Fine Jewelry
segment. The charge is included in other charges (gains) in the consolidated statements of operations.

As
of July 31, 2010, our market capitalization was below carrying value. While we considered the market capitalization decline in our evaluation of fair value, we determined it
did not impact the overall goodwill impairment analysis as we believe the decline in our market capitalization is primarily the result of concerns about our sales, profitability and liquidity.

The
changes in the carrying amount of goodwill are as follows (in thousands):

Year Ended July 31,2010

2009Goodwill, beginning of period

$
94,605

$
103,685Impairment charges





(5,020
)Foreign currency adjustments


3,783


(4,060
)Goodwill, end of period

$
98,388

$
94,605


5. OTHER ASSETS

Our other assets consist of the following (in thousands):

Year Ended July 31,2010

2009Debt issuance costs

$
22,773

$
1,420Investments in debt and equity securities


26,346


24,842Other


3,549


3,218$
52,668

$
29,480


6. INVESTMENTS

Investments in debt and equity securities held by our insurance subsidiaries are reported as other assets in the accompanying
consolidated balance sheets. Investments are recorded at fair value based on quoted market prices. All investments are classified as available-for-sale. All
long-term debt securities outstanding at July 31, 2010 will contractually mature within 1 to 22 years.

Our
investments consist of the following (in thousands):

July 31, 2010

July 31, 2009Cost

Fair Value

Cost

Fair ValueU.S. government obligations

$
18,212

$
19,530

$
17,673

$
18,354Corporate bonds and notes


2,641


2,835


3,355


3,500Corporate equity securities


4,086


3,981


3,431


2,988$
24,939

$
26,346

$
24,459

$
24,842


At July 31, 2010 and 2009, the carrying value of investments included a net unrealized gain of $1.4 million and $0.4 million,
respectively, which are included in accumulated other comprehensive income. Realized gains and losses on investments are determined on the specific identification basis. There were no material net
realized gains or losses during fiscal year 2010. The net realized gain totaled $0.4 million in fiscal year 2009. Investments with a carrying value of $7.6 million and
$7.7 million
were on deposit with various state insurance departments at July 31, 2010 and 2009, respectively, as required by law.

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7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Our accounts payable and accrued liabilities consist of the following (in thousands):

Year Ended July 31,2010

2009Accounts payable

$
157,189

$
124,435Accrued payroll


7,668


7,444Accrued taxes


15,003


17,118Warranty deferred revenue


78,141


60,164Accrued rent


8,786


7,577Bailey Banks & Biddle lease reserve


5,642


23,155Store closure reserve


5,135


20,309Other


40,358


49,747$
317,922

$
309,949


8. LONG-TERM DEBT

Our long-term debt consists of the following (in thousands):

Year Ended July 31,2010

2009Revolving credit agreement

$
165,000

$
310,500Senior Secured Term Loan


151,703


316,703


310,500Less current portion of long-term debt


(11,250
)

Less unamortized discount on Senior Secured Term Loan


(20,769
)

$
284,684

$
310,500


On May 10, 2010, we amended and restated our revolving credit agreement and executed a $150 million Senior Secured Term Loan and
associated Warrant and Registration Rights Agreement. The terms of each agreement are discussed below.



On May 10, 2010, we entered into an agreement to amend and restate our revolving credit agreement. Prior to that, our revolving
credit agreement provided for borrowings up to $500 million. Borrowings under the credit agreement were capped at the lesser of: (1) 73 percent of the cost of eligible inventory
during October through December and 69 percent for the remainder of the year (minus certain reserves that may be established under the credit agreement), plus 85 percent of
credit card receivables; or (2) 90 percent of the appraised liquidation value of eligible inventory (minus certain reserves that may be established under the credit agreement), plus
85 percent of credit card receivables. The credit agreement provided for increased seasonal borrowing capacity of up to $100 million from October 15 through December 15 and
contained an accordion feature that allowed us to permanently increase the credit agreement size in $25 million increments up to an additional $100 million, subject to approval by our
lenders and certain other requirements. We were also required to maintain $50 million of borrowing availability or satisfy a minimum fixed charge coverage ratio of 1.1:1.0 for an applicable
12 month reference period.



On May 10, 2010, we entered into an agreement to amend and restate various terms of the revolving credit agreement with Bank of
America, N.A. and certain other lenders. The Amended and Restated

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Revolving
Credit Agreement (the "Revolving Credit Agreement") consists of two tranches: (a) an extended tranche totaling $530 million, including seasonal borrowings of
$88 million, maturing on April 30, 2014 and (b) a non-extending tranche totaling $120 million, including seasonal borrowings of $20 million, maturing on
August 11, 2011. The commitments under the agreement from both tranches total $650 million, including seasonal borrowings of $108 million. Borrowings under the Revolving Credit
Agreement are capped at the lesser of: (1) 73 percent of the cost of eligible inventory during October through December and 69 percent for the remainder of the year (less certain
reserves that may be established under the agreement), plus 85 percent of eligible credit card receivables or (2) 90 percent of the appraised liquidation value of eligible
inventory (less certain reserves that may be established under the agreement), plus 85 percent of eligible credit card receivables. On January 1, 2011, the rate applied to the appraised
liquidation value of eligible inventory will be reduced to 87.5 percent. The Revolving Credit Agreement also contains an accordion feature that allows us to permanently increase borrowings up
to an additional $100 million, subject to approval by our lenders and certain other requirements. The Revolving Credit Agreement is secured by a first priority security interest and lien on
merchandise inventory, credit card receivables and certain other assets and a second priority security interest and lien on all other assets. At July 31, 2010, we had borrowing availability
under the Revolving Credit Agreement of $241.7 million.

