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

Form 10-K

For the fiscal year ended July 31, 2011

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 is not a well-known seasoned issuer. 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 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, 2011 was $149,504,600. For this purpose, directors and officers have been assumed to be affiliates. As of September 13, 2011, 32,162,161 shares of Zale Corporation's common
stock were outstanding.

Zale
Corporation is an accelerated filer.

Zale
Corporation is not a shell company.

DOCUMENTS INCORPORATED BY REFERENCE.

Portions of Zale Corporation's definitive Proxy Statement for the 2011 Annual Meeting of Stockholders to be held on December 2,
2011 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

13Item 2.

Properties

13Item 3.

Legal Proceedings and Other Matters

14Item 4.

Reserved

14Item 4A.

Executive Officers of the Registrant

14PART II.Item 5.

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

16Item 6.

Selected Financial Data

18Item 7.

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

20Item 7A.

Quantitative and Qualitative Disclosures About Market
Risk

33Item 8.

Financial Statements and Supplementary
Data

34Item 9.

Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

34Item 9A.

Controls and Procedures

34Item 9B.

Other Information

35PART III.Item 10.

Directors, Executive Officers and Corporate
Governance

36Item 11.

Executive Compensation

36Item 12

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

36Item 13.

Certain Relationships and Related Transactions, and Director
Independence

36Item 14.

Principal Accountant Fees and Services

36PART IV.Item 15.

Exhibits and Financial Statements
Schedules

37


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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, 2011, we operated 1,163
specialty retail jewelry stores and 666 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, 2011, we generated $1.7 billion of revenues. We compete in the approximately $64 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 a retailer's reliability, credibility and commitment to customer service.

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 2011, Fine Jewelry generated $1.5 billion, or 86 percent of our revenues and Kiosk Jewelry generated $239 million, or 14 percent of our
revenues.

Fine Jewelry

Fine Jewelry 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®, Canada's largest fine jewelry retailer, 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 brand reach through the
e-commerce sites,www.zales.com, www.zalesoutlet.com, www.gordonsjewelers.comand www.peoplesjewellers.com.



Zales, our U.S. based flagship, is a leading brand name in jewelry retailing in the U.S., operating 650 stores in
50 states and Puerto Rico with an average store size of 1,686 square feet. Gordon's operates 168 stores in 27 states and Puerto Rico with an average store size of 1,517 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.

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Table of Contents

Gordon's
was founded in 1905 and its customers share similar demographic characteristics with the Zales customer. 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 59 percent of our total revenues, with an average transaction value of $422 in fiscal year 2011.
Additionally, both brands operate as multi-channel retailers and serve internet customers through the e-commerce sites:www.zales.comand www.gordonsjewelers.com, which accounted for approximately four percent of our total revenues in fiscal year 2011. Internet sales totaled
$74.3 million in fiscal year 2011 compared to $63.8 million in fiscal year 2010.



In Canada, we operate 213 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 17 percent of our total revenues in fiscal year 2011. The average store size is 1,613
square feet with an average transaction value of $335 in fiscal year 2011. Beginning in October 2010, Peoples Jewellers serves internet customers through the e-commerce site, www.peoplesjewellers.com.

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 assortment and branded jewelry lines.



We operate 132 Zales Outlet stores in 35 states and Puerto Rico, sales from which accounted for 10 percent of our total revenues
in fiscal year 2011. The average store size is 2,360 square feet, with an average transaction value of $455 in fiscal year 2011.

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.

Kiosk Jewelry

Kiosk Jewelry 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 Kiosk Jewelry through the
e-commerce site,www.pagoda.com. At July 31, 2011, Piercing Pagoda operated 666 locations in 41 states and Puerto Rico, sales from
which accounted for 14 percent of our total revenues in fiscal year 2011. Kiosk Jewelry specializes in gold, silver and non-precious metal products, including entry level diamond
merchandise, that capitalize on the latest fashion trends.

At
the entry level price point, Kiosk Jewelry services fashion conscious customers of all ages. Kiosk Jewelry 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.

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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 $41 in fiscal year 2011.

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, Jewel Re-Insurance Ltd. and ZCSC, LLC. These four 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 2011, 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 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 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 2011, All Other 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. 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 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 $64 billion of sales in 2010, 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.

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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)

2011

2010

2009Zales (includingzales.com)

$
851,748

$
788,491

$
879,424Gordon's (includinggordonsjewelers.com)


174,475


174,586


230,995Zales Outlet


166,317


154,747


168,497Peoples and Mappins (includingpeoplesjewellers.com)(a)(b)


298,107


260,683


256,710Piercing Pagoda (includingpagoda.com)(c)


239,231


226,187


232,809Insurance


12,685


11,611


11,309$
1,742,563

$
1,616,305

$
1,779,744Average Sales Per Location (in thousands)(d):Zales

$
1,184

$
1,079

$
1,142Gordon's


940


875


965Zales Outlet


1,229


1,147


1,149Peoples and Mappins


1,409


1,212


1,213Piercing Pagoda


356


338


330


(a)In
October 2010, we commenced operations of an e-commerce site for Peoples Jewellers.(b)Reflects
all revenue from Canadian operations, which constitutes all of our foreign operations. Long-lived assets from foreign operations
totaled approximately $30.9 million, $35.4 million and $40.6 million at July 31, 2011, 2010 and 2009, respectively.(c)In
May 2010, we commenced operations of an e-commerce site for Piercing Pagoda.(d)Based
on merchandise sales for locations open a full 12 months during the applicable year.


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Locations by BrandYear Ended July 31, 2011

Locations Opened
During Period

Locations Closed
During Period

Locations at End
of PeriodZales


1


26


650Gordon's





24


168Zales Outlet


2


6


132Peoples and Mappins


1


3


213Piercing Pagoda


7


13


66611


72


1,829Year Ended July 31, 2010Zales





18


675Gordon's





10


192Zales Outlet





4


136Peoples and Mappins


6


3


215Piercing Pagoda





12


6726


47


1,890Year Ended July 31, 2009Zales


3


94


693Gordon's





59


202Zales Outlet


6


9


140Peoples and Mappins


5


1


212Piercing Pagoda





55


68414


218


1,931


Business Segment Data

Information concerning sales, segment income and total assets 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.

Customer Experience

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. Our store layout is designed to optimize merchandise presentation, which provides particular focus on arrangement of
showcases, lighting and materials. To support peak selling seasons, merchandise presentations are changed periodically.

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. To protect the investment in our fine jewelry, all stores also offer
protection plans to our guests that provide extended warranty coverage that may be purchased at the customer's option, and generous return and exchange policies. 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
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

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service.
Our goal is to form and sustain an effective relationship with the customer from the first sale. 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 education and training programs, particularly with store managers and jewelry consultants. We provide selling and
merchandise product training for all store personnel. In fiscal year 2011, we launched a new training program,Engage,designed to ensure our jewelry
consultants across all brands will provide a consistent customer experience. We have also continued to expand Diamond Council of America ("DCA") training to our store managers, district managers,
regional directors and certain jewelry consultants to provide a more in-depth understanding of the technical aspects of selling diamonds. At July 31, 2011, 48 percent of our
store personnel were DCA certified compared to 15 percent last year.

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 20 countries and we operate a manufacturing subsidiary that is our largest
supplier of finished products. At the end of fiscal year 2011, approximately four percent and 15 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. We had $53.5 million and $81.1 million
of consignment inventory on hand at July 31, 2011 and 2010, respectively. During fiscal years 2011 and 2010, we purchased approximately 17 percent and 20 percent, respectively, of
our finished merchandise from our top five vendors with no single vendor exceeding five percent in 2011. 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.

We
maintain stringent inventory control systems, extensive security systems and loss prevention procedures to minimize 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.

As
a specialty retail jeweler, we are affected by industry-wide fluctuations in the prices of diamonds, gold, silver 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 programs help 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 programs, which allows our jewelry consultants to provide the customer
with a variety of financing options. Approximately 32 percent and 34 percent of our U.S. sales (excluding Piercing Pagoda which does not offer proprietary credit) were financed by
proprietary

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credit
in fiscal years 2011 and 2010, respectively. Our Canadian propriety credit card sales represented approximately 21 percent and 22 percent of Canadian sales for fiscal years 2011
and 2010, respectively.

In
March 2001, we entered into a 10-year agreement with Citibank under which Citibank issued private label credit cards branded with an appropriate trademark, and provided
financing for our U.S. 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 varied according to the credit
plan that was chosen by the customer (i.e., revolving, interest free). The agreement also enabled us to write credit insurance. In September 2010, prior to the scheduled expiration of the
Citibank agreement in March 2011, 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.

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.

In
August 2011, we entered into an agreement with Monterey Financial Services, Inc. to provide alternative financing options to our U.S. customers who have been declined by
Citibank.

Employees

As of July 31, 2011, we had approximately 12,600 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 fiscal quarter, which includes the holiday
months of November and December, accounting for a disproportionately greater percentage of annual sales 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.

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
technology support. 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
$34.5 million over a

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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 our
strategic initiatives.

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 $8 million in fiscal year 2012 for enhancements to our information systems and infrastructure.

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 four 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.

The
U.S. Dodd-Frank Act requires the Securities and Exchange Commission ("SEC") to issue rules, which are still being prepared, for the disclosure and reporting on the use of
certain minerals, including gold, which come from the conflict zones of the Democratic Republic of Congo and adjoining countries. The supply chain for gold and other minerals is complex and it is
estimated that the rules will likely add to the Company's costs, but this increase is not expected to be material.

Available Information

We provide links to our filings with the SEC and to the SEC filings of our directors and executive officers under Section 16
(Forms 3, 4 and 5) 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 "Investor Relations" in the
"SEC Filings" 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

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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.

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 openings,
renovations, 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.

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Any disruption in the supply of finished goods from our largest merchandise vendors could adversely impact our sales.

We purchase substantial amounts of finished goods from our five largest merchandise vendors. If our supply with these top vendors was
disrupted, particularly at certain critical times of the year, our sales could be adversely affected in the short-term until alternative supply arrangements could be established.

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 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. Our vendors have experienced significant increases in commodity costs, especially diamond, gold
and silver costs. It is likely that the increase in commodity prices will result in higher merchandise costs, which could materially affect us in the future. 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.

The
U.S. Dodd-Frank Act requires the Securities and Exchange Commission to issue rules, which are still being prepared, for the disclosure and reporting on the use of certain
minerals, including gold, which come from the conflict zones of the Democratic Republic of Congo and adjoining countries. The supply chain for gold and other minerals is complex and it is estimated
that the rules will likely add to the Company's costs, but this increase is not expected to be material.