Borrowings
under the extended tranche bear interest based on average excess availability at either: (i) LIBOR plus the applicable margin (ranging from 350 to 400 basis points) or
(ii) the base rate (as defined in the Revolving Credit Agreement) plus the applicable margin (ranging from 250 to 300 basis points). Borrowings under the non-extending tranche bear
interest based on the average excess availability of either: (i) LIBOR plus the applicable margin (ranging from 100 to 150 basis points) or (ii) the base rate (as defined in the
Revolving Credit Agreement). We are required to pay a quarterly unused commitment fee for the extended tranche of 50 basis points and a quarterly unused commitment fee for the
non-extending tranche ranging from 20 to 25 basis points, each based on the preceding quarter's unused commitment.

We
are required to maintain excess availability (as defined in the Revolving Credit Agreement) of not less than $60 million during the thirty days prior to, and six months after,
on a projected basis, August 11, 2011. In addition, excess availability cannot be less than $40 million during the term of the agreement and less than $50 million on one occasion
for three consecutive business days in each four month period, except for the period from September 1 through November 30, when excess availability can be less than $50 million on
two occasions, but in no event can excess availability be less than $50 million more than four times during any 12 consecutive months. The Revolving Credit Agreement contains various other
covenants including restrictions on the incurrence of certain indebtedness, liens, investments, acquisitions and asset sales.

We
incurred debt issuance costs associated with the Revolving Credit Agreement totaling approximately $13 million. The debt issuance costs are included in other assets in the
accompanying consolidated balance sheet as of July 31, 2010 and will be amortized to interest expense on a straight line basis over the four year life of the Revolving Credit Agreement.

On
September 24, 2010, we received a waiver and consent from the lenders under the Amended and Restated Revolving Credit Agreement permitting the amendments to our Senior Secured
Term Loan and the related payments to Z Investment Holdings, LLC (see below for additional details).



On September 24, 2010, we amended our Senior Secured Term Loan (the "Term Loan") with Z Investment Holdings, LLC (see
additional details below under the headingFirst Amendment to the Senior Secured Term Loan). The following information relates to the Term Loan prior to
the amendment.

On
May 10, 2010, we entered into a $150 million Term Loan and a Warrant and Registration Rights Agreement (as discussed below) with Z Investment Holdings, LLC, an
affiliate of Golden Gate Capital.

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The
Term Loan matures on May 10, 2015 and is secured by a first priority security interest in substantially all current and future intangible assets not secured under the Revolving Credit
Agreement and a second priority security interest on merchandise inventory, credit card receivables and certain other assets. The proceeds received were used to pay down amounts outstanding under the
Revolving Credit Agreement after payment of debt issuance costs incurred pursuant to the Revolving Credit Agreement and the Term Loan.

The
Term Loan bears interest at 15 percent payable on a quarterly basis. We can elect to pay all interest in cash or defer up to one-third of the interest by adding it
to the principal balance of the loan. We may repay all or any portion of the Term Loan with the following penalty prior to maturity: (i) 10 percent during the first year;
(ii) 7.5 percent during the second year; (iii) 5.0 percent during the third year; (iv) 2.5 percent during the fourth year and (v) no penalty in the
fifth year. For the fiscal year ended July 31, 2010, we elected to defer $1.7 million of interest.

The
Term Loan contains various covenants, as defined in the agreement, including maintenance of minimum consolidated EBITDA thresholds, maintaining minimum store contribution thresholds
for Zale Canada, as defined, and Piercing Pagoda and restrictions on the incurrence of certain indebtedness, liens, investments, acquisitions and asset sales. The minimum consolidated EBITDA threshold
for the twelve months ending July 31, 2011 is $10 million. The minimum store contribution threshold for the twelve month period ending July 31, 2011 for Zale Canada and Piercing
Pagoda is CAD $30 million and $20 million, respectively. The Term Loan also requires us to maintain minimum liquidity, as defined, of $120 million through December 31, 2010
and $135 million thereafter.

We
incurred debt issuance costs associated with the Term Loan totaling approximately $13 million, $1.7 million of which was attributable to the warrants (see more details
below underWarrant and Registration Rights Agreement) and expensed on the date of issuance. The remaining $11.3 million of debt issuance costs
are included in other assets in the accompanying consolidated balance sheet and will be amortized to interest expense using the effective interest method over the life of the loan.

On
May 10, 2010, we acknowledged the terms of an intercreditor agreement (the "Intercreditor Agreement") between Bank of America N.A, as agent under the Revolving Credit
Agreement, and Z Investment Holdings, LLC, as agent under the Term Loan. Under the Intercreditor Agreement, Z Investment Holdings, LLC, may request Bank of America N.A. to establish a
reserve equal to two and one-half percent of the borrowing base, as defined in the Revolving Credit Agreement, if the excess availability is less than $75 million at any time,
thereby reducing the amount we can borrow under the Revolving Credit Agreement. In addition, the Intercreditor Agreement restricts changes that can be made to certain terms and covenants under the
Term Loan.



On September 24, 2010, we amended the Term Loan with Z Investment Holdings, LLC. The amendment eliminated the Minimum
Consolidated EBITDA covenant and our option to pay a portion of future interest payments in kind subsequent to July 31, 2010. As a result, all future interest payments will be made in cash. In
consideration for the amendment, we paid Z Investment Holdings, LLC an aggregate of $25.0 million, of which $11.3 million was used to pay down the outstanding principal balance of
the Term Loan, $1.2 million was a prepayment premium and
$12.5 million was an amendment fee. The outstanding balance of the Term Loan after the amendment totaled $140.5 million.

In
accordance with ASC 470-50,DebtModifications and Extinguishments, the amendment is considered a significant
modification which required us to account for the Term Loan and related unamortized costs as an extinguishment and record the amended Term Loan at fair value. As a result, we will record a charge to
interest expense totaling $45.8 million in the first quarter of fiscal year 2011. The charge consists of $20.3 million related to the unamortized discount associated with the Warrants
issued in connection with the Term Loan, the $12.5 million amendment fee, $10.3 million related to the unamortized

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debt
issuance costs associated with the Term Loan and $2.7 million related to the prepayment premium and other costs associated with the amendment.



In connection with the execution of the Term Loan, we entered into a Warrant and Registration Rights Agreement (the "Warrant
Agreement") with Z Investment Holdings, LLC. Under the terms of the Warrant Agreement, we issued 6.4 million A-Warrants and 4.7 million B-Warrants
(collectively, the "Warrants") to purchase shares of our common stock, on a one-for-one basis, for an exercise price of $2.00 per share, which was below market value at the
date of issuance. The Warrants, which are currently exercisable and which expire seven years after issuance, represent 25 percent of our common stock on a fully diluted basis (including the
shares issuable upon exercise of the Warrants, and excluding certain out-of-the-money stock options) as of the date of the issuance. The A-Warrants were
exercisable immediately; however, the B-Warrants were not exercisable until the shares of common stock to be issued upon exercise of the B-Warrants were approved by our
stockholders, which occurred on July 23, 2010. The number of shares and exercise price are subject to customary antidilution protection. The Warrant Agreement also entitles the holder to
designate two, and in certain circumstances three, directors to our board. The holders of the Warrants may, at their option, at any time beginning on August 31, 2010, request that we register
for resale all or part of the common stock issuable under the Warrant Agreement.

The
fair value of the Warrants totaled $21.3 million as of the date of issuance and was recorded as a long-term liability, with a corresponding discount to the
carrying value of the Term Loan. The discount is being amortized to interest expense over the life of the loan using the effective interest method. On July 23, 2010, the stockholders approved
the shares of common stock to be issued upon exercise of the B-Warrants. The long-term liability associated with the Warrants was marked-to-market as of
the date of the stockholder
approval resulting in an $8.3 million gain during the fourth quarter of fiscal year 2010. The remaining amount of $13.0 million was reclassified to stockholders' investment and is
included in additional paid-in capital in the accompanying consolidated balance sheet. Debt issuance costs attributable to the Warrants totaling $1.7 million was expensed on the
date of issuance. As indicated above, the remaining unamortized discount as of September 24, 2010 totaling $20.3 million associated with the Warrants will be charged to interest expense
during the first quarter of fiscal year 2011.

The
fair value of the Warrants was estimated using the Black-Scholes option pricing model. The assumptions used in the option pricing model include expected volatility of
80 percent, a risk-free interest rate of 2.9 percent and an expected life of seven years. Expected volatility and expected life of the Warrants are based on historical
experience. The risk-free interest rate is based on the yield of a seven year U.S. Treasury zero coupon note.

Future
maturities of long-term debt for each of the following five years and thereafter are as follows (in thousands):

Year Ended July 31:2011

$
11,2502012


2013


2014


165,0002015


140,453Thereafter


$
316,703


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Interest paid under the Revolving Credit Agreement during fiscal years 2010 and 2009 was $7.4 million and $11.0 million,
respectively. Interest paid under the Term Loan during fiscal years 2010 was $3.4 million.

9. OTHER LIABILITIES

Our other liabilities consist of the following (in thousands):

Year Ended July 31,2010

2009Long-term straight-line rent

$
33,182

$
34,543Long-term warranty deferred revenue


140,740


150,016Insurance reserves


5,447


5,788$
179,369

$
190,347


10. LEASE TERMINATIONS

During fiscal years 2010 and 2009, we recorded lease termination charges related to the Bailey Banks & Biddle lease obligations
discussed below and certain store closures primarily in our Fine Jewelry segment. The lease termination charges for leases where the Company has finalized settlement negotiations with the landlords
are based on the amounts agreed upon in the termination agreement. If a settlement has not been reached for a lease, the charges are based on the present value of the remaining lease rentals,
including common area maintenance and other charges, reduced by estimated sublease rentals that could reasonably be obtained. We were not able to finalize agreements with all of the landlords, and
certain landlords have made demands, or initiated legal proceedings to collect the remaining base rent payments associated with the terminated leases. While we believe we have made reasonable
estimates and assumptions to record these charges, it is possible a material change could occur and we may be required to record additional charges.

In
connection with the sale of the Bailey Banks & Biddle brand in November 2007, we assigned the applicable store operating leases to the buyer, Finlay Fine Jewelry Corporation
("Finlay"). As a condition of this assignment, we remained contingently liable for the leases for the remainder of the respective current lease terms, which generally ranged from fiscal year 2009
through fiscal year 2017. On August 5, 2009, Finlay filed for Chapter 11 bankruptcy protection and subsequently decided to liquidate. We recorded a $23.2 million charge during the
fourth quarter of fiscal year 2009 associated with all 45 Bailey Banks & Biddle locations (see Note 17 for additional information). The maximum potential liability for base rent payments
under the remaining six leases totaled approximately $13 million as of July 31, 2010. As of October 12, 2010, we finalized agreements or reached agreements in principle with the
landlords to settle the lease obligations for two of the remaining six leases, including obligations with respect to common area maintenance and other charges. Base rents for the remaining leases
totaled approximately $8.0 million as of July 31, 2010. Settlements with respect to the obligations for the remaining locations are still under negotiation.

The
activity related to lease reserves associated with the store closures and the Bailey Banks & Biddle lease obligations for the year ended July 31, 2010, is as follows
(in thousands):

Store Closures

Bailey Banks &
Biddle

TotalBeginning of period

$
20,309

$
23,155

$
43,464Charges and adjustments


3,426


(2,118
)

1,308Payments


(18,600
)

(15,395
)

(33,995
)End of period

$
5,135

$
5,642

$
10,777


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11. OTHER CHARGES (GAINS)

Our other charges (gains) consist of the following (in thousands):

Year Ended July 31,2010

2009

2008Store impairments

$
29,944

$
14,873

$
1,909Store closure charges


3,426


27,047


Goodwill impairment





5,020


Change in vacation policy








(12,609
)$
33,370

$
46,940

$
(10,700
)


In fiscal year 2010, we recorded a $29.9 million charge related to the impairment of long-lived assets associated with
underperforming stores and a $3.4 million charge related to store closures (see Note 10 for additional information related to lease terminations). The impairment charges and store
closures were primarily in our Fine Jewelry segment. The impairment of long-lived assets is based on the amount that the carrying value exceeds the estimated fair value of the assets. The
fair value is based on future cash flow projections over the remaining lease term using a discount rate that we believe is commensurate with the risk inherent in our current business model. If actual
results are not consistent with our cash flow projections, we may be required to record additional impairments. If operating earnings over the remaining lease term for each store included in our
impairment test as of July 31, 2010 were to decline by 10 percent, we would be required
to record additional impairments of $0.3 million. If operating earnings were to decline by 20 percent, the additional impairments required would increase to $1.3 million.