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.

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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.

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

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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, senior secured term loan 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.

Any security breach with respect to our information technology systems could result in legal or financial liabilities, damage to our reputation and a loss of customer
confidence.

During the course of our business, we regularly obtain and transmit through our information technology systems customer credit and
other data. If our information technology systems are breached due to the actions of outside parties, or otherwise, an unauthorized third party may obtain access to confidential customer information.
Any breach of our systems that results in unauthorized access to customer information could cause us to incur significant legal and financial liabilities, damage to our reputation and a loss of
customer confidence. In each case, these impacts could have an adverse effect on our business and results of operations.

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 internal 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.

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Table of Contents

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 made by management, we may be required to recognize impairments.

Additional factors 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 February 2012, 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 maintenance fees and merchants association dues, as well as
percentage rents based on the store's gross sales.

We
lease 19 percent of our store and kiosk locations from Simon Property Group and 13 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, 2011:

Term Expires

Stores

Kiosks

Other(a)

Total

Percentage
of Total2012


230


314


3


547


29.8
%2013


195


224





419


22.8
%2014


144


70





214


11.7
%2015


136


47


1


184


10.0
%2016 and thereafter


458


11


1


470


25.7
%1,163


666


5


1,834


100.0
%


---

Management believes that substantially all of the store leases expiring in fiscal year 2012 that it wishes to renew (including leases which
expired earlier and are currently being operated under month-to-month

13

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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


60

Chief Executive OfficerMatthew W. Appel


55

Chief Administrative Officer and Chief Financial OfficerGilbert P. Hollander


58

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


46

Executive Vice President, Chief Marketing OfficerJeannie Barsam


50

Senior Vice President, Merchandise Planning and AllocationJohn A. Legg


49

Senior Vice President, Supply ChainBecky Mick


49

Senior Vice President, Chief Stores OfficerToyin Ogun


51

Senior Vice President, Human Resources and Customer Service


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 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 appointed Chief Administrative Officer of the Company effective May 5, 2011, and continues to serve
as the Company's Chief Financial Officer. Mr. Appel was 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.

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Table of Contents

Mr. Gilbert P. Hollanderwas appointed Executive Vice President and Chief Sourcing Officer in September 2007, and was given the
additional title of Chief Merchant 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 appointed 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.

Ms. Jeannie Barsamwas appointed Senior Vice President, Merchandise Planning and Allocation in March 2011. Prior to joining the
Company, Ms. Barsam served as Senior Vice President, Planning and Allocation of Charlotte Russe, Inc. from November 2009 to February 2011. From December 2007 to November 2009,
Ms. Barsam served as Senior Vice President, Merchandise Planning and Allocation of The Talbots, Inc. Prior to The Talbots, Inc., Ms. Barsam held various senior management
positions with Gap, Inc. from August 2000 to December 2007.

Mr. John A. Leggwas appointed Senior Vice President, Supply Chain in August 2010. Prior to joining the Company, Mr. Legg
served as Managing Director of Management Services International, LLC from 2008 to 2010. From 2007 to 2008, Mr. Legg was Senior Vice President, Global Distribution and Logistics of The
Warnaco Group, Inc. Prior to The Warnaco Group, Inc., Mr. Legg was Vice President, International Distribution of Liz Claiborne, Inc., from 1999 to 2007.

Ms. Becky Mick was appointed Senior Vice President, Chief Stores Officer in July 2010. Ms. Mick served as Vice President
Zale North America since joining the Company in September 2008. Prior to joining the Company, Ms. Mick served as Vice President, Director of Stores and Operations of The Disney Store from May
2006 to April 2008. Ms. Mick served as Vice President of The Children's Place from August 2005 to May 2006. From 1997 to 2005, Ms. Mick held various management positions with Old Navy.

Mr. Toyin Ogunwas appointed Senior Vice President, Human Resource and Customer Service in March 2011. Prior to joining the
Company, Mr. Ogun served as Vice President, Human Resource of L.L. Bean, Inc. from October 2009 to March 2010. Mr. Ogun served as Senior Vice President and Chief Talent Officer of
Sears Holdings from August 2007 to August 2009. Prior to Sears Holdings, Mr. Ogun held various senior management positions with Limited Brands, Inc. from February 1998 to August 2007.

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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.

2011

2010High

Low

High

LowFirst

$
2.70

$
1.53

$
8.20

$
4.73Second

$
5.76

$
2.72

$
5.51

$
2.08Third

$
4.92

$
3.40

$
3.80

$
1.83Fourth

$
6.81

$
3.25

$
3.27

$
1.39


As of September 13, 2011, the Company's outstanding shares of common stock were held by approximately 556 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, 2011, we had borrowing
availability under the revolving credit agreement of approximately $161.3 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" for additional information related to our revolving
credit agreement and Senior Secured Term Loan.

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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, 2006 to July 31, 2011. The comparison assumes $100 was invested on July 31, 2006 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

7/31/06

1/31/07

7/31/07

1/31/08

7/31/08

1/31/09

7/31/09

1/31/10

7/31/10

1/31/11

7/31/11Zale Corporation

$
100.00

$
107.46

$
82.90

$
63.88

$
86.37

$
4.84

$
23.12

$
8.51

$
6.87

$
18.24

$
21.91S&P 500


100.00


113.75


116.13


111.12


103.25


68.20


82.64


90.79


94.07


110.94


112.56S&P Smallcap Spec


100.00


120.80


113.16


80.95


81.36


44.66


78.49


91.31


103.22


133.34


129.97S&P 600 Smallcap


100.00


112.98


114.10


104.97


104.66


66.41


84.49


92.29


100.69


120.83


125.58


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.

17

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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, 2011, 2010, 2009 and 2008 has been derived from our audited consolidated
financial statements. The statement of operations and balance sheet data for the fiscal year ended July 31, 2007 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 31,2011

2010

2009

2008

2007Revenues

$
1,742,563

$
1,616,305

$
1,779,744

$
2,138,041

$
2,152,785Costs and expenses:Cost of sales(a)


862,468


802,172


948,572


1,089,553


1,029,553Selling, general and administrative


859,588


846,205


934,249


991,772


974,855Depreciation and amortization


41,326


50,005


58,947


60,244


56,595Other charges (gains)(b)


7,047


33,370


46,940


(10,700
)

9,658Operating (loss) earnings


(27,866
)

(115,447
)

(208,964
)

7,172


82,124Interest expense(c)


82,619


15,657


10,399


12,364


18,969Other gains(d)





(6,564
)




(3,500
)

(Loss) earnings before income taxes


(110,485
)

(124,540
)

(219,363
)

(1,692
)

63,155Income tax expense (benefit)


1,557


(28,750
)

(53,015
)

4,761


16,812(Loss) earnings from continuing operations


(112,042
)

(95,790
)

(166,348
)

(6,453
)

46,343(Loss) earnings from discontinued operations, net of taxes


(264
)

2,118


(23,155
)

7,084


11,143Net (loss) earnings

$
(112,306
)
$
(93,672
)
$
(189,503
)
$
631

$
57,486Basic net (loss) earnings per common share:(Loss) earnings from continuing operations

$
(3.49
)
$
(2.99
)
$
(5.21
)
$
(0.15
)
$
0.95(Loss) earnings from discontinued operations


(0.01
)

0.07


(0.73
)

0.16


0.23Basic net (loss) earnings per share

$
(3.50
)
$
(2.92
)
$
(5.94
)
$
0.01

$
1.18Diluted net (loss) earnings per common share:(Loss) earnings from continuing operations

$
(3.49
)
$
(2.99
)
$
(5.21
)
$
(0.15
)
$
0.95(Loss) earnings from discontinued operations


(0.01
)

0.07


(0.73
)

0.16


0.22Diluted net (loss) earnings per share

$
(3.50
)
$
(2.92
)
$
(5.94
)
$
0.01

$
1.17Weighted-average number of common shares outstanding:Basic


32,129


32,062


31,899


42,361


48,694Diluted


32,129


32,062


31,899


42,476


48,995Balance Sheet Data:Working capital

$
399,553

$
372,109

$
460,885

$
613,665

$
774,778Total assets


1,189,899


1,171,278


1,230,972


1,415,260


1,600,144Long-term debt


395,454


284,684


310,500


326,306


227,306Total stockholders' investment


212,827


308,020


373,793


566,471


880,414


---

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Table of Contents

Segment Data

We report our business under three segments: Fine Jewelry, Kiosk Jewelry and All Other. All Other 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

2011

2010

2009

2008

2007Revenues:Fine Jewelry(a)

$
1,490,647

$
1,378,507

$
1,535,626

$
1,876,170

$
1,876,580Kiosk(b)


239,231


226,187


232,809


249,489


262,627All Other


12,685


11,611


11,309


12,382


13,578Total revenues

$
1,742,563

$
1,616,305

$
1,779,744

$
2,138,041

$
2,152,785Depreciation and amortization:Fine Jewelry

$
28,009

$
35,558

$
42,407

$
42,832

$
39,933Kiosk


3,361


4,120


4,899


5,296


5,625All Other














Unallocated


9,956


10,327


11,641


12,116


11,037Total depreciation and amortization

$
41,326

$
50,005

$
58,947

$
60,244

$
56,595Operating (loss) earnings:Fine Jewelry(c)

$
(16,312
)
$
(84,818
)
$
(192,683
)
$
18,909

$
100,531Kiosk(d)


16,060


13,133


2,465


9,905


6,170All Other


7,831


4,731


5,706


5,641


6,780Unallocated(e)


(35,445
)

(48,493
)

(24,452
)

(27,283
)

(31,357
)Total operating (loss) earnings

$
(27,866
)
$
(115,447
)
$
(208,964
)
$
7,172

$
82,124Assets(f):Fine Jewelry(g)

$
805,245

$
820,353

$
868,227

$
987,369

$
1,250,967Kiosk


85,999


85,631


107,457


118,601


120,660All Other


40,406


33,643


24,842


27,234


25,406Unallocated


258,249


231,651


230,446


282,056


203,111Total assets

$
1,189,899

$
1,171,278

$
1,230,972

$
1,415,260

$
1,600,144Capital expenditures:Fine Jewelry

$
8,818

$
9,945

$
18,702

$
59,289

$
47,433Kiosk








420


3,266


3,036All Other














Unallocated


6,497


4,705


9,235


22,582


28,791Total capital expenditures

$
15,315

$
14,650

$
28,357

$
85,137

$
79,260


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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, 2011, we operated 1,163 fine jewelry stores
and 666 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. Fine Jewelry is comprised of five brands, Zales Jewelers®, Zales
Outlet®, Gordon's Jewelers®, Peoples Jewellers® and Mappins Jewellers®, and is 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. Kiosk Jewelry 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. Kiosk Jewelry specializes in gold, silver and non-precious metal products that capitalize on the latest fashion trends. All Other includes our insurance and reinsurance
operations, which offer insurance coverage primarily to our private label credit card customers.

In
fiscal year 2010, we began the execution of a multi-year strategy to stabilize the business and return the Company to profitability. The key elements of that strategy
include:





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Comparable
store sales increased by 8.1 percent during fiscal year 2011. At constant exchange rates, which excludes the effect of translating Canadian currency denominated sales
into U.S. dollars, comparable store sales increased by 7.1 percent for the fiscal year. Gross margin increased by 10 basis points to 50.5 percent for the fiscal year ended
July 31, 2011 compared to the same period in the prior
year. The increase in gross margin was due to a 100 basis point increase in revenues recognized related to warranties, a 110 basis point decrease in inventory impairment charges as a result of
improved sales and a 25 basis point decrease in merchandise discounts. The increase was partially offset by a 220 basis point increase in the cost of merchandise, including an $11.3 million
increase in the last-in, first-out ("LIFO") inventory charge, and a change in the sales mix to lower margin merchandise. Operating margin improved by 550 basis points to
negative 1.6 percent compared to negative 7.1 percent in the same period in the prior year primarily as a result of increased sales and a $26 million net decrease in store
impairments and closure charges.

During
the fiscal year ended July 31, 2011 and 2010, the average Canadian currency rate appreciated by approximately six percent and 12 percent, respectively, relative to
the U.S. dollar. The appreciation in the Canadian currency rate for the year ended July 31, 2011 resulted in a $15.6 million increase in reported revenues, offset by an increase in
reported cost of sales and selling, general and administrative expenses of $7.5 million and $6.7 million, respectively. The appreciation in the Canadian currency rate for the year ended
July 31, 2010 resulted in a $27.9 million increase in reported revenues, 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 $1.4 million and $2.8 million during the fiscal years ended July 31, 2011 and 2010, respectively.

Net
earnings associated with warranties totaled $72.6 million for the year ended July 31, 2011, compared to $51.1 million for the same period in the prior year. The
increase in net earnings is primarily the result of increased sales and a change in our warranty product from a two-year warranty to a lifetime

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warranty
in fiscal year 2007. The revenues related to lifetime warranties are recognized on a straight-line basis over a five-year period.

Substantially
all U.S. inventories represent finished goods, which are valued using the LIFO retail inventory method. We are required to determine the LIFO cost on an interim basis by
estimating annual inflation trends, annual purchases and ending inventory. Actual annual inflation rates and inventory balances as of the end of any fiscal year may differ from interim estimates. The
inflation rates pertaining to merchandise inventories, especially as they relate to diamond, gold, and silver costs, are primary components in determining our LIFO inventory. As a result of recent
commodity cost increases, we have recorded LIFO charges in cost of sales totaling $17.0 million and $5.7 million during the fiscal years ended July 31, 2011 and 2010,
respectively.

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.

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 31,2011

2010

2009Revenues


100.0
%

100.0
%

100.0
%Costs and expenses:Cost of sales


49.5


49.6


53.3Selling, general and administrative


49.3


52.4


52.5Depreciation and amortization


2.4


3.1


3.3Other charges


0.4


2.1


2.6Operating loss


(1.6
)

(7.1
)

(11.7
)Interest expense


4.7


1.0


0.6Other gains





(0.4
)

Loss before income taxes


(6.3
)

(7.7
)

(12.3
)Income tax expense (benefit)


0.1


(1.8
)

(3.0
)Loss from continuing operations


(6.4
)

(5.9
)

(9.3
)(Loss) earnings from discontinued operations, net of taxes





0.1


(1.3
)Net loss


(6.4
)%

(5.8
)%

(10.6
)%


Year Ended July 31, 2011 Compared to Year Ended July 31, 2010

Revenues.Revenues for fiscal year 2011 were $1,742.6 million, an increase of 7.8 percent compared to revenues of
$1,616.3 million for the same period in the prior fiscal year. Comparable store sales increased 8.1 percent as compared to the same period in the prior year. The increase in comparable
store sales was attributable to a 5.9 percent increase in average transaction value in our fine jewelry stores and a 2.6 percent increase in the number of customer transactions. The
increase in revenue was also due to $22.4 million in revenues recognized related to warranties and a $15.6 million increase related to the

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appreciation
of the Canadian currency rate, partially offset by a decrease in revenues related to 61 stores closed (net of store openings) during fiscal year 2011.

Fine
Jewelry contributed $1,490.6 million of revenues in the fiscal year ended July 31, 2011, an increase of 8.1 percent as compared to $1,378.5 million for
the same period in the prior year.

Kiosk
Jewelry contributed $239.2 million of revenues in the fiscal year ended July 31, 2011 as compared to $226.2 million in the prior year, representing an increase
of 5.8 percent. The increase in revenue is due primarily to a 3.4 percent increase in average transaction value.

All
Other contributed $12.7 million in revenues for the fiscal year ended July 31, 2011 as compared to $11.6 million for the same period in the prior year,
representing an increase of 9.3 percent.

During
the fiscal year ended July 31, 2011, we opened four stores in Fine Jewelry and seven locations in Kiosk Jewelry. In addition, we closed 59 stores in Fine Jewelry and 13
kiosks in Kiosk Jewelry.

Cost of Sales.Cost of sales includes cost related to merchandise sold, receiving and distribution, customer repairs and repairs
associated with
warranties. Cost of sales as a percentage of revenues was 49.5 percent for the year ended July 31, 2011, compared to 49.6 percent for the same period in the prior year. The
decrease is due to a 110 basis point decrease in inventory impairment charges as a result of improved sales and a 25 basis point decrease in merchandise discounts compared to the same period in the
prior year. The decrease was partially offset by a 125 basis point increase in the cost of merchandise, including an $11.3 million increase in the LIFO inventory charge, and a change in sale
mix to lower margin merchandise.

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 49.3 percent of revenues for the year ended July 31, 2011, compared to 52.4 percent for the same period in
the prior year. The 310 basis point improvement was primarily the result of improved sales. SG&A increased by $13.4 million to $859.6 million for the year ended July 31, 2011. The
increase is primarily the result of a $23.4 million increase in labor costs and store and corporate performance-based compensation associated with improved sales and a $5.7 million
increase in credit card fees primarily due to increased sales in the U.S. The increase was partially offset by a $7.6 million decrease in professional fees and severance costs, a
$5.8 million decrease related to fees paid to Citibank in fiscal year 2010 and a $3.2 million decrease in rent and occupancy costs.

Depreciation and Amortization.Depreciation and amortization as a percent of revenues for the year ended July 31, 2011 and
2010 was
2.4 percent and 3.1 percent, respectively. The decrease is primarily the result of store closures and impairment charges recorded during fiscal years 2011 and 2010.

Other Charges.Other charges for the year ended July 31, 2011 includes a $6.8 million charge related to the impairment
of
long-lived assets associated with underperforming stores and a $0.3 million charge associated with store closures. Other charges 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.

Interest Expense.Interest expense as a percent of revenues for the years ended July 31, 2011 and 2010 was 4.7 percent
and
1.0 percent, respectively. Interest expense increased by $67.0 million to $82.6 million for the year ended July 31, 2011. The increase is primarily due to a charge totaling
$45.8 million associated with the first amendment to our Senior Secured Term Loan ("Term Loan") on September 24, 2010. In accordance with Accounting Standards Codification ("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. The charge consisted of $20.3 million related to the unamortized
discount associated with the warrants issued in connection with the Term Loan, a $12.5 million amendment fee, $10.3 million related to

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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. The remaining
$21.2 million increase in interest expense is due primarily to a $16.2 million increase in interest related to the Term
Loan and an increase in the weighted-average effective interest rate associated with the revolving credit agreement to 3.7 percent as compared to 1.8 percent for the same period in the
prior 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 Expense (Benefit).Income tax expense totaled $1.6 million for the year ended July 31, 2011, compared to a
$28.8 million income tax benefit for the year ended July 31, 2010. Income tax expense for the year ended July 31, 2011 is primarily associated with earnings of our Canadian
subsidiaries, partially offset by the recognition of a $4.6 million tax refund associated with the Worker, Homeownership and Business Assistance Act of 2009 ("WHBA"). The income tax benefit for
the year ended July 31, 2010 is primarily the result of the recognition of a $33.4 million refund associated with the WHBA, partially offset by tax expense primarily associated with our
Canadian subsidiaries.

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 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 a decrease in revenues related to 41 stores closed (net of store openings), 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.

Fine
Jewelry 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.

Kiosk
Jewelry contributed $226.2 million of revenues in the fiscal year ended July 31, 2010 as 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.

All
Other 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 six stores in Fine Jewelry. In addition, we closed 35 stores in Fine Jewelry and 12 kiosks in Kiosk Jewelry.

Cost of Sales.Cost of sales includes cost related to merchandise sold, receiving and distribution, customer repairs and repairs
associated with
warranties. 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 the cost of merchandise.

Selling, General and Administrative.Included in 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

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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.Other charges 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 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 Fine Jewelry.

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 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 Expense (Benefit).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 WHBA, partially offset by $2.8 million of tax expense associated with our Canadian subsidiaries. The 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 ASC 740,Income
Taxes, 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.

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 2011, our cash requirements were funded through cash
flows from operations and our revolving credit agreement with a syndicate of lenders led by Bank of America, N.A. We 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, 2011 and 2010 was approximately 46 days and 44 days, respectively. As
of July 31, 2011, we had cash and cash equivalents totaling $35.1 million.

Net
cash from operating activities decreased from $52.3 million for the year ended July 31, 2010 to a use of $47.0 million for the year ended July 31, 2011.
The $99.3 million decrease is primarily the result of: (1) a $50.4 million increase in inventory; (2) a $28.8 million decrease in refunds under the WHBA;
(3) a $15.2 million payment related to the Term Loan amendment; (4) a $21.2 million increase in interest payments primarily related to the Term Loan; and (5) a
$46.0 million increase related to the timing of

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vendor
payments. The decrease was partially offset by a $23.7 million decrease in cash payments related to lease terminations associated with closed stores and an increase in cash generated
from operations.