In
fiscal year 2009, we recorded a $14.9 million charge related to the impairment of long-lived assets associated with underperforming stores and a
$27.0 million charge related to 119 store closures. The store closure charge consists primarily of estimated lease termination costs of $16.1 million, impairments related to
long-lived assets of $8.9 million and severance costs of $1.1 million. The impairment charges and store closures were primarily in our Fine Jewelry segment. The store
closures were the result of a strategic decision to close certain underperforming stores not meeting minimum contribution margins. In addition, we recorded a $5.0 million goodwill impairment
charge. See Note 10 for additional information related to the store closures and Note 4 for additional information related to the goodwill impairment charge.

In
fiscal year 2008, we recorded a $1.9 million charge related to the impairment of long-lived assets associated with underperforming stores. In addition, we recorded
a $12.6 million benefit related to a change in our vacation policy from one that required employees to earn vacation in the year prior to the date of grant to a policy where employees earn
vacation in the same year it is used. We also eliminated our policy to pay terminated employees for unused vacation, where not prohibited by law.

12. LEASES

We rent most of our retail space under operating leases that generally range from 5 to 10 years and may contain minimum rent
escalations, while kiosk leases generally range from three to five years. Our store support center lease extends to 2018. We recognize the minimum rent payments on a straight-line basis
over the term of the lease, including the construction period. Contingent rentals paid to lessors of certain store facilities are determined principally on the basis of a percentage of sales in excess
of

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contractual
limits. All existing real estate leases are operating leases. Rent expense from continuing operations is included in SG&A and is as follows (in thousands):

Year Ended July 31,2010

2009

2008Retail space:Minimum rentals

$
189,655

$
202,656

$
204,210Rentals based on sales


2,154


3,297


5,490191,809


205,953


209,700Equipment and corporate headquarters


3,729


2,166


3,431$
195,538

$
208,119

$
213,131


Future minimum lease payments as of July 31, 2010, for all non-cancelable leases were as follows (in thousands):

Year Ended

Minimum Rent
Commitments2011

$
179,6062012


155,5962013


128,2822014


104,8092015


84,303Thereafter


157,065$
809,661


13. INCOME TAXES

Currently, we file a consolidated income tax return. The effective income tax rate from continuing operations varies from the
federal statutory rate of 35 percent as follows (in thousands):

Year Ended July 31,2010

2009

2008Federal income tax benefit at statutory rate

$
(43,589
)
$
(76,763
)
$
(592
)State income taxes, net of federal benefit


(11,581
)

(9,015
)

1,345Tax on repatriation of foreign earnings(a)


12,677


13,912


Canadian rate changes(b)


(3,206
)

(2,878
)

(2,446
)Foreign & U.S. tax credits





8,159


(1,319
)Goodwill impairment





1,750


Expiration of net operating loss carryforwards


(2,675
)




4,349Valuation allowance


24,288


12,501


1,904IRC Section 162m limitation


(472
)

776


674Other


(4,192
)

(1,457
)

846Income tax (benefit) expense

$
(28,750
)
$
(53,015
)
$
4,761Effective income tax rate


23.1
%

24.2
%

(281.4
)%


---

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Table of Contents

The provision for income taxes from continuing operations consists of the following (in thousands):

Year Ended July 31,2010

2009

2008Current income tax (benefit) expense:Federal

$
(32,826
)
$
520

$
2,293Foreign


4,145


6,830


17,661State


296


869


701Total current income tax (benefit) expense


(28,385
)

8,219


20,655Deferred income tax benefit:Federal


1,104


(60,107
)

(11,034
)Foreign


(1,504
)

1,296


(5,700
)State


35


(2,423
)

840Total deferred income tax benefit


(365
)

(61,234
)

(15,894
)$
(28,750
)
$
(53,015
)
$
4,761


Deferred tax assets and liabilities are determined based on estimated future tax effects of the difference between the financial statement and tax
basis of asset and liability balances using statutory tax rates. Tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities
at July 31, 2010 and 2009, respectively, are as follows (in thousands):

Year Ended July 31,2010

2009Current deferred taxes:AssetsAccrued liabilities

$
38,117

$
44,875Inventory reserves


12,320


12,088Net operating loss carryforward


4,894


5,255Other


62


356Current deferred tax assets


55,393


62,574LiabilitiesMerchandise inventories, principally due to LIFO reserve


(110,787
)

(104,295
)Accrued liabilities


(3,742
)

(4,662
)Current deferred tax liabilities, net

$
(59,136
)
$
(46,383
)Non-current deferred taxes:AssetsNet operating loss carryforward

$
68,232

$
30,906Property and equipment


3,178


Stock-based compensation


5,456


3,820Accrued liabilities


52,214


50,081Investments in subsidiaries


6,467


1,695Other


3,469


4,841139,016


91,343Valuation allowances


(52,038
)

(23,436
)Non-current deferred tax assets


86,978


67,907LiabilitiesProperty and equipment





(1,144
)State and local taxes


(862
)

(38
)Undistributed earnings


(8,310
)

Goodwill


(12,593
)

(12,752
)Other


(561
)

(2,441
)Non-current deferred tax assets, net

$
64,652

$
51,532


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Deferred tax assets, net of valuation allowances, were $142.4 million and $130.5 million at July 31, 2010 and 2009,
respectively. Deferred tax liabilities were $136.9 million and $125.3 million at July 31, 2010 and 2009, respectively.

A
valuation allowance must be provided when it is more likely than not that the deferred income tax asset will not be realized. Our valuation allowances totaled $52.0 million and
$23.4 million as of July 31, 2010 and 2009, respectively, and relate to deferred tax assets associated with certain federal, state and foreign net operating loss carryforwards. The
valuation allowances were established due to the uncertainty of our ability to utilize the net operating loss carryforwards in the future.

Deferred
tax assets associated with net operating loss carryforwards totaled $73.1 million and $36.2 million as of July 31, 2010 and 2009, respectively. Deferred tax
assets associated with foreign tax credits totaled $5.1 million and $0.4 million as of July 31, 2010 and 2009, respectively. The net operating loss carryforwards expire from
fiscal year 2011 to fiscal year 2030.

In
fiscal year 2010, we recorded an income tax benefit totaling $33.4 million related to tax refunds associated with net operating loss carrybacks pursuant to the Worker,
Homeownership and Business Assistance Act of 2009 (the "WHBA"). The WHBA, which was enacted in November 2009, includes provisions that extend the time period in which net operating loss carrybacks can
be utilized from two to five years, with certain limitations.

The
total amount of unrecognized tax benefits as of July 31, 2010 was $3.9 million, of which $2.6 million would favorably impact the effective tax rate if resolved
in our favor. Over the next twelve months, management does not anticipate that the amount of unrecognized tax benefits will be reduced due to our tax position being sustained upon audit or as a result
of the expiration of the statute of limitations for specific jurisdictions.

A
reconciliation of the fiscal year 2010 beginning and ending balance of unrecognized tax benefits is as follows (in thousands):

Unrecognized
Tax BenefitsBalance at July 31, 2009

$
4,732Additions based on tax positions related to fiscal 2010


384Additions based on tax positions related to prior years


503Releases based on tax positions related to prior years


(947
)Settlements with tax authorities


(421
)Expiration of statute of limitations


(314
)Balance at July 31, 2010

$
3,937


We recognize accrued interest and penalties related to unrecognized tax benefits in our income tax expense. We had $2.6 million,
$2.7 million and $1.8 million of interest and penalties accrued at July 31, 2010, 2009 and 2008, respectively. During fiscal years 2010 and 2009, we recognized interest expense
totaling $0.4 million. During fiscal year 2008, we recognized interest expense totaling $0.6 million.

Income
tax refunds, net of taxes paid, during fiscal year 2010 and 2009 totaled $30.0 million and $6.4 million, respectively. Income taxes paid, net of refunds, for fiscal
year 2008 was $1.0 million.

14. STOCK-BASED COMPENSATION

We are authorized to provide grants of options to purchase our common stock, restricted stock, restricted stock units and
performance-based restricted stock units under the Zale Corporation 2003 Stock Incentive Plan and the Non-Employee Director Equity Compensation Plan (collectively, the "Plans"). We are
authorized to issue up to 6.3 million shares of our common stock for stock options and restricted stock

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to
employees and non-employee directors under the Plans. Stock options and restricted share awards are issued from treasury stock. Stock-based compensation expense is included in SG&A in
the consolidated statements of operations and totaled $3.9 million, $5.7 million and $4.4 million for the fiscal years ended July 31, 2010, 2009 and 2008, respectively. The
income tax benefit recognized in the consolidated statements of operations related to stock-based compensation totaled $1.4 million, $1.0 million and $1.3 million during fiscal
years 2010, 2009 and 2008, respectively.

Stock Options.Stock options are granted at an exercise price equal to or greater than the market value of the shares of our common
stock at the date
of grant, generally vest ratably over a four-year vesting period and generally expire ten years from the date of grant. Expense related to stock options is recognized using a
graded-vesting schedule over the vesting period. As of July 31, 2010, there was $3.6 million of unrecognized compensation cost related to stock option awards that is expected to be
recognized over a weighted-average period of 2.4 years.

Stock
option transactions during fiscal year 2010 are summarized as follows:

Number of
Options

Weighted Average
Exercise Price

Weighted Average
Remaining
Contractual Life
(Years)

Aggregate
Intrinsic
ValueOutstanding, beginning of year


2,748,866

$
23.18Granted


1,659,200


3.80Exercised





Forfeited


(1,309,650
)

11.18Expired


(496,199
)

21.93Outstanding, end of year


2,602,217

$
17.08


7.18

$
Options exercisable, end of year


1,256,545

$
24.99


5.37

$



For the years ended July 31, 2009 and 2008, the total intrinsic value of stock options exercised was $1.2 million and
$0.4 million, respectively. The weighted average fair values of option grants were $2.51, $7.38 and $6.09 during fiscal years 2010, 2009 and 2008, respectively. The fair value of stock options
that vested during fiscal years 2010, 2009 and 2008 was $1.0 million, $1.9 million and $1.6 million, respectively.

The
fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The following table presents the weighted-average assumptions
used in the option pricing model for stock option grants in fiscal years 2010, 2009 and 2008:

2010

2009

2008Expected volatility


84.5
%

41.4
%

27.7
%Risk-free interest rate


2.3
%

2.7
%

3.6
%Expected lives in years


5.0


5.0


5.0Dividend yield


0.0
%

0.0
%

0.0
%


Expected volatility and the expected life of the stock options are based on historical experience. The risk-free rate is based on the
yield of a five-year Treasury Note.