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 fiscal year 2011 and 2010, we recognized tax benefits associated with the WHBA totaling
$4.6 million and $33.4 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, 2011 was $720.8 million, an increase of $17.7 million compared to July 31, 2010. The increase is the
result of higher merchandise cost, additional merchandise purchased as a result of increased sales, an increase in the Canadian exchange rate and lower inventory valuation reserves due to improved
inventory turn. The increase was partially offset by an $11.3 million increase in the LIFO reserve compared to the same period in the prior year.



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") consisted 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. On April 21, 2011, the $120 million non-extending tranche was assigned to other lenders and the maturity date was extended to April 30, 2014, the
maturity date for the remainder of the credit facility. 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) 87.5 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. The rate applied to the appraised liquidation value was 90 percent prior to January 1, 2011. The Revolving Credit Agreement also contains an accordion
feature that allows us to permanently increase commitments 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, 2011, we had borrowing availability under the Revolving Credit Agreement of $161.3 million.

Based
on the most recent inventory appraisal performed as of June 2011, available borrowings under the Revolving Credit Agreement will be determined under item (2) described in
the preceding paragraph. The monthly borrowing rates calculated from the cost of eligible inventory are as follows: 61 and 64 percent for August and September 2011, respectively; ranging from
72 to 74 percent for the period of October through December 2011 and ranging from 60 to 64 percent for the period of January through July 2012.

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Borrowings under the Revolving Credit Agreement 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). We are required to pay a
quarterly unused commitment fee of 50 basis points based on the preceding quarter's unused commitment.

Excess
availability (as defined in the Revolving Credit Agreement) 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. Excess availability was
approximately $111.3 million as of July 31, 2011. The Revolving Credit Agreement contains various other covenants including restrictions on the incurrence of certain indebtedness, liens,
investments, acquisitions and asset sales. As of July 31, 2011, we were in compliance with all covenants under the Revolving Credit Agreement.

We
incurred debt issuance costs associated with the Revolving Credit Agreement totaling $14.1 million, including $1.1 million associated with the April 21, 2011
extension of the $120 million portion of the credit facility. The debt issuance costs are included in other assets in the accompanying consolidated balance sheets and are amortized to interest
expense on a straight-line basis over the four-year life of the Revolving Credit Agreement.



On May 10, 2010, we entered into a $150 million Senior Secured Term Loan (the "Term Loan") and a Warrant and Registration
Rights Agreement (as discussed 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 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. Debt issuance costs associated with the Term Loan totaled approximately $13.0 million, $1.7 million of which was attributable to the
warrants issued in connection with the Term Loan (see more details below underWarrant and Registration Rights Agreement) and expensed on 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. 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 was 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 recorded 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.

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The
Term Loan bears interest at 15 percent payable on a quarterly basis. 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. Our ability to repay the Term Loan prior to maturity is restricted by certain conditions under the Revolving Credit Agreement, including a
fixed charge coverage ratio that we currently do not meet.

The
Term Loan contains various covenants, as defined in the agreement, including maintaining minimum store contribution thresholds for Piercing Pagoda and Zale Canada, as defined, and
restrictions on the incurrence of certain indebtedness, liens, investments, acquisitions and asset sales. The Piercing Pagoda and Zale Canada minimum store contribution threshold for the twelve-month
period ending July 31, 2011 is $20 million and CAD $30 million, respectively. As of July 31, 2011, store contribution for Piercing Pagoda and Zale Canada would have to
decline by more than 39 percent and 31 percent, respectively, to breach these covenants. The Piercing Pagoda minimum store contribution thresholds for fiscal year 2012 range from
$21 million to $26 million. The Zale Canada minimum store contribution thresholds for fiscal year 2012 range from CAD $31 million to CAD $36 million. Liquidity (as defined
in the Term Loan) was $238.9 million as of July 31, 2011, which exceeded the $135 million minimum liquidity requirement under the Term Loan by $103.9 million. As of
July 31, 2011, we were in compliance with all covenants under the Term Loan.



In connection with the execution of the Term Loan in May 2010, 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. The Warrants, which are currently
exercisable and expire seven years after issuance, represented 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, 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. 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. Issuance costs attributable to the Warrants totaling $1.7 million were 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 was 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 (the "TD Agreement") with TD Financing
Services Inc. ("TDFS") to provide financing for our Canadian customers to purchase merchandise through private label credit cards beginning July 1, 2010. In addition, TDFS

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provides
credit insurance for our customers and receives 40 percent of the net profits, as defined, and the remaining 60 percent is 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. As of July 31, 2011, credit sales exceeded the $50 million threshold for the program year ending
June 30, 2011. Our customers use our private label credit card to pay for approximately 21 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 upon termination with Citibank as a result of
insolvency, material breaches of the MSA and violations of applicable law related to the credit card program. As of July 31, 2011, we were in compliance with all covenants under the MSA. We
will be required to meet the net credit card sales threshold of $315 million beginning October 1, 2011, which we expect to exceed. Our customers use our private label credit card to pay
for approximately 32 percent of purchases in the U.S.



In connection with the sale of the Bailey Banks & Biddle brand in November 2007, we assigned the brand's 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 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. The remaining liability for base rent payments under the
remaining three leases which have not yet been settled as of July 31, 2011 totaled approximately $2.5 million. As of July 31, 2011, the remaining lease reserve associated with the
Bailey Banks & Biddle lease obligations totaled $1.2 million. During the year ended July 31, 2011, we made payments totaling $5.4 million. In addition, the lease reserve
was increased by $0.9 million as a result of changes in assumptions used to calculate the reserve.

During
fiscal 2011 and 2010, we recorded lease termination charges related to certain Fine Jewelry stores closed in fiscal year 2009. As of July 31, 2011, the remaining lease
reserve associated with the store closures totaled $0.6 million. During fiscal year 2011, we made payments totaling $4.9 million related to the 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 that a material change could occur and we may be
required to record additional charges.

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Capital Expenditures

During fiscal year 2011, we invested approximately $0.4 million in capital expenditures to convert three stores to different
nameplates and open one store in Fine Jewelry. We also opened seven stores in Kiosk Jewelry. We invested approximately $8.4 million to remodel, relocate and refurbish 15 stores in Fine Jewelry
and to complete store enhancement projects. We also invested
$6.5 million in infrastructure, primarily related to our information technology. We anticipate investing approximately $30 million in capital expenditures in fiscal year 2012, including
approximately $22 million in existing store refurbishments and approximately $8 million in capital investments related to information technology infrastructure and support operations.

Contractual Obligations

Aggregate information about our contractual obligations as of July 31, 2011 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

$
395

$


$
255

$
140

$


$
Interest on Senior Secured Term Loan(a)


79


21


42


16





Operating leases(b)


686


170


252


160


104


Operations services agreement(c)


37


7


15


15





Other long-term liabilities(d)


6














6Total

$
1,203

$
198

$
564

$
331

$
104

$
6


---

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

In October 2009, the Financial Accounting Standards Board ("FASB") issued Accountings Standards Update 2009-13, Multi-Deliverable Revenue Arrangements,("ASU 2009-13"). ASU 2009-13 amends the criteria under Accounting Standards
Codification (ASC) Topic 605,Revenue Recognition,for separating consideration in multi-deliverable revenue arrangements. Under previous
guidance, if vendor-specific objective evidence or third-party evidence of fair value were not available, the arrangement was accounted

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for
as a single unit of accounting. The amendment allows management to estimate the selling price if either vendor-specific objective evidence or third-party evidence are unavailable. As a result of
the amendment, multi-deliverable arrangements are separated in more circumstances than under the previous guidance. We adopted this standard effective August 1, 2010. There was not a material
impact from the adoption of this guidance on our consolidated financial statements.

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 adopted this standard, except for the
Level 3 disclosures, effective February 1, 2010. There was not a material impact from the adoption of this guidance on our consolidated financial statements.

In
May 2011, the FASB issued Accounting Standards Update 2011-04,Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in
U.S. GAAP and IFRSs("ASU 2011-04"). ASU 2011-04 amends ASC Topic 820,Fair Value Measurements and
Disclosures,to improve comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International
Financial Reporting Standards. The amendment is effective during interim and annual periods beginning after December 15, 2011. We do not expect a material impact from the adoption of this
guidance on our consolidated financial statements.

In
June 2011, the FASB issued Accounting Standards Update 2011-05,Presentation of Comprehensive Income("ASU
2011-05"). ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendment will
instead require that all nonowner changes in stockholders' equity be presented either in a single continuous statement, referred to as the statement of comprehensive income, or in two separate but
consecutive statements. The amendment is effective for fiscal years beginning after December 15, 2011. We do not expect 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, 2011.

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 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 2011, approximately four percent and 15 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.

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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 deflation in our own prices than the U.S. Bureau of Labor Statistics 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. As of the date of the test, the fair value of the Peoples Jewellers and Piercing Pagoda reporting units would have to decline by more than 18 percent and 60 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 92 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. Premium revenues from
our insurance businesses relate to credit insurance policies sold to customers who purchase our merchandise under the proprietary credit program. Insurance premiums are recognized over the coverage
period.

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Revenues
related to lifetime warranties are recognized on a straight-line basis over an estimated life of five years, while revenues related to the optional theft protection
are recognized over the two-year contract period. In addition, we offer one-year warranties to our Kiosk Jewelry customers that are recognized over the 12-month
contract period. ASC 605-20 requires recognition of revenue related to extended warranty products in proportion to the costs expected to be incurred if sufficient historical
evidence exists to demonstrate the pattern of expected costs. We are recognizing revenues related to warranties on a straight-line basis as a result of our determination that we currently
have insufficient historical evidence to recognize revenue in proportion to the costs. Once the appropriate level of historical evidence is obtained, we believe revenue will be recognized on an
accelerated basis which could have a material impact on our results 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.

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, 2011 of $30.4 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, 2011, we had borrowings of $255 million under our revolving credit agreement. A one percent increase in the
interest rate would increase annual interest expense by approximately $3 million. The outstanding principal of our revolving credit agreement and Senior Secured Term Loan approximates fair
value as of July 31, 2011.