Restricted Share Awards.Restricted share awards consist of restricted stock, restricted stock units and performance-based restricted
stock units.
Restricted stock and restricted stock units granted to employees through fiscal year 2007 generally vest on the third anniversary of the grant date and are subject to restrictions on sale or transfer.
Restricted stock and restricted stock units granted to employees after fiscal year 2007 generally vest twenty-five percent on the second and third anniversary of the date of the

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Table of Contents

grant
and the remaining fifty percent vest on the fourth anniversary of the date of the grant, subject to restrictions on sale or transfer. Restricted stock granted to non-employee
directors vest on the first anniversary of the grant date and are subject to restrictions on sale or transfer. The fair value of restricted stock and restricted stock units is based on our closing
stock price on the date of grant. Performance-based restricted stock units entitle the holder to receive a specified number of shares of our common stock based on our achievement of performance
targets established by the Compensation Committee. If we fail to meet the specified performance targets, the holder will not receive any shares of common stock, or, if we substantially exceed the
targets, the holder may receive up to two hundred percent of the performance-based restricted stock units granted. At the sole discretion of the Compensation Committee, the holder of a restricted
stock unit or performance-based restricted stock unit may receive a cash payment in lieu of a payout of shares of common stock equal to the fair market value of the number of shares of common stock
the holder otherwise would have received. As of July 31, 2010, there was $1.1 million of unrecognized compensation cost related to restricted stock awards that is expected to be
recognized over a weighted-average period of 1.5 years.

Restricted
share award transactions during fiscal year 2010 are summarized as follows:

Number of
Restricted
Share Awards

Weighted
Average
Fair Value
Per AwardRestricted share awards, beginning of year


440,783

$
17.39Granted


15,000


5.66Vested


(175,124
)

16.63Forfeited


(143,484
)

18.49Restricted share awards, end of year


137,175

$
15.93


15. STOCK REPURCHASE PROGRAM

During fiscal year 2008, the Board of Directors authorized share repurchases of $350 million. As part of the stock repurchase
program, we entered into an accelerated share repurchase agreement ("ASR") for $100 million and four Rule 10b5-1 plans (the "10b5-1 Plans"). In November 2007, the
counterparty under the ASR delivered 4.3 million shares to us. In April 2008, an additional 1.6 million shares were delivered upon final settlement of the ASR. We also repurchased
$226.7 million, or 11.7 million shares, of our common stock under the 10b5-1 Plans and through open market purchases. A total of 17.6 million shares were repurchased
during fiscal year 2008 at an average price of $18.59. As of July 31, 2010, we were authorized to repurchase an additional $23.3 million under our stock repurchase program. Our Term Loan
contains a $1.0 million limit for repurchase of our common stock in any fiscal year.

16. COMPREHENSIVE INCOME

Comprehensive income represents the change in equity during a period from transactions and other events, except those resulting from
investments by and distributions to stockholders. Income taxes are generally not provided for foreign currency translation adjustments, as such adjustments relate to permanent investments in
international subsidiaries.

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The
following table gives further detail regarding changes in the composition of accumulated other comprehensive income (in thousands):

Cumulative
Translation
Adjustment

Unrealized Gain
(Loss) on
Securities

Total Accumulated
Other
Comprehensive
IncomeBalance at July 31, 2007

$
46,378

$
(439
)
$
45,939Cumulative translation adjustment


4,356





4,356Unrealized gain on securities





791


791Reclassification to earnings





(50
)

(50
)Balance at July 31, 2008


50,734


302


51,036Cumulative translation adjustment


(13,810
)




(13,810
)Unrealized gain on securities





521


521Reclassification to earnings





(440
)

(440
)Balance at July 31, 2009


36,924


383


37,307Cumulative translation adjustment


10,110





10,110Unrealized gain on securities





1,026


1,026Reclassification to earnings





(3
)

(3
)Balance at July 31, 2010

$
47,034

$
1,406

$
48,440


17. DISPOSITION OF BAILEY BANKS & BIDDLE

In November 2007, we sold substantially all of the assets and certain liabilities related to the Bailey Banks & Biddle brand to
Finlay. The assets consisted primarily of inventory and property and equipment totaling approximately $190 million and $28 million, respectively. The sale resulted in a
pre-tax gain of approximately $14 million, which includes a $24.7 million reduction in the last-in, first-out provision resulting from the liquidation
of the Bailey Banks & Biddle inventory. In connection with the sale, we assigned the applicable store leases to Finlay. As a condition of this assignment, we remained contingently liable for
the leases for the remainder of the respective current lease terms, which generally ranged from fiscal year 2009 through fiscal year 2017. On August 5, 2009, Finlay filed for Chapter 11
bankruptcy protection and subsequently decided to liquidate. As a result, we recorded lease termination charges totaling $23.2 million in fiscal year 2009. We recorded a gain totaling
$2.1 million related to adjustments to the lease reserve in fiscal year 2010. The decision to sell was a result of our strategy to focus on our moderately priced business and our continued
focus on maximizing return on investments. We have

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Table of Contents

reported
the results of operations of Bailey Banks & Biddle as discontinued operations, which consist of the following (in thousands):

Year Ended July 31,2010

2009

2008Revenues

$


$


$
56,585Earnings (loss) before income taxes

$
2,118

$
(23,155
)
$
(2,604
)Income tax benefit(a)








1,016Earnings (loss) from discontinued operations before gain on sale


2,118


(23,155
)

(1,588
)Gain on sale of Bailey Banks & Biddle, net of taxes of $5,544








8,672Earnings (loss) from discontinued operations

$
2,118

$
(23,155
)
$
7,084


---

18. SEGMENTS

We report our operations under three business segments: Fine Jewelry, Kiosk Jewelry, and All Other. All corresponding items of segment
information in prior periods have been presented consistently.

Our
Fine Jewelry segment consists of five principal brands, predominantly focused on the value-oriented customer as our core customer target. Each brand specializes in fine jewelry and
watches, with merchandise and marketing emphasis focused on diamond products. These five brands have been aggregated into one reportable segment. The Kiosk Jewelry segment operates under the brand
names Piercing Pagoda®, Plumb Gold, and Silver and Gold Connection® through mall-based kiosks and is focused on the opening price point customer. The
Kiosk Jewelry segment specializes in gold and silver products that capitalize on the latest fashion trends. The All Other segment includes our insurance and reinsurance operations, which offer
insurance coverage primarily to our private label credit card customers. Management's expectation is that overall economics of each of our major brands within each reportable segment will be similar
over time.