Inflation.Substantially all U.S. inventories represent finished goods, which are valued using the last-in, first-out
("LIFO") retail inventory method. We are required to determine the LIFO cost on an interim basis by estimating annual inflation trends, annual purchases and ending inventory. The inflation

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rates
pertaining to merchandise inventories, especially as they relate to gold, silver and diamond costs, are primary components in determining our LIFO inventory. As a result of recent commodity cost
increases, we have recorded LIFO charges in cost of sales totaling $17.0 million and $5.7 million during the fiscal years ended July 31, 2011 and 2010, respectively. It is likely
that the increase in commodity prices will continue to result in higher merchandise costs, which could materially affect us in the future.

Commodity Risk.Our results are subject to fluctuations in the underlying cost of diamonds, gold, silver and other metals which
are key raw material
components of the products sold by us. We principally address commodity risk through retail price point adjustments.

Foreign Currency Risk.We are not subject to significant gains or losses as a result of currency fluctuations because most of
our purchases are U.S.
dollar-denominated. However, our Canadian operations expose us to market risk from currency rate exposures, which may adversely affect our results of operations. During the fiscal year ended
July 31, 2011 and 2010, the average Canadian currency rate appreciated by approximately six percent and 12 percent, respectively, relative to the U.S. dollar. The appreciation in the
Canadian currency rate for the year ended July 31, 2011 resulted in a $15.6 million increase in reported revenues, offset by an increase in reported cost of sales and selling, general
and administrative expenses of $7.5 million and $6.7 million, respectively. The appreciation in the Canadian currency rate for the year ended July 31, 2010 resulted in a
$27.9 million increase in reported revenues, 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 $1.4 million and
$2.8 million during the fiscal years ended July 31, 2011 and 2010, respectively.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

We refer you to the Index to Consolidated Financial Statements attached hereto on page 40 for a listing of all financial
statements. The consolidated financial statements are included on pages F-1 through F-31. We incorporate these consolidated financial statements in this document by
reference.

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.

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Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended July 31, 2011 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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," "Related Party
Transactions," and "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive Proxy Statement for the 2011 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," "Executive
Compensation," "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 2011 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 2011 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 2011 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
2011 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 40 for a listing of all financial statement documents included on
pages F-1 through F-31.



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

July 31, 2010 Form 10-K, Exhibit 4.2b4.3

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

July 31, 2010 Form 10-K, Exhibit 4.4b4.5

Form of Assignment and Acceptance Agreement, dated as of April 21, 2011

April 30, 2011 Form 10-Q, Exhibit 4.110.1*

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 10.2


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 noted10.3*

Zale Corporation Omnibus Stock Incentive Plan

July 31, 2000 Form 10-K, Exhibit 10.3a10.4a*

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 10.710.10*

Amended and Restated Employment Security Agreement for 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

July 31, 2010 Form 10-K, Exhibit 10.1210.13*

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


38

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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

July 31, 2010 Form 10-K, Exhibit 10.1510.16*

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 31, 2006 Form 10-K, Exhibit 10.1810.20

Private Label Credit Card Program Agreement

May 12, 2010 Form 8-K, Exhibit 10.110.21

Amended and Restated Merchant Services Agreement with Citibank (South Dakota), N.A.

October 31, 2010 Form 10-Q, 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


39

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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


40

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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, 2011. 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 OfficerSeptember 20, 2011

/s/ MATTHEW W. APPEL Matthew W. Appel Chief Administrative Officer
and Chief Financial OfficerSeptember 20, 2011


F-1

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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 the accompanying consolidated balance sheets of Zale Corporation and subsidiaries as of July 31, 2011 and 2010, and the related consolidated statements of
operations, stockholders'
investment, and cash flows for each of the three years in the period ended July 31, 2011. 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, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 2011, 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, 2011, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated September 20, 2011 expressed an unqualified opinion thereon.

/s/ ERNST
& YOUNG LLP

Dallas,
Texas
September 20, 2011

F-2

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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, 2011, 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, 2011, 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 sheets of Zale Corporation and
subsidiaries as of July 31, 2011 and 2010, and the related consolidated statements of operation, stockholders' investment, and cash flows for each of the three years in the period ended
July 31, 2011 of Zale Corporation and our report dated September 20, 2011 expressed an unqualified opinion thereon.

/s/ ERNST
& YOUNG LLP

Dallas,
Texas
September 20, 2011

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Table of Contents

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

Year Ended July 31,2011

2010

2009Revenues

$
1,742,563

$
1,616,305

$
1,779,744Cost and expenses:Cost of sales


862,468


802,172


948,572Selling, general and administrative


859,588


846,205


934,249Depreciation and amortization


41,326


50,005


58,947Other charges


7,047


33,370


46,940Operating loss


(27,866
)

(115,447
)

(208,964
)Interest expense


82,619


15,657


10,399Other gains





(6,564
)

Loss before income taxes


(110,485
)

(124,540
)

(219,363
)Income tax expense (benefit)


1,557


(28,750
)

(53,015
)Loss from continuing operations


(112,042
)

(95,790
)

(166,348
)(Loss) earnings from discontinuedoperations, net of taxes


(264
)

2,118


(23,155
)Net loss

$
(112,306
)
$
(93,672
)
$
(189,503
)Basic and diluted net loss per common share:Loss from continuing operations

$
(3.49
)
$
(2.99
)
$
(5.21
)(Loss) earnings from discontinued operations


(0.01
)

0.07


(0.73
)Net loss per share

$
(3.50
)
$
(2.92
)
$
(5.94
)Weighted-average number of common shares outstanding:Basic


32,129


32,062


31,899Diluted


32,129


32,062


31,899


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 31,2011

2010ASSETSCurrent Assets:Cash and cash equivalents

$
35,125

$
26,235Merchandise inventories


720,782


703,115Other current assets


49,811


41,964Total current assets


805,718


771,314Property and equipment, net


141,751


173,359Goodwill


104,620


98,388Other assets


44,843


52,668Deferred tax asset


92,967


75,549Total assets

$
1,189,899

$
1,171,278LIABILITIES AND STOCKHOLDERS' INVESTMENTCurrent Liabilities:Accounts payable and accrued liabilities

$
313,444

$
317,922Deferred tax liability


92,721


70,033Current portion of long-term debt





11,250Total current liabilities


406,165


399,205Long-term debt, less current portion


395,454


284,684Other liabilities


175,453


179,369Commitments and contingenciesStockholders' Investment:Common stock, par value $0.01, 150,000 shares authorized; 54,732 shares issued; 32,159 and 32,107 shares outstanding at July 31, 2011 and 2010,
respectively


488


488Additional paid-in capital


161,575


160,645Accumulated other comprehensive income


63,385


48,440Accumulated earnings


451,704


564,010677,152


773,583Treasury stock, at cost, 22,573 and 22,625 shares at July 31, 2011 and 2010, respectively


(464,325
)

(465,563
)Total stockholders' investment


212,827


308,020Total liabilities and stockholders' investment

$
1,189,899

$
1,171,278


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 31,2011

2010

2009Cash Flows From Operating Activities:Net loss

$
(112,306
)
$
(93,672
)
$
(189,503
)Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Non-cash interest


34,580


3,380


684Depreciation and amortization


41,326


50,005


58,947Deferred taxes


5,280


39


(61,014
)Loss on disposition of property and equipment


1,431


1,005


2,663Impairment of property and equipment


6,762


29,944


23,786Gain on warrants





(8,315
)

Goodwill impairment








5,020Stock-based compensation


2,150


3,865


5,713Loss (earnings) from discontinued operations


264


(2,118
)

23,155Conversion of paid in kind interest to Senior Secured Term Loan





1,703


Changes in assets and liabilities:Merchandise inventories


(8,071
)

42,374


53,184Other current assets


(6,913
)

10,103


53,759Other assets


(1,982
)

2,071


2,807Accounts payable and accrued liabilities


(3,462
)

24,226


1,583Other liabilities


(6,005
)

(12,288
)

21,911Net cash (used in) provided by operating activities


(46,946
)

52,322


2,695Cash Flows From Investing Activities:Payments for property and equipment


(15,315
)

(14,650
)

(28,357
)Purchase of available-for-sale investments


(9,388
)

(2,959
)

(22,721
)Proceeds from sales of available-for-sale investments


6,140


2,409


25,779Net cash used in investing activities


(18,563
)

(15,200
)

(25,299
)Cash Flows From Financing Activities:Borrowings under revolving credit agreement


3,604,800


4,465,100


5,107,150Payments on revolving credit agreement


(3,514,800
)

(4,610,600
)

(5,122,955
)Proceeds from Senior Secured Term Loan





150,000


Debt issuance costs





(25,523
)

Payments on Senior Secured Term Loan


(11,250
)




Proceeds from exercise of stock options


67





6,211Excess tax benefit on stock options exercised








158Net cash provided by (used in) financing activities


78,817


(21,023
)

(9,436
)Cash Flows Used in Discontinued Operations:Net cash used in operating activities of discontinued operations


(5,391
)

(15,395
)

Effect of exchange rate changes on cash


973


544


(4,315
)Net change in cash and cash equivalents


8,890


1,248


(36,355
)Cash and cash equivalents at beginning of period


26,235


24,987


61,342Cash and cash equivalents at end of period

$
35,125

$
26,235

$
24,987


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, 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
)

308,020Net loss














(112,306
)




(112,306
)Unrealized gain on securities











755








755Cumulative translation adjustment











14,190








14,190Comprehensive loss




















(97,361
)Issuance of common stock


52





(1,220
)







1,238


18Stock-based compensation








2,150











2,150Balances at July 31, 2011


32,159

$
488

$
161,575

$
63,385

$
451,704

$
(464,325
)
$
212,827


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, 2011, we operated 1,163 specialty retail jewelry
stores and 666 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. Fine Jewelry 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 Zale
Jewelers'® national advertising and brand recognition. Gordon's Jewelers® is a value-oriented regional jeweler. Peoples Jewellers®, Canada's largest fine jewelry
retailer, 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 Fine Jewelry have expanded their presence in the retail market through their e-commerce sites, www.zales.com, www.zalesoutlet.com,
www.gordonsjewelers.comandwww.peoplesjewellers.com.

Kiosk
Jewelry 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. Kiosk Jewelry specializes in gold, silver and non-precious metal products that capitalize on the latest fashion trends. In May 2010, we
expanded our presence in Kiosk Jewelry through our e-commerce site,www.pagoda.com.

All
Other 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, 2011 and 2010. 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 four 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 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
2011, approximately four percent and 15 percent of our total inventory represented raw materials and finished goods related to our manufacturing program and distribution center, respectively.
These inventories are valued at the

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weighted-average
cost of those items. The LIFO charge was $17.0 million, $5.7 million and $1.0 million for the years ended July 31, 2011, 2010 and 2009,
respectively. The cumulative LIFO provision reflected in the accompanying consolidated balance sheets was $35.9 million and $18.9 million at July 31, 2011 and 2010, respectively.
Domestic inventories, excluding the cumulative LIFO provision, were $619.8 million and $606.4 million at July 31, 2011 and 2010, respectively. Our Canadian inventory totaled
$136.9 million and $115.6 million at July 31, 2011 and 2010, 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 $53.5 million and $81.1 million of
consignment inventory on hand at July 31, 2011 and 2010, 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 be generated using weighted-average cost of capital,
terminal values and updated financial projections. If

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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 5 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 92 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. Premium revenues from
our insurance businesses relate to credit insurance policies sold to customers who purchase our merchandise under the proprietary credit program. Insurance premiums are recognized over the coverage
period.

Revenues
related to lifetime warranties are recognized on a straight-line basis over an estimated life of five years, while revenues related to the optional theft protection
are recognized over the two-year contract period. In addition, we offer one-year warranties to our Kiosk Jewelry customers that are recognized over the 12-month
contract period. ASC 605-20 requires recognition of revenue related to extended warranty products in proportion to the costs expected to be incurred if sufficient historical
evidence exists to demonstrate the pattern of expected costs. We are recognizing revenues related to warranties on a straight-line basis as a result of our determination that we currently
have insufficient historical evidence to recognize revenue in proportion to the costs. Once the appropriate level of historical evidence is obtained, we believe revenue will be recognized on an
accelerated basis which could have a material impact on our results of operations.

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. issued private label
credit cards branded with appropriate Company trademarks. We received a $41.8 million incentive for entering into the agreement that was recognized ratably over 10 years. The remaining
$4.2 million incentive balance was recognized as revenue during fiscal year 2010.

Cost of Sales.Cost of sales includes cost related to merchandise sold, receiving and distribution, customer repairs and repairs
associated with
warranties.

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. Share-based awards are recognized as
compensation expense over the requisite service period.

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Stock Repurchase Program.During fiscal year 2008, the Board of Directors authorized share repurchases of $350 million. As
of July 31,
2011, $23.3 million was remaining under our stock repurchase program. Our Term Loan contains a $1.0 million limit for repurchase of our common stock in any fiscal year.

Preferred Stock.At July 31, 2011 and 2010, 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 $12.7 million,
$11.6 million and
$11.3 million for the fiscal years ended July 31, 2011, 2010 and 2009, 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 $76.5 million, $75.8 million and $87.9 million for the fiscal years ended July 31,
2011, 2010 and 2009, respectively, net of amounts contributed by vendors. The amounts of prepaid advertising at July 31, 2011 and 2010 were $3.6 million and $0.8 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 $1.0 million, $0.5 million and $5.9 million for the fiscal years ended July 31, 2011, 2010 and 2009, respectively. Vendor allowances
included in cost of sales totaled $3.7 million, $3.6 million and $1.3 million for the years ended July 31, 2011, 2010 and 2009, respectively.

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.

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, 2007. We are subject to audit by taxing authorities of most states and certain foreign

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Table of Contents

jurisdictions
and are subject to examination by these taxing jurisdictions for fiscal years generally after July 31, 2005.

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.

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, 2011, the average Canadian currency rate appreciated by approximately six 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 $15.6 million increase in reported revenues compared to fiscal year 2010, offset by an increase in
reported cost of sales and selling, general and administrative expenses of $7.5 million and $6.7 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 $1.4 million and $2.8 million during the fiscal years ended July 31, 2011 and
July 31, 2010 respectively.

Loss Per Common Share.Basic loss per common share is computed by dividing net loss available to common stockholders by the
weighted-average number
of common shares outstanding for the reporting period. Diluted earnings per share reflects 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 3.0 million for the year ended
July 31, 2011 and 2.6 million for the years ended July 31, 2010 and 2009. There were antidilutive warrants of 11.1 million for the years ended July 31, 2011 and
2010.

We
incurred a net loss of $112.3 million, $93.7 million and $189.5 million for the years ended July 31, 2011, 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.

Concentrations of Business and Credit Risk.During fiscal year 2011, we purchased approximately 17 percent of our finished
merchandise from
five vendors with no single vendor exceeding five percent, compared to approximately 20 percent in the prior year. In fiscal years 2011 and 2010, approximately 17 percent and
12 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, 2011 and 2010, 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,

F-12

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Table of Contents

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.

Reclassification.Certain prior year valuation reserves associated with deferred tax assets have been reclassified in the
accompanying consolidated
balance sheets to conform to our fiscal year 2011 presentation.

2. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an
orderly transaction between market participants at the measurement date. In determining fair value, ASC 820,Fair Value Measurements and
Disclosures, 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.




The following tables include our assets and liabilities that are measured at fair value on a recurring basis (in thousands):

Fair Value for the
Year Ended July 31, 2011Level 1

Level 2

Level 3AssetsU.S. government obligations

$
24,540

$


$
Corporate bonds and notes


1,935





Corporate equity securities


3,961





$
30,436

$


$
LiabilitiesLease reserves

$


$


$
1,721




Fair Value for the
Year Ended July 31, 2010Level 1

Level 2

Level 3AssetsU.S. government obligations

$
19,530

$


$
Corporate bonds and notes


2,835





Corporate equity securities


3,981





$
26,346

$


$
LiabilitiesLease reserves

$


$


$
10,777


Investments in U.S. government obligations, corporate bonds and notes, and equity securities are based on quoted market prices in active markets,
and therefore were classified as a Level 1 measurement in the fair value hierarchy (see Note 7 for additional information related to our investments).

F-13

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Table of Contents

Lease
reserves associated with closed stores are calculated using significant unobservable inputs including the present value of the remaining lease rentals using a weighted-average cost
of capital and estimated sublease rentals, and therefore were classified as a Level 3 measurement in the fair value hierarchy. 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 (see Note 11 for additional information related to lease reserves).



The following table includes our long-lived assets that were measured at fair value, using Level 3 inputs, on a
nonrecurring basis (in thousands):

Fair Value for the
Year Ended July 31,2011

2010Long-lived assets

$
1,217

$
3,491


Potential impairment losses related to long-lived assets are calculated using significant unobservable inputs including the present
value of future cash flows expected to be generated using a weighted-average cost of capital and updated financial projections, and therefore are classified as a Level 3 measurement in the fair
value hierarchy. For the year ended July 31, 2011, long-lived assets of $8.0 million were written down to their fair value of $1.2 million, resulting in an impairment
charge of $6.8 million. For the year ended July 31, 2010, long-lived assets of $33.4 million were written down to their fair value of $3.5 million, resulting in
an impairment charge of $29.9 million.

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 the 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.



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. The outstanding principal of our revolving credit agreement and Senior Secured Term Loan approximates fair value as
of July 31, 2011. The fair values of the revolving credit agreement and the Senior Secured Term Loan were based on estimates of current interest rates for similar debt, a Level 3 input.

3. OTHER CURRENT ASSETS

Other current assets consist of the following (in thousands):

Year Ended July 31,2011

2010Prepaid rent

$
20,504

$
20,083Vendor returns and deposits


2,209


4,767Tax receivable


10,735


8,622Other


16,363


8,492$
49,811

$
41,964


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Table of Contents

4. PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following (in thousands):

Year Ended July 31,2011

2010Building and leasehold improvements

$
236,295

$
232,079Furniture and fixtures


464,707


448,440Construction in progress


3,811


13,256704,813


693,775Less accumulated depreciation and amortization


(563,062
)

(520,416
)$
141,751

$
173,359


5. 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. At the end of the second quarter of fiscal year 2011, we completed our annual impairment testing of goodwill. Based on the test results, we concluded that no impairment was necessary for
the $85.2 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 the Peoples Jewellers and Piercing Pagoda reporting units would have to decline by more than 18 percent and 60 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 based on estimates of long-term inflation expectations; and (3) discount rates of 16.5 percent to 19 percent based
on our weighted-average cost of capital. 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. 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.

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

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

Year Ended July 31,2011

2010Goodwill, beginning of period

$
98,388

$
94,605Foreign currency adjustments


6,232


3,783Goodwill, end of period

$
104,620

$
98,388


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Table of Contents

6. OTHER ASSETS

Other assets consist of the following (in thousands):

Year Ended July 31,2011

2010Debt issuance costs

$
10,048

$
22,773Investments in debt and equity securities


30,436


26,346Other


4,359


3,549$
44,843

$
52,668


7. 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, 2011 will contractually mature within 1 to 21 years. Our investments consist of the following (in thousands):

Year Ended July 31, 2011

Year Ended July 31, 2010Cost

Fair Value

Cost

Fair ValueU.S. government obligations

$
22,972

$
24,540

$
18,212

$
19,530Corporate bonds and notes


1,802


1,935


2,641


2,835Corporate equity securities


3,501


3,961


4,086


3,981$
28,275

$
30,436

$
24,939

$
26,346


At July 31, 2011 and 2010, the carrying value of investments included a net unrealized gain of $2.2 million and $1.4 million,
respectively, which are included in accumulated other comprehensive income. Realized gains and losses on investments are determined on the specific identification basis. The net realized gains totaled
$0.2 million and $0.4 million in fiscal year 2011 and 2009, respectively. There were no material net realized gains or losses during fiscal year 2010. Investments with a carrying
value of $7.5 million and $7.6 million were on deposit with various state insurance departments at July 31, 2011 and 2010, respectively, as required by law.

8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

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

Year Ended July 31,2011

2010Accounts payable

$
143,938

$
157,189Accrued payroll


12,431


7,668Accrued taxes


16,681


15,003Warranty deferred revenue


94,188


78,141Accrued rent


9,962


8,786Lease reserves


1,721


10,777Other


34,523


40,358$
313,444

$
317,922


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Table of Contents

9. LONG-TERM DEBT

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

Year Ended July 31,2011

2010Revolving credit agreement

$
255,000

$
165,000Senior Secured Term Loan


140,454


151,703395,454


316,703Less current portion of long-term debt





(11,250
)Less unamortized discount on Senior Secured Term Loan





(20,769
)$
395,454

$
284,684




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") consisted 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. On April 21, 2011, the $120 million non-extending tranche was assigned to other lenders and the maturity date was extended to April 30, 2014, the
maturity date for the remainder of the credit facility. 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) 87.5 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. The rate applied to the
appraised liquidation value was 90 percent prior to January 1, 2011. The Revolving Credit Agreement also contains an accordion feature that allows us to permanently increase commitments
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, 2011, we had borrowing availability
under the Revolving Credit Agreement of $161.3 million.