We
use earnings before unallocated corporate overhead, interest and taxes but include an internal charge for inventory carrying cost to evaluate segment profitability. Unallocated costs
before income taxes include corporate employee-related costs, administrative costs, information technology costs, corporate facilities and depreciation expense.

Income
tax information by segment has not been included as taxes are calculated at a company-wide level and not allocated to each segment.

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Year Ended July 31,Selected Financial Data by Segment

2010

2009

2008(amounts in thousands)Revenues:Fine Jewelry(a)

$
1,378,507

$
1,535,626

$
1,876,170Kiosk


226,187


232,809


249,489All Other


11,611


11,309


12,382Total revenues

$
1,616,305

$
1,779,744

$
2,138,041Depreciation and amortization:Fine Jewelry

$
35,558

$
42,407

$
42,832Kiosk


4,120


4,899


5,296All Other








Unallocated


10,327


11,641


12,116Total depreciation and amortization

$
50,005

$
58,947

$
60,244Operating (loss) earnings:Fine Jewelry(b)

$
(84,818
)
$
(192,683
)
$
18,909Kiosk(c)


13,133


2,465


9,905All Other


4,731


5,706


5,641Unallocated(d)


(48,493
)

(24,452
)

(27,283
)Total operating (loss) earnings

$
(115,447
)
$
(208,964
)
$
7,172Assets(e):Fine Jewelry(f)

$
820,353

$
868,227

$
987,369Kiosk


85,631


107,457


118,601All Other


33,643


24,842


27,234Unallocated


220,754


230,446


282,056Total assets

$
1,160,381

$
1,230,972

$
1,415,260Capital expenditures:Fine Jewelry

$
9,945

$
18,702

$
59,289Kiosk





420


3,266All Other








Unallocated


4,705


9,235


22,582Total capital expenditures

$
14,650

$
28,357

$
85,137


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19. CONTINGENCIES

On September 23, 2010, we entered into a five year agreement to amend and restate various terms of the Merchant Services
Agreement ("MSA") with Citibank (South Dakota), N.A. ("Citibank"), to provide financing for our U.S. customers to purchase merchandise through private label credit cards beginning October 1,
2010. The MSA will automatically renew for successive two year periods, unless either party notifies the other in writing of its intent not to renew. In addition, the MSA can be terminated by either
party upon certain breaches by the other party and also can be terminated by Citibank if our net credit card sales during any twelve month period are less than $315 million or if net card sales
during a twelve month period decrease by 20 percent or more from the prior twelve month period. After any termination, we may purchase or be obligated to purchase the credit card portfolio
under certain circumstances. Our customers use our private label credit card to pay for approximately 40 percent of purchases in the U.S.

Our
previous U.S. agreement with Citibank required us to maintain a minimum volume of credit sales that we did not meet. As a result, Citibank could have terminated the agreement after
providing 180 days written notice, unless we paid Citibank merchant fees associated with the shortfall to the minimum volume of credit sales. We retained the right under the agreement with
Citibank to not pay the fees and change service providers. As a result, the fees did not represent a contractual obligation prior to our decision to pay the additional amounts on June 15, 2010.
The decision to pay the fee was made to allow sufficient time to negotiate the terms of an agreement with Citibank and consider proposals from other service providers without disrupting the upcoming
holiday season. As a result of our decision, we recorded a charge totaling $5.8 million during the fourth quarter of fiscal year 2010.

On
May 7, 2010, we entered into a five year Private Label Credit Card Program Agreement (the "TD Agreement") with TD Financing Services Inc. ("TDFS"), a wholly-owned
subsidiary of Toronto-Dominion Bank, to provide financing for our Canadian customers to purchase merchandise through private label credit cards beginning July 1, 2010. In addition, TDFS
provides credit insurance for our customers and will receive 40 percent of the net profits, as defined, and the remaining 60 percent will be paid to us. The TD Agreement replaced the
agreement with Citi Cards Canada Inc., which expired on June 30, 2010. The TD Agreement will automatically renew for successive one year periods, unless either party notifies the other
in writing of its intent not to renew. The agreement may be terminated at any time during the 90 day period following the end of a program year in the event that credit sales are less than
$50 million in the immediately preceding year. If TDFS terminates the agreement as a result of a breach by us, we will be required to pay a termination fee of $1.0 million in the first
year, $0.7 million in the second year or $0.3 million in the third year. Our customers use our private label credit card to pay for approximately 24 percent of purchases in
Canada.

In
November 2009, the Company and four former officers, Neal L. Goldberg, Rodney Carter, Mary E. Burton and Cynthia T. Gordon, were named as defendants in two purported class-action
lawsuits filed in the United States District Court for the Northern District of Texas. The suits alleged various violations of securities laws arising from the financial statement errors that led to
the restatement completed by the Company as part of its Annual Report on Form 10-K for the fiscal year ended July 31, 2009. On August 9, 2010, the two lawsuits were
consolidated into one. The consolidated
lawsuit requests unspecified damages and costs. It is in the preliminary stage and we intend to vigorously contest them. However, the Company cannot predict the outcome or duration of the lawsuit.

In
December 2009, the directors of the Company and four former officers, Neal L. Goldberg, Rodney Carter, Mary E. Burton and Cynthia T. Gordon, were named as defendants in a derivative
action lawsuit brought on behalf of the Company by a shareholder in the County Court of Dallas County, Texas. The suit alleges various breaches of fiduciary and other duties by the defendants that
generally are related to the financial statement errors described above. In addition, the Board of Directors has received demands from two shareholders requesting that the Board of Directors take
action against each of the individuals named in the derivative lawsuit to recover damages for the alleged breaches. The lawsuit requests unspecified

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damages
and costs. The lawsuit has been stayed pending developments in the consolidated federal lawsuit described above. In the event that the defendants prevail, they are likely to be entitled to
indemnification from the Company with respect to their defense costs. The Company cannot predict the outcome or duration of the lawsuit.

The
Securities and Exchange Commission continues to investigate the Company with respect to the matters underlying the lawsuits and demands described above. The Company cannot predict
the outcome or duration of the investigation.