Based
on the most recent inventory appraisal performed as of June 2011, available borrowings under the Revolving Credit Agreement will be determined under item (2) described in
the preceding paragraph. The monthly borrowing rates calculated from the cost of eligible inventory are as follows: 61 and 64 percent for August and September 2011, respectively; ranging from
72 to 74 percent for the period of October through December 2011 and ranging from 60 to 64 percent for the period of January through July 2012.

Borrowings
under the Revolving Credit Agreement 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). We are required to pay a quarterly unused
commitment fee of 50 basis points based on the preceding quarter's unused commitment.

Excess
availability (as defined in the Revolving Credit Agreement) 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

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Table of Contents

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.
Excess availability was approximately $111.3 million as of July 31, 2011. The Revolving Credit Agreement contains various other covenants including restrictions on the incurrence of
certain indebtedness, liens, investments, acquisitions and asset sales. As of July 31, 2011, we were in compliance with all covenants under the Revolving Credit Agreement.

We
incurred debt issuance costs associated with the Revolving Credit Agreement totaling $14.1 million, including $1.1 million associated with the April 21, 2011
extension of the $120 million portion of the credit facility. The debt issuance costs are included in other assets in the accompanying consolidated balance sheets and are 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 May 10, 2010, we entered into a $150 million Senior Secured Term Loan (the "Term Loan") and a Warrant and Registration
Rights Agreement (as discussed 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 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. Debt issuance costs associated with the Term Loan totaled approximately $13.0 million, $1.7 million of which was attributable to the
warrants issued in connection with the Term Loan (see more details below underWarrant and Registration Rights Agreement) and expensed on 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. 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 was 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 recorded 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.

The
Term Loan bears interest at 15 percent payable on a quarterly basis. 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. Our ability to repay the Term Loan prior to maturity is restricted by certain conditions under the Revolving Credit Agreement, including a
fixed charge coverage ratio that we currently do not meet.

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Table of Contents

The
Term Loan contains various covenants, as defined in the agreement, including maintaining minimum store contribution thresholds for Piercing Pagoda and Zale Canada, as defined, and
restrictions on the incurrence of certain indebtedness, liens, investments, acquisitions and asset sales. The Piercing Pagoda and Zale Canada minimum store contribution threshold for the twelve-month
period ending July 31, 2011 is $20 million and CAD $30 million, respectively. As of July 31, 2011, store contribution for Piercing Pagoda and Zale Canada would have to
decline by more than 39 percent and 31 percent, respectively, to breach these covenants. The Piercing Pagoda minimum store contribution thresholds for fiscal year 2012 range from
$21 million to $26 million. The Zale Canada minimum store contribution thresholds for fiscal year 2012 range from CAD $31 million to CAD $36 million. Liquidity (as defined
in the Term Loan) was $238.9 million as of July 31, 2011, which exceeded the $135 million minimum liquidity requirement under the Term Loan by $103.9 million. As of
July 31, 2011, we were in compliance with all covenants under the Term 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.



In connection with the execution of the Term Loan in May 2010, 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. The Warrants, which are currently
exercisable and expire seven years after issuance, represented 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, 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. 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. Issuance costs attributable to the Warrants totaling $1.7 million were 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 was charged to interest expense during the first quarter of fiscal year 2011.

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Table of Contents

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

Year Ended:2012

$
2013


2014


255,0002015


140,4542016


Thereafter


$
395,454


Interest paid under the Revolving Credit Agreement during fiscal years 2011 and 2010 was $10.4 million and $7.4 million,
respectively. Interest paid under the Term Loan during fiscal years 2011 and 2010 was $21.7 million and $3.4 million, respectively.

10. OTHER LIABILITIES

Other liabilities consist of the following (in thousands):

Year Ended July 31,2011

2010Long-term straight-line rent

$
31,299

$
33,181Long-term warranty deferred revenue


137,992


140,741Insurance reserves


6,162


5,447$
175,453

$
179,369


11. LEASE TERMINATIONS

We have recorded lease termination charges related to certain store closures, primarily in Fine Jewelry, and lease obligations
associated with the Bailey Banks & Biddle brand that was sold in November 2007 (see Note 17 for additional information). 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.

The
activity related to lease reserves associated with the store closures and the Bailey Banks & Biddle lease obligations for the year ended July 31, 2011, is as follows
(in thousands):

Store Closures

Bailey Banks &
Biddle

TotalBeginning of period

$
5,135

$
5,642

$
10,777Charges and adjustments


285


906


1,191Payments


(4,856
)

(5,391
)

(10,247
)End of period

$
564

$
1,157

$
1,721


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Table of Contents

12. OTHER CHARGES

Other charges consist of the following (in thousands):

Year Ended July 31,2011

2010

2009Store impairments

$
6,762

$
29,944

$
14,873Store closure charges


285


3,426


27,047Goodwill impairment








5,020$
7,047

$
33,370

$
46,940


In fiscal year 2011, we recorded a $6.8 million charge related to the impairment of long-lived assets associated with
underperforming stores and a $0.3 million charge related to store closures (see Note 11 for additional information related to lease terminations). The impairment charges and store
closures were primarily in Fine Jewelry. 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, 2011 were to decline by 20 percent, we would be required to record additional impairments of $0.2 million. If operating earnings were to decline by
30 percent, the additional impairments required would increase to $1.0 million.

We
recorded charges related to the impairment of long-lived assets associated with underperforming stores of $29.9 million and $14.9 million in fiscal years
2010 and 2009, respectively. We also recorded store closure charges of $3.4 million and $27.0 million in fiscal years 2010 and 2009, respectively. In fiscal year 2009, the store closure
charge related to 119 closures and consisted 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 Fine Jewelry. In addition, we recorded a $5.0 million goodwill impairment charge in fiscal
year 2009. See Note 11 for additional information related to the store closures and Note 5 for additional information related to the goodwill impairment charge.

13. 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 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 31,2011

2010

2009Retail space:Minimum rentals

$
188,766

$
189,655

$
202,656Rentals based on sales


2,796


2,154


3,297191,562


191,809


205,953Equipment and corporate headquarters


3,837


3,729


2,166$
195,399

$
195,538

$
208,119


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Table of Contents

Future minimum lease payments as of July 31, 2011, for all non-cancelable leases were as follows (in thousands):

Year Ended

Minimum Rent
Commitments2012

$
169,5922013


139,6342014


113,1012015


89,7692016


70,172Thereafter


104,157$
686,425


14. 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 31,2011

2010

2009Federal income tax benefit at statutory rate

$
(38,750
)
$
(43,589
)
$
(76,763
)State income taxes, net of federal benefit


(4,250
)

(11,581
)

(9,015
)Tax on repatriation of foreign earnings


14,099


12,677


13,912Canadian rate changes(a)


(4,040
)

(3,206
)

(2,878
)Foreign & U.S. tax credits








8,159Goodwill impairment








1,750Expiration of net operating loss carryforwards





(2,675
)

Change in valuation allowance


44,406


24,288


12,501Depreciation and amortization adjustment(b)


(8,512
)




Other


(1,396
)

(4,664
)

(681
)Income tax expense (benefit)

$
1,557

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


(1.4
)%

23.1
%

24.2
%


---

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Table of Contents

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

Year Ended July 31,2011

2010

2009Current income tax (benefit) expense:Federal

$
(9,628
)
$
(32,826
)
$
520Foreign


5,003


4,145


6,830State


910


296


869Total current income tax (benefit) expense


(3,715
)

(28,385
)

8,219Deferred income tax expense (benefit):Federal


5,114


1,104


(60,107
)Foreign


159


(1,504
)

1,296State


(1
)

35


(2,423
)Total deferred income tax expense (benefit)


5,272


(365
)

(61,234
)$
1,557

$
(28,750
)
$
(53,015
)


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, 2011 and 2010, respectively, are as follows (in thousands):

Year Ended July 31,2011

2010Current deferred taxes:AssetsAccrued liabilities

$
35,867

$
38,117Inventory reserves


6,539


12,320Net operating loss carryforward





4,894Other


31


62Current deferred tax assets


42,437


55,393Valuation allowances


(16,792
)

(10,897
)Current deferred tax assets


25,645


44,496LiabilitiesMerchandise inventories, principally due to LIFO reserve


(114,066
)

(110,787
)Accrued liabilities


(4,300
)

(3,742
)Current deferred tax liabilities, net

$
(92,721
)
$
(70,033
)Non-current deferred taxes:AssetsNet operating loss carryforward

$
119,563

$
68,232Property and equipment


4,130


3,178Stock-based compensation


5,360


5,456Accrued liabilities


53,699


52,214Investments in subsidiaries


11,365


6,467Other


6,451


3,469200,568


139,016Valuation allowances


(79,756
)

(41,141
)Non-current deferred tax assets


120,812


97,875LiabilitiesState and local taxes


(1,523
)

(862
)Undistributed earnings


(11,609
)

(8,310
)Goodwill


(14,070
)

(12,593
)Other


(643
)

(561
)Non-current deferred tax assets, net

$
92,967

$
75,549


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Deferred tax assets, net of valuation allowances, were $146.5 million and $142.4 million at July 31, 2011 and 2010, respectively. Deferred
tax liabilities were $146.2 million and $136.9 million at July 31, 2011 and 2010, 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 $96.5 million and
$52.0 million as of July 31, 2011 and 2010, 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 $119.6 million and $73.1 million as of July 31, 2011 and 2010, respectively. Deferred
tax assets associated with foreign tax credits totaled $10.2 million and $5.1 million as of July 31, 2011 and 2010, respectively. The net operating loss carryforwards expire from
fiscal year 2012 to fiscal year 2031.

In
fiscal year 2011 and 2010, we recorded income tax benefits totaling $4.6 million and $33.4 million, respectively, 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, 2011 was $4.9 million, of which $3.2 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 materially 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 2011 beginning and ending balance of unrecognized tax benefits is as follows (in thousands):

Unrecognized
Tax BenefitsBalance at July 31, 2010

$
3,937Additions based on tax positions related to fiscal 2011


275Additions based on tax positions related to prior years


804Expiration of statute of limitations


(158
)Balance at July 31, 2011

$
4,858


We recognize accrued interest and penalties related to unrecognized tax benefits in our income tax expense. We had $2.6 million of interest
and penalties accrued at July 31, 2011 and 2010 and $2.7 million of interest and penalties accrued at July 31, 2009. There was no material interest expense in fiscal years 2011,
2010 and 2009.

Income
tax refunds, net of taxes paid, during fiscal years 2011, 2010 and 2009 totaled $1.0 million, $30.0 million and $6.4 million, respectively.

15. 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 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

F-24

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Table of Contents

statements
of operations and totaled $2.2 million, $3.9 million and $5.7 million for the fiscal years ended July 31, 2011, 2010 and 2009, respectively. The income tax
benefit recognized in the consolidated statements of operations related to stock-based compensation totaled $0.1 million, $1.4 million and $1.0 million during fiscal years 2011,
2010 and 2009, 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, 2011, there was $2.4 million of unrecognized compensation cost related to stock option awards that is expected to be
recognized over a weighted-average period of 2.2 years.

Stock
option transactions during fiscal year 2011 are summarized as follows:

Number of
Options

Weighted-Average
Exercise Price

Weighted-Average
Remaining
Contractual Life
(Years)

Aggregate
Intrinsic
ValueOutstanding, beginning of year


2,602,217

$
17.08Granted


982,200


2.24Exercised


(25,500
)

2.64Forfeited


(372,480
)

7.16Expired


(206,305
)

24.01Outstanding, end of year


2,980,132

$
13.07


6.82

$
4,560,484Options exercisable, end of year


1,441,186

$
22.02


4.80

$
566,175


For the years ended July 31, 2011 and 2009, the total intrinsic value of stock options exercised was $0.1 million and
$1.2 million, respectively. No stock options were exercised in fiscal year 2010. The weighted-average fair values of option grants were $1.38, $2.51 and $7.38 during fiscal years 2011, 2010 and
2009, respectively. The fair value of stock options that vested during fiscal years 2011, 2010 and 2009 was $2.0 million, $1.0 million and $1.9 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 2011, 2010 and 2009:

2011

2010

2009Expected volatility


93.5
%

84.5
%

41.4
%Risk-free interest rate


1.0
%

2.3
%

2.7
%Expected lives in years


4.0


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 a
U.S. Treasury yield that has a life which approximates the expected life of the option.

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. There were no performance-based restricted stock units outstanding as of July 31, 2011. 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, 2011, there was $0.6 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 2011 are summarized as follows:

Number of
Restricted
Share Awards

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


137,175

$
15.93Granted


115,000


2.33Vested


(36,925
)

17.60Forfeited


(10,400
)

21.29Restricted share awards, end of year


204,850

$
7.72


16. COMPREHENSIVE LOSS

Comprehensive loss represents the change in equity during a period from transactions and other events, except those resulting from
investments by and distributions to stockholders. The following table gives further detail regarding changes in the composition of accumulated other comprehensive income (in thousands):

Cumulative
Translation
Adjustment

Unrealized Gain
on Securities

Total Accumulated
Other
Comprehensive
IncomeBalance 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


48,440Cumulative translation adjustment


14,190





14,190Unrealized gain on securities





924


924Reclassification to earnings





(169
)

(169
)Balance at July 31, 2011

$
61,224

$
2,161

$
63,385


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Table of Contents

17. DISPOSITION OF BAILEY BANKS & BIDDLE

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.
As a result, we recorded lease termination charges totaling $23.2 million during the fourth quarter of fiscal year 2009 associated with all 45 Bailey, Banks & Biddle locations. 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 recorded charges related to the leases totaling
$0.9 million and $23.2 million in discontinued operations for the years ended July 31, 2011 and 2009, respectively. In fiscal year 2011, we also received a $0.6 million
distribution from the Finlay bankruptcy. In fiscal year 2010, we recorded a gain related to the leases totaling $2.1 million in discontinued operations. There is no tax impact associated with
discontinued operations due to the uncertainty of our ability to utilize net operating loss carryforwards in the future.

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.

Fine
Jewelry consists of five principal brands, Zales Jewelers®, Zales Outlet®, Gordon's Jewelers®, Peoples Jewllers® and Mappins
Jewellers®, and is 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. Kiosk Jewelry 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. Kiosk Jewelry specializes in gold, silver and
non-precious metal products that capitalize on the latest fashion trends. All Other 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 costs and depreciation and amortization.

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

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Table of Contents

Year Ended July 31,Selected Financial Data by Segment

2011

2010

2009(amounts in thousands)Revenues:Fine Jewelry(a)

$
1,490,647

$
1,378,507

$
1,535,626Kiosk


239,231


226,187


232,809All Other


12,685


11,611


11,309Total revenues

$
1,742,563

$
1,616,305

$
1,779,744Depreciation and amortization:Fine Jewelry

$
28,009

$
35,558

$
42,407Kiosk


3,361


4,120


4,899All Other








Unallocated


9,956


10,327


11,641Total depreciation and amortization

$
41,326

$
50,005

$
58,947Operating loss:Fine Jewelry(b)

$
(16,312
)
$
(84,818
)
$
(192,683
)Kiosk(c)


16,060


13,133


2,465All Other


7,831


4,731


5,706Unallocated(d)


(35,445
)

(48,493
)

(24,452
)Total operating loss

$
(27,866
)
$
(115,447
)
$
(208,964
)Assets(e):Fine Jewelry(f)

$
805,245

$
820,353

$
868,227Kiosk


85,999


85,631


107,457All Other


40,406


33,643


24,842Unallocated


258,249


231,651


230,446Total assets

$
1,189,899

$
1,171,278

$
1,230,972Capital expenditures:Fine Jewelry

$
8,818

$
9,945

$
18,702Kiosk








420All Other








Unallocated


6,497


4,705


9,235Total capital expenditures

$
15,315

$
14,650

$
28,357


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19. CONTINGENCIES

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. On August 9, 2010, the two lawsuits were consolidated into one consolidated lawsuit, which 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. The lawsuit requests unspecified damages
and costs. On August 1, 2011, the Court dismissed the lawsuit with prejudice. The plaintiff has until September 30, 2011 to appeal the decision.

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 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 damages and costs. The lawsuit was stayed pending
developments in the consolidated federal lawsuit described above. The Board of Directors also received a demand from two other shareholders that the Company take legal action against Rebecca Higgins
as a result of her purported role in the financial statement errors. 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.

On
April 21, 2011, the Securities and Exchange Commission concluded their investigation of the Company with respect to the matters underlying the lawsuits and demands described
above and did not recommend any enforcement action against the Company. No penalties or fines were assessed to the Company.

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

In fiscal year 2007, we began offering our Fine Jewelry customers lifetime warranties on certain products that cover sizing and
breakage with an option to purchase theft protection for a two-year period. Revenues related to the lifetime warranties are recognized on a straight-line basis over an
estimated life of five years, while revenues related to the optional theft protection are recognized over the two-year contract period. In addition, we offer our Kiosk Jewelry customers a
one-year warranty that covers a one-time replacement for breakage. The revenue from the one-year warranties is recognized over a 12-month period.
ASC 605-20,Revenue RecognitionServices,requires recognition of revenue related to extended warranty products in
proportion to the costs expected to be incurred if sufficient historical evidence exists to demonstrate the pattern of expected costs. We are recognizing revenues related to warranties on a
straight-line basis as a result of our determination that we currently have insufficient historical evidence to recognize revenue in proportion to the costs. Once the appropriate level of
historical evidence is obtained, we believe revenue will be recognized on an accelerated basis which could have a material impact on our

F-29

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Table of Contents

results
of operations. The change in deferred revenue associated with the sale of warranties is as follows (in thousands):

Year Ended July 31,2011

2010Deferred revenue, beginning of period

$
218,882

$
210,180Warranties sold(a)


108,431


79,039Revenue recognized(b)


(95,133
)

(70,337
)Deferred revenue, end of period

$
232,180

$
218,882


---

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", collectively the "Plans"). The Plans are defined contribution plans covering substantially all employees of the Company who have completed one year of
service (at least 1,000 hours) and are aged 21 or older. Participants in the Plans can contribute from one percent to 60 percent (30 percent for highly-compensated employees) of
his or her annual salary subject to Internal Revenue Service ("IRS") and Puerto Rico Internal Revenue Code ("PR Code") limitations. Upon satisfying all eligibility requirements, employees who have not
otherwise elected will be automatically enrolled in their respective plan at a contribution rate of three percent for participants in the U.S. Plan (two percent prior to October 1, 2010) or two
percent for participants in the PR Plan. We generally 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 generally made on an annual basis, and 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. Effective February 27, 2009, we temporarily suspended matching contributions until business conditions permit the
reinstatement of the matching contributions. The matching contribution expense totaled $1.8 million for fiscal year 2009.

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Table of Contents

22. QUARTERLY RESULTS OF CONTINUING OPERATIONS (UNAUDITED)

Unaudited quarterly results of continuing operations for the fiscal years ended July 31, 2011 and 2010 were as follows (in
thousands, except per share data):

Fiscal Year 2011
For the Three Months EndedJuly 31, 2011

April 30, 2011

January 31, 2011

October 31, 2010Revenues

$
377,267

$
411,843

$
626,416

$
327,037Cost of sales


183,792


205,424


311,308


161,944(Loss) earnings from continuing operations(a)


(32,703
)

(9,928
)

27,742


(97,153
)(Loss) earnings per diluted share from continuing operations


(1.02
)

(0.31
)

0.86


(3.03
)




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(b)


(28,618
)

(14,631
)

7,171


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


(0.89
)

(0.46
)

0.22


(1.87
)


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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 20th day of September, 2011.

ZALE CORPORATION/S/ MATTHEW W. APPEL MATTHEW W. APPEL Chief Administrative Officer
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

September 20, 2011/s/ MATTHEW W. APPEL Matthew W. Appel

Chief Administrative Officer and Chief Financial Officer (principal financial officer of the registrant)

September 20, 2011/s/ JAMES E. SULLIVAN James E. Sullivan

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

September 20, 2011/s/ JOHN B. LOWE, JR. John B. Lowe, Jr.

Chairman of the Board

September 20, 2011/s/ YUVAL BRAVERMAN Yuval Braverman

Director

September 20, 2011


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Table of Contents

Signature

Title

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

Director

September 20, 2011/s/ STEFAN L. KALUZNY Stefan L. Kaluzny

Director

September 20, 2011/s/ PETER MORROW Peter Morrow

Director

September 20, 2011/s/ DAVID F. DYER David F. Dyer

Director

September 20, 2011


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Table of Contents

Exhibit
Number

Description of Exhibit10.10

Amended and Restated Employment Security Agreement for Theo Killion10.16

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.

---