We
are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established based on management's best estimates of our potential
liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies. Management
believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.

20. DEFERRED REVENUE

We offer our customers lifetime warranties on certain products that cover sizing and breakage with an option to purchase theft
protection for a two-year period. The revenue from the lifetime warranties is recognized on a straight-line basis over a five year period. The change in deferred revenue
associated with the sale of warranties is as follows (in thousands):

Year Ended July 31,2010

2009Deferred revenue, beginning of period

$
210,180

$
168,811Warranties sold(a)


79,039


93,549Revenue recognized(b)


(70,337
)

(52,180
)Deferred revenue, end of period

$
218,882

$
210,180


---

21. BENEFIT AND RETIREMENT PLANS

We maintain the Zale Corporation Savings & Investment Plan (the "U.S. Plan") and the Zale Corporation Puerto Rico Employees
Savings and Investment Plan (the "PR Plan"). The PR Plan was adopted in fiscal year 2008. As amended in fiscal year 2009, both plans allow all employees who are at least age 21 to participate in the
plans, although new employees are required to complete one year of continuous service with us to be eligible to participate. Each employee in the U.S. Plan can contribute from one percent to
60 percent of his or her annual salary subject to Internal Revenue Service ("IRS") limitations, (30 percent for highly-compensated employees). Employees in the PR Plan can contribute
from one to 10 percent of his or her annual salary subject to the Puerto Rico Internal Revenue Code ("PR Code"). Employees who have not otherwise elected will be automatically enrolled in their
respective plan at a contribution rate of two percent upon satisfying all eligibility requirements. We match $0.50 in cash for every dollar an employee of either plan contributes to the plan up to
four percent of annual compensation subject to IRS and PR Code limitations. Matching contributions are made on an annual basis, and

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employees
must be employed with us on the last day of the plan year to receive our matching contributions. Employees who began contributing to the plans prior to calendar year 2009 vest in our matched
contributions immediately. Employees who began contributing to the plans after calendar year 2008 must complete two years of service prior to vesting in matched contributions. Due to economic
conditions, we temporarily suspended matching contributions effective February 27, 2009 with respect to any pre-tax contributions remitted to the plans during that period. We will
periodically reevaluate whether business conditions permit the reinstatement of the matching contributions. The matching contribution expense totaled $1.8 million and $2.1 million for
fiscal years 2009 and 2008, respectively.

22. QUARTERLY RESULTS OF CONTINUING OPERATIONS (UNAUDITED)

Unaudited quarterly results of continuing operations for the fiscal years ended July 31, 2010 and 2009 were as follows (in
thousands, except per share data):

Fiscal Year 2010
For the Three Months EndedJuly 31, 2010

April 30, 2010

January 31, 2010

October 31, 2009Revenues

$
345,000

$
359,843

$
582,252

$
329,210Cost of sales


163,154


177,103


292,539


169,377(Loss) earnings from continuing operations(a)


(28,618
)

(14,631
)

7,171


(59,712
)(Loss) earnings per diluted share from continuing operations


(0.89
)

(0.46
)

0.22


(1.87
)




Fiscal Year 2009
For the Three Months EndedJuly 31, 2009

April 30, 2009

January 31, 2009

October 31, 2008Revenues

$
357,114

$
379,110

$
679,391

$
364,130Cost of sales(b)


191,363


189,075


380,691


187,443Loss from continuing operations(c)


(66,644
)

(19,545
)

(31,776
)

(48,383
)Loss per diluted share from continuing operations


(2.09
)

(0.61
)

(1.00
)

(1.52
)


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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 12th day of October, 2010.

ZALE CORPORATION/S/ MATTHEW W. APPEL MATTHEW W. APPEL Executive Vice President
and Chief Financial Officer


KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Theo Killion and Matthew W. Appel, and each of them, as his true and lawful
attorneys-in-fact and agents, with full powers and substitution and resubstitution for him, in his name place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and authority to do perform each and every act and thing requisite and necessary to be done in and about
the premises as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents may lawfully
do or cause to be done by virtue hereof.

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/ THEO KILLION Theo Killion

Chief Executive Officer (principal executive officer of the registrant), Director

October 12, 2010/s/ MATTHEW W. APPEL Matthew W. Appel

Executive Vice President and Chief Financial Officer (principal financial officer of the registrant)

October 12, 2010/s/ JAMES E. SULLIVAN James E. Sullivan

Vice President, Controller and Chief Accounting Officer (principal accounting officer of the registrant)

October 12, 2010/s/ JOHN B. LOWE, JR. John B. Lowe, Jr.

Chairman of the Board

October 12, 2010/s/ YUVAL BRAVERMAN Yuval Braverman

Director

October 12, 2010


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Table of Contents

Signature

Title

Date/s/ KENNETH B. GILMAN Kenneth B. Gilman

Director

October 12, 2010/s/ STEFAN L. KALUZNY Stefan L. Kaluzny

Director

October 12, 2010/s/ PETER MORROW Peter Morrow

Director

October 12, 2010/s/ CHARLES M. SONSTEBY Charles M. Sonsteby

Director

October 12, 2010


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Table of Contents

Exhibit
Number

Description of Exhibit4.2b

First Amendment to Credit Agreement, dated as of September 24, 20104.4b

First Amendment to Intercreditor Agreement, dated as of September 24, 201010.10b

Offer Letter to Theo Killion10.12

Offer Letter to Richard Lennox10.15

Separation and Release Agreement with Mary Kwan10.16

Base Salaries and Target Bonus for the Named Executive Officers23.1

Consent of Ernst & Young LLP31.1

Rule 13a-14(a) Certification of Chief Executive Officer31.2

Rule 13a-14(a) Certification of Chief Financial Officer32.1

Section 1350 Certification of Chief Executive Officer32.2

Section 1350 Certification of Chief Financial Officer


The above list reflects all exhibits filed herewith. See Item 15 for a complete list of our exhibits, including exhibits incorporated by
reference from previous filings.

